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"The stream of Time, irresistible, ever moving, carries off and bears away all things that come to birth and plunges them into utter darkness, both deeds of no account and deeds which are mighty and worthy of commemoration. . .Nevertheless, the science of History is a great bulwark against the stream of Time; in a way it checks this irresistible flood, it holds in a tight grasp whatever it can seize floating on the surface and will not allow it to slip away into the depths of Oblivion. "
- Anna Comnena (1083-1153), The Alexiad
"I have taken all knowledge to be my province."
- Francis Bacon, 1592
Tuesday, January 4, 2005
A Drop in the Rankings
Well, America is no longer one of the ten freest economies in the world. Mainly because the economies of other countries have liberalized, and only to a lesser degree because of increased regulation here.
When it comes to China. I've noted before that people who would normally decry any distortion of the workings of the market are willing to rationalize it when engaged in by China. Lets just take this section and examine it:
By contrast, Chinese export workers make textiles, toys, sporting goods and light electronics, i.e., industries the developed countries mostly gave up a long time ago.
You can see this in the global-trade data. Chinese exports have been penetrating European, Japanese and U.S. markets at a headline growth rate of 35% per year--but total Asian exports have not. Overall Asian market share has in fact grown very slowly, which means that for each additional dollar industrialized consumers spend on Chinese imports, imports from the rest of Asia actually fall.
So the fact that China's currency manipulations are, according to the author, resulting in a siphoning of trade & jobs not from developed countries, but from other developing countries that might have filled the market if it weren't for the artificially pegged value of the Yuan makes it ok? No principled free-marketeer would accept that just because it isn't "our" oxen that are being (directly) gored it is something we shouldn't worry about. The fact is that such distortions of the market do affect not just those people in other developing countries that might have found work in those industries were it not for China's mercantilistic policies, but ourselves as well, and that the longer these distortions go on, the worse their impact on the functioning of the global market.
And remember, Doc: There's No Such Thing As A Free Lunch.
As an employee of one of those aggressive plaintiffs' firms, four years ago I researched various adverse effects of Vioxx. At that time (sometime in 2000), the FDA had received scores of adverse event reports. Problems with renal and cardiac function have been reported, both via the FDA's Adverse Event Reporting System and peer-reviewed medical journals for quite a while now, so Merck's decision seems slow to me. As a matter of fact, increased litigation may have prompted the withdrawal.
I'm not so sure this will be a litigation goldmine though - common users of Vioxx are elderly, and therefore most likely to have preexisting cardiac, renal or gastrointestinal problems.
Well, folks will have to make up their own mind whether Merck did the right thing on their own or did it too slow. They did what they did at no little cost to themselves, though, and were not forced into it as far as I can see. But, then, my vision is limited - I've mentioned too many times how my ability to scan the news, and gather information in general, is limited at best of late.
that's why I'm reluctant to blog too much. I don't know if I always succeed, but I strive to make posts that aren't superficial reaction-to-headline stuff, but which have a bit of depth-of-perception to them. I don't feel I can really do that well again until I'm able to immerse myself in the information world again. Believe me, I very much want to do that. I have and will continue to gain a lot from joining the Army, but being cut off is the biggest downside so far. I find I miss being part of the "blogosphere" more than I thought I would.
Update: Here's more background for those who are really into the topic.
So we're often told how irresponsible and uncaring corporations, especially drug corporations, are.
Well, today, the drug company Merck revealed that, as a result of their own testing, they would be withdrawing one of their drugs from the market.
The result? A plunge in share prices, a drop in the Dow as a whole, and it's likely that Merck will be hit with scores of lawsuits. That's life, and I'm not suggesting they should have done anything differently. But it might be time to start talking about "Lawyer responsibility". The fact that a company that took action when they learned they had a problem is likely to be hit up for large sums of money anyhow speaks ill of the state of torts in America.
If you haven't already read this piece on outsourcing by Daniel Drezner in yesterday's NTY, you should. I made many of these points myself last Spring, but they bear repeating in the face of campaign rhetoric on the subject. For me at least, this part of Drezner's article is key:
The data did show that from 1997 to 2002, annual imports of business, technical and professional services increased by $16.3 billion. However, during that same half-decade, exports of those services increased by $20.5 billion a year. In 2002 alone, the United States ran a $27 billion trade surplus in business services, the sector in which jobs are most likely to be outsourced.
People talk of how America loses out from outsourcing as if economic activity occurs in isolation, and if one thing happens (jobs being outsourced) its opposite is not also, simultaneously, occurring. In this case, the opposite is insourcing of jobs - foreign companies hiring people here in America.
That benefits American workers, and America benefits more from "insourcing" than it loses in "outsourcing". We cannot lament the one and try to stop it while expecting to benefit from the other. If America pursues policies that are aimed at preventing "outsourcing" of jobs from here to other countries, we should expect other countries to respond in kind and attempt to prevent their companies from sending jobs to America. There are two arguments with this, of course. The first is that many countries do pursue policies aimed at keeping jobs "at home", in their country, so why shouldn't we? The second is an argument against foreign investment in America, "buying up America".
It is true that many European countries in particular pursue "job protection policies", aimed at insuring jobs aren't lost in France or Germany, for example. But the irony is that those policies backfire by creating perverse incentives. Because their labor markets are rendered less flexible by such policies, European companies are reluctant to hire people in their home countries. Indeed, much of the "insourcing" of jobs that America benefits from is European companies preferring to hire people here in America instead. It should not surprise anyone that job growth, productivity, prosperity, and economic growth are consistently higher in America, while unemployment is the only major economic indicator that is significantly higher in countries like France, Germany, and Holland - countries that have followed the policy prescriptions that people who want to prevent outsourcing here want us to emulate.
As for foreign investment, there is a case to be made for the idea that profits remitted to foreign companies mean "they" have leverage over our economic future. What if they stop investing here? They can, for example, "pull the plug" in many ways - for example, selling rather than buying U.S. Treasury Bills. That might be a problem down the road - but it's only likely to happen if we make America less attractive to foreign investment. For example, by changing our policies to make them similar to that of other nations, thus eliminating the comparative advantage(s) that have made America more attractive to these foreign investors than their home countries are. But till we do that, we have and will continue to benefit from such investment, which even those who are concerned about it implicitly accept, given that their worry tends to boil down to what the consequences will be if it reverses.
Foreign investment in the United States - "insourcing" of jobs - is a great boon to our economy, but one that we can only expect to continue if we also allow it's reverse, the "outsourcing" of jobs. What this amounts to is the flexibility of the American economy. Preserving that is more important than "preserving" a few jobs in the short term by eliminating (or at least reducing) this flexibility and the dynamism that comes with it.
As for the politics of it, neither Bush-Cheney nor Kerry-Edwards are pure on this score. Bush initiated Steel Tariffs, for example, aimed at "protecting" American jobs - but which ended up costing more jobs than it saved, because of the affect on industries that use steel. Then there is the Farm Bill. But Kerry & Edwards have advocated more sweeping changes in our economic and trade policies, which would make such retrograde measures the rule. It's almost enough to make one long for the days when Clinton was standing up for NAFTA and Gore was making the public case for free trade - till one remembers that the latter, at least, is singing the same siren song as Edwards & Kerry these days.
(See here for an index of sorts of my previous posts on this subject).
Check out this UPI piece on tech jobs. Outsourcing doesn't seem to be slowing people down. . .except maybe in other countries:
Helms, a former semiconductor manufacturing executive, said the news media has blown the impact of outsourcing out of proportion but the perception probably does impact the thinking of students considering a career in computer science.
"If you look carefully at the numbers in terms of the kind of jobs and the numbers, it's a small factor, but to the extent it gets overplayed that certainly weighs on the minds on the 18-, 19-, 22- year-olds we have coming into UTD," said the former president of International SEMATECH, an Austin-based consortium of semiconductor manufacturers.
Although the gloom surrounds U.S. jobs going overseas there is a different twist in the Telecom Corridor because many of the high tech manufacturers are foreign-owned, such as Ericsson, Alcatel, Nortel, and Fujitsu, noted a leading Texas economist.
In other words, they are outsourcing jobs to the United States, said Dr. Bernard Weinstein, director of the University of North Texas Center for Economic Development. He emphasizes again that offshoring is nothing new in a global economy.
"While we're talking right now about the loss of IT jobs, Toyota is talking about building a new plant in San Antonio," he said.
Construction is scheduled to begin later this year on a $800 million Toyota plant that will produce 150,000 Tundra trucks each year. Once operational in 2006, it will employ 2,000 people and generate a $100 million annual payroll.
(Emphasis added). Of course, to some, it is only "outsourcing" when jobs leave the U.S. for other countries - not when jobs leave other countries to come into the U.S..
The state of the economy, and in particular job growth, is a major issue in the campaign. It's important to be accurately informed on it, so check out my latest piece at Enter Stage Right. As usual, there's a bunch of good articles there, check 'em all out.
Over the weekend I had a shortish debate via e-mail with George Kysor on the subject of outsourcing. First he asked well, what would happen if American companies decided to move all their jobs overseas, huh? I replied that I found that an implausible reducto ad absurdum argument and thus not really worth pondering, but, ok, what if that happened but then foreign companies decided to move all their jobs here?
He replied to that mail and the exchanges got a bit more substantive and so are worth posting here. His first reply was:
I'm sorry, if you want "a more plausible economic argument," then you'll have to look elsewhere because I'm certainly not an economist. Here's a few examples of what I've observed - rather than how I interpret economic statistics - (1) at first, most all computer programs used in the USA were written by American programmers, then, as as competition increased between program suppliers, programming is now increasingly being outsourced; (2) at first all computers and component parts (such as drives, mother boards, etc.) were produced in the USA, but as competition increased more and more were made outside the USA and now, at best, only assembled in the USA; (3) at first all TV sets (together with the chassis, tuner, tubes & CRT) were made in the USA (my first TV was a 16," B&W, and cost $300) but now all the USA TV manufacturers have gone under and every TV is now produced outside the USA; (4) 70, 60, and even 50 years ago almost all manufactured consumer goods of all types were produced in the USA, but now, however, I'd be hard pressed to find anything that wasn't manufactured in the USA. Therefore it is my contention that a zillion jobs have evaporated in the USA during the last 50 years and, furthermore, the workers now involved in producing all those manufactured consumer goods live outside the USA. See the rest of my argument at The Leveling.
The problem with Kysor's analysis is that it sees only half the picture - in a dynamic economy, jobs are being eliminated all the time, but also new jobs are being created - and at a higher rate - all the time. Likewise, American companies may employ people overseas, but so to do foreign companies employ Americans, and "outsource" jobs from their countries to ours. Would America be better off if no one "outsourced"? No, it would be worse off. He replied:
Yes, Porphyrogenitus, I am looking at only one sector of the economy: manufactured consumer goods. This is the sector that I consider to be one of the primary economic-engines, if you will, for the creation of wealth. By taking raw material and fashioning it to produce something useful/needed/wanted for others is to create wealth. Without that wealth-generating sector in the USA, it is only a matter of time before the economic leveling.
You're not even looking at one sector of the economy, you're looking at only one half of a single aspect of that economy. If you actually look at the American manufacturing sector, it has grown, not shrunk, recently. Go ahead and look at the economic reports. Job losses in the manufacturing sector have *not* been primarily due to outsourcing, but due to surging productivity over the last several years. If you're implying that America is deindustrializing, I've been hearing such claims all my life and once believed them myself, but the truth is as I said: manufacturing, as a % of GDP, remains ~the same now as it was 15 years ago, 20 years ago, and more. Again, factual knowledge rather than manufactured hysteria is important here.
The problem with politicians who get people to focus on outsourcing is that they whip the economically ignorant into a frenzy, and make people rush to inaccurate conclusions such as the one in your latest mail.
That was the end of the e-mail exchanges so far. On Sunday he sent me a mail with a large file attachment, presumably on Outsourcing, but my policy - my adamant policy - is to not accept file attachments from folks I don't know very well (thus no need for someone to write in and say "well, it's really ok", 'cause I aint downloading it. Btw, links to articles are fine. I don't like links pdfs as much, they're clunky).
Here's an extended response though, that goes beyond the e-mails. People have been saying we're deindustrializing for as long as I've been alive, but it hasn't happened. I used to have the same concerns/fears that George expresses. I don't think it's unacceptable to have such concerns, but it's best to keep your eye on empirical reality and test them against it. A lot of things sound plausible but aren't born out in reality. Colbertism/Mercantilism and French economics generally sounds plausible, but doesn't work well in reality. Similarly, one can be concerned about the loss of this that or the other manufacturing sector - but in reality manufacturing remains about the same proportion of our economy as it has for the last quarter century. We used to make things that we no longer do, but we always move on to making higher value-added goods.
The problem isn't other countries grabbing our jobs, it's that we move up the technological scale. Likewise, one can say that yes, for at least the past quarter century manufacturing has been roughly the same proportion of the American economy, but before then manufacturing was a higher proportion. But likewise, a majority of Americans were once employed in the agricultural sector. I know that, my family (the Ruhlands, Becks, and Zimmermans) are were Wisconsin Dairy farmers. Indeed, some of my distant relatives still are. But not most of those in my mother's generation, and hardly any in my generation. I bring this up because, as America switched to a manufacturing economy from an agricultural one, people also engaged in a lot of worry about how it would be the doom of us.
Manufacturing is not the job-growth sector of the American economy, though it is a job-growth sector of less advanced economies. The reason isn't de-industrialization, but productivity growth in American manufacturing (less workers needed to produce the same result, the same as with agriculture) and the development of new economic sectors: the information economy, for one. This is a good segue to George's article, The Leveling, which begins as follows:
My belief that a world-wide free market will cause leveling of wages and prices is, as far as I know, not shared by any other libertarian.
Similar concerns were expressed in the past. I remember being a big Prestowitz fan in the late '80s to early '90s, and was big on Reich and Kuttner (and pre-NYT ranter Krugman), and Lester Thurow. A lot of people said, during the '80s and '90s, that we would have a race-to-the-bottom in wages.
Didn't happen. Americans are more prosperous than before. Personal income has risen. Some point to household incomes being stagnant or declining, but the reason for that is smaller household sizes, not declining incomes. Now, there might be a global leveling, but the way it will happen will be incomes in other countries growing and catching up as they develop and productivity improves - not immiseration in the U.S.
Again, we can test that against empirical reality and that's what we see happening - except in economies that make too much of a fetish out of retaining jobs in declining industries and preventing economic turnover, the "creative destruction" that results in greater prosperity. If one looks at continental Europe or even at Japan, this is the cause of much of the problems they have - and economic growth has been slower than in the U.S. as a result.
I recommend past posts I have made related to this subject. Don't forget to check out the links included in them:
Finally, don't forget my analysis of Noam Scheiber's TNR article where he admitted all this stuff about outsourcing &tc was bovine fecal matter but fine for Kerry (and others) to engage in as long as it conned the electorate into voting Bush out and Kerry in.
A good piece on the subject in the Financial Times. Read it while you can. Here's the key graph:
The first mistake of many politicians, argues Matthew Slaughter, a professor at the Tuck School of Business at Dartmouth College, New Hampshire, is to assume that a job created overseas is one not created in the US. "An overseas worker is sometimes a substitute for a US worker but very often they are a complement for a US worker," he says. "Expanding an overseas network frequently means you have to hire more workers in the US too."
This is one of the arguments as well:
Economists also argue that while the job losses caused by offshoring are conspicuous, the benefits are larger. Although the gains are hard to quantify, some analysts are now attempting to do so.
Assuming that companies shift staff overseas partly to save money, economists argue that the effect of offshoring is to lower prices in the US. This raises the purchasing power of US consumers and, on the margin, helps keep interest rates lower. This in turn should lead to higher consumer spending and stronger economic activity, which creates more jobs.
That concept tends to be beyond the sophisticated, deep-thinkers in Democratic politics, though. Ironically, it's one of the few Clinton-era positions that they haven't retained, and one of the few that they should have. Even Al Gore seems to have forgotten much on this score, and is almost unrecognizable from the man who made the case for NAFTA on similar grounds. Today, they and their supporters seem to prefer to demagogue the issue.
Lest people get the wrong point when it comes to my China Harangues, it's not that I fall for the dubious demagogy over outsourcing aimed at whipping the electorate into a frenzy in ways that, if it were done by a Pat Buchanan type (Right-winger) would be called xenophobic demonization. "Outsourcing" isn't bad for the economy, though to be sure it sucks to lose your job. But as I mentioned in a previous post, you may as well blame surging productivity then. Economically it makes as much sense as blaming outsourcing. This is significant because, while partisan hacks want you to believe the American economy is approaching collapse, it is booming and will keep booming. But, as Kerry says, elect him and he'll put an end to all that.
I also not an advocate for "fair trade", which is always a protectionist boondoggle. The Washington Post had a good article on anti-dumping measures and how they're used in practice. Check out the methodology the Commerce Department uses. Often it's simply protectionist methods to punish efficient production.
Of course, there is such a thing as dumping, and China has yet to implement all of what they agreed to in exchange for membership in the WTO. While it's more than fair to point out and highlight economic demagogy here at home, doing so while ignoring economic (and other) practices of other countries that are also inimical to trade liberalization is to engage in propaganda oneself. I'm happy to hit us for our agricultural subsidies, steel tariffs, and other benighted policies, none of which are a "gift" to foreign countries for all that it allows them to buy, for example, American wheat at a lower price. But our violations of free trade principles, while particularly odious because we're supposed to be a leader in trade liberalization, are objectively minor compared to those of China.
"Right now, the people of Hong Kong are fighting for direct elections...but the Beijing authorities are unable to consent. They even say, 'Wait another 30 years and we'll see'."
Well, as I said in previous posts, if things go well in China, then in a generation they'll be where India is now.
Update: Frank Gaffney has more on the threat we're ignoring now. Is China a threat? Well, to paraphrase a Reagan '84 ad:
There's a dragon in the woods. For some people, the dragon is easy to see. Others don't see it at all. Some people say the dragon is tame. Others say it is vicious and dangerous. Since no one can really be sure who is right, isn't it smart to be as strong as the dragon? If there is a dragon.
Continuing the series of posts that began here then continued here with some reflections on India, there is this piece by David Shaffer on blaming India for job losses. Indeed, sometimes it seems like people are singing the Blame Canada song with the word "Canada" struck out and "India" written in in crayon.
Also, listening to the Chicken Littles trying to whip Americans into a frenzy of hysteria, you'd think the country was deindustrializing at a rapid pace, all due to outsourcing. Well, actually industrial production continues to go up - and has been going up sharply. The tech sector is rebounding from the overhang of the '90s.
Manufacturing jobs are down, but manufacturing production is up, so what gives? "We're losing all our industry to India" can't be the answer. No, the "culprit" is large productivity gains in manufacturing and technology. Normally, increasing productivity is not considered a sign of economic decline - quite the contrary. As this Washington Times editorial by Donald Lambro puts it:
Manufacturers have been reducing payrolls, in middle management and on the production line, because they have found ways to produce more goods at far less cost, boosting profits for further expansion and fatter investor and worker pension dividends.
Ok, but what about jobs? People need employment, after all. I certainly know that. Well, as Noam Scheiber put it in the TNR piece linked to here says, that will come. Of course, in the meantime Noam wants Kerry to demagogue the issue to gain power, but that aspect of things was covered in that post. The problem is that lying to people to defeat Bush also whips them into a frenzy against the fer'ners who are stealing their jobs. Usually Liberals claim to be against jingoistic demonization of foreigners for political advantage, distinguishing themselves from the likes of Pat Buchanan on those matters.
I guess there's less difference between them and him than they want people to believe.
But the Washington Times puts the choice this way:
So how can we create more manufacturing jobs? Mr. Bush says we do it by expanding the economic pie — by cutting taxes on workers and on businesses, expanding free-trade agreements to open more markets to made-in-America products and commodities, and reducing federal regulations that heap huge costs on everything we buy and make us less competitive.
Mr. Kerry's prescription for manufacturing doesn't seem based on expanding anything. Instead, he calls for increased regulations (which levy higher costs of their own) and wants to punish businesses that find ways to reduce their costs.
In many cases his plans would kill even more jobs. Economics reporter Amy Goldstein, writing in The Washington Post, says Mr. Kerry's "central proposals to stem the flow of U.S. jobs overseas are relatively modest."
Now, TNR is generally considered a thoughtful, straightforward mag by people - including me - especially in comparison to the "Moonie-owned" Washington Times. But which treats this matter with more seriousness and candor?
David Schuler writes via e-mail in response to this post on China's market economy:
Don't be too enthusiastic about India. As the world's foremost proponent of autarky (total self-sufficiency i.e. no trade at all) India has only recently eased this policy a little. They still have substantial tariffs and prohibitions on all kinds of foreign imports. Their recent interest in trade may be convert's enthusiasm. Or it may be a passing fancy.
Oh, I'm aware of India's economic policies and the "Registry Raj". But where some people reserve their enthusiasm for a China that remains a one-party State and shows signs of developing in a rather National Socialist direction, I am far more upbeat about India, for several reasons:
India is a multiparty Democracy.
India is influenced by British concepts of the Rule of Law to a greater degree.
India actually has something that can be called a "private sector". In China, people are still subject to the kind of corrupt, Mandarinite expropriations as exemplified by the story I linked to in that post.
As someone who's read & been influenced by Ralph Peters (among others) and his observations on the information economy (see this post and the Peters article linked to there), I see a lot more potential in India at the moment than in China, especially as a potential future ally.
This is not to say that India is by any means perfect. David Schuler goes on:
I'd feel a lot less uneasy about offshore outsourcing to India if they'd allow more imports.
Yes, that's a good and fair point. I'll note that it's an aspect of things that China enthusiasts tend to ignore when issuing encomiums on the wonders of China's economy and our trade with them. I'd say the situation there is worse, because so much of it is effectively state-managed (businesses owned by the Chinese Army, for example). At its best the economic situation in China resembles Russia's current situation, and at its worst it still resembles the old statist system.
I.m a real free-trader and my main concerns about offshore outsourcing (which is mostly what's under discussion when talking about trade with India) are that
1. we should not subsidize offshore outsourcing (we are now)
That's a matter of our policy, and I blame us for that - not India, and not China, and not any other country. That's something we should change, but I don't hold other countries responsible for our bad policies. It's sufficient to hold them responsible for their own.
2. we should not indemnify companies against loss if offshore outsourcing goes bad. The actual protections against this are few indeed and when an outsourcing deal goes bad (as some inevitably will) there will be a hue and cry for some kind of assistance.
I'd agree with that, too. But again that's a matter of our policy and what's wrong with it, rather than what's wrong with India or China.
3. as long as U. S. businesses fail to invest in the U. S. job creation in the private sector here will continue to lag. What's going to happen to the people laid off? What's going to happen to the people entering the labor market for the first time?
Here there's a question regarding whether U.S. businesses are "failing to invest in the U.S. job creation". This can't be equated with the fact that they invest overseas and thus whatever they are investing somewhere else is a "failure" to invest that same money here. We - including American workers - benefit from foreign investment here, it would be inappropriate to not allow American companies to invest overseas if they see fit. Also I don't see any problem with American companies investing in ways that increase productivity and thus require fewer workers, fewer "jobs", to produce the same or more things.
The only problem related to this is the degree to which government policies, either here or overseas, distort the market. David pointed out two ways in which our government's policies encourage outsourcing in ways that distort natural market-driven decisions. There are also ways in which we discourage that, but likewise there are ways in which foreign countries compel investment: if you want to do business in China, for example, you have to give the wookie what he wants.
Ultimately, though, I see a fundamental difference between an Indian Democracy with free speech and elections, where people can be persuaded and the persuasion made effective through the ballot box, and a one-party oligarchic state like China, where that won't happen until there is a shift. People say that China will one day (a generation or so) make that transition. It might - then it might only be a generation behind India in these developments. It might get to where India already is. Yes, India has had their experiment with Autarchic Socialism, and found it wanting. They have a long ways to go in market liberalization - but they're already further down the path than China is in so many ways. I think India's future is better than China's because, as Ralph Peters wrote in the piece I mentioned, "freedom works". People in India may not be as free as we are - but they're far freer than in China, where forced labor still produces much of what we import from China and web-based technologies that India is now competing with us in are kept out of people's in China hands because the government wants to control information.
So neither are perfect embodiments of the market economy, but there is a distinction between China and India, a distinction with a difference.
Bai Yiben worked hard to build up his property development business after retiring from a state-owned textile company in 1992, saving every penny and plowing it back into the company. After years of struggling, his firm turned the corner in 2000.
His newfound wealth didn't go unnoticed. Powerful officials linked to China's military and Communist Party decided they wanted the fruits of his labor, family members charge.
Check out the whole sorry story.
Me? I like India a lot more - not that it's perfect. But it's better in many ways. Democratic government helps, for one. The other thing you'll notice if you read to the end of the Friedman piece is that the Indians seem to have a much better idea of what a market economy involves than China's government does. Or than most American Democratic politicians for that matter.
So it's been awhile since I wrote about China and trade (follow-up here). I wasn't sure how to handle things, but I knew - and know - we're not looking at a free market model here.
I'm certainly not a protectionist, of either the right variety or the Left/Shimberal variety. But the trade situation with China is a challenge, and the NYT had a piece this week that examines that challenge, making the same comparison with Japan that I alluded to in the posts referenced above.
To me, that comparison is a negative one. That is, it makes a point opposite of the one that those who are concerned with China as they were with Japan might want. Because a lot - virtually all - of those concerns proved to be overblown, often overheated, raising the specter of boogiemen verging on accusing the Japanese of some conspiracy to overturn America and buy it up. Now, our very real concern isn't with Japanese commercial dominance, but the moribund state of Japan's economy. It is only just now emerging from more than a decade of stagnation. If it is emerging at all. The problem with the once-vaunted Japanese financial sector isn't that it threatens to displace ours, it's that it has an overhang of bad loans, hindering Japan's ability to grow.
The comparison between the views of Japan that many Americans had then (think Gephardt '88, Buchanan '92) and China now is emotional, and that some of the concerns are the same. But in details, the cases are very different: Japan's political economy, neither then nor now, bears little resemblance to China's political economy now. Here, I think some of the concerns with respect to China that proved so specious with respect to Japan are real, though not the more over the top conspiracy theories.
The NYT article:
While China's economy is still one-third the size of Japan's, the potential size of its market has made it very hard for companies to say no when Beijing officials demand that they build factories, transfer the latest technology or adopt Chinese technical standards.
Which shows that in these instances, the idea that businesses are making deals with other businesses, is a superficial facade. The fact is that this is far from a libertarian free market, it's a situation of government dictat, where Chinese businesses are often owned by a branch of the Chinese government, which imposes terms rather than negotiating them. They impose conditions on doing business in China that would normally be deplored if people weren't so seduced by the potential of China's market. Such conditions are common in third-world states, but China is so large that it matters much more in their case. As Stalin once said, "quantity has a quality all its own". There are few alternatives in doing business in China, and thus choice - a hallmark of market economics - is restricted by government. When the EU does this, libertarians deplore it. For some reason, when China imposes worse conditions, they turn a blind eye to it and want us to treat it as a gift, a boon of the Chinese government to us. This is odd coming from those who normally are suspicious of the generous nature of governments, in particular one-party governments that restrict liberty:
Its transition from a planned economy to a form of capitalism seems to make it especially susceptible to economic booms and busts, and Chinese officials have begun worrying that an unsustainable economic bubble is developing. At the same time, China's one-party system may struggle to adapt to the social tensions brought to the surface by rapid economic development.
The significant phrase here is "one-party system". Japan was, to be sure, dominated by the Liberal Democratic Party, and certainly had (and still has) a problem with the Permanent Bureaucracy in much the same way that France or Italy does. But to not see the distinction is a failure. Japan had (and has) real politics. China remains a one-party dictatorship. Neither business nor Labour can be considered free, and this matters with respect to trade with China - not "only" on the moral level, but at the commercial/economic level.
The Bush administration over the last year has tried to assuage worries about job losses by talking tough with the Chinese — in particular, demanding that China let the exchange value of its currency float upward to raise the price of its exports. But it has also continued to assert its faith in a policy of free trade.
Of course, there's no contradiction here, though the NYT writers don't appear to recognize that. Artificial manipulation of exchange rates is an offense to free trade. Under market conditions, the value of China's currency would be higher than it is now. Those who support that because it's a gift to them aren't really in favor of free markets - they're just like others who are willing to accept government provided benefits that come at someone else's cost (and there's always a cost, citizen. TANSTAAFL). The cost of the imports they buy are being artificially subsidized. What's next? Defense of the EU's CAP on Libertarian, free-market grounds? Of the Bush-Daschle Farm Bill?
The point is that this is a distortion of the market, not the market in action. It's one of many that trade with China involves, and it is very difficult to alter this situation, as the NYT article points out. Why? Is it because of natural market forces? No, it's due to the ability of China's government to prevent market liberalization:
China's strengths are indeed impressive. Its wage advantage is much greater than Japan's was a decade or two ago. China has the diplomatic muscle to resist trade and currency concessions that might undermine its competitive edge. And its opening to foreign investment brings China both the latest technology and the corporate connections overseas that help it fight restrictions on its exports.
(Emphasis added).
A significant part of China's "wage advantage" is real, a result of the remaining poverty and low productivity of China. But part is artificial, a result of the aforementioned currency manipulations. China is able to maintain a restricted market - yes, it is more open than before, but hardly very open - as a result of its government ("diplomatic muscle"). In a free market, if a business closes as a result of competition and its workers lose their jobs and shift to another industry, it is because they were out-competed by a better company producing things more efficiently (or an innovation that displaces the product, &tc). Normally, free marketeers would object to market distorting policies because they can have the effect of putting good businesses at a disadvantage. This means that the competition is rigged and the businesses that suffer may not be the inferior ones, while the businesses that prosper may not be the superior ones. This is the case here, and if it were not then China would not pursue the policies they have in place, and use their diplomatic muscle to maintain them. This is hardly a "gift" to market economics. This is not to say that Chinese products are necessarily inferior, but the prices are artificial. Interference with the pricing mechanisms of the market are hardly defensible on free trade grounds. If anyone has a convincing argument that does defend them on those grounds that they would like to present me with, I'm all ears (or, rather, eyes).
China’s trade surplus with the U.S. is high, not entirely due to market forces, but due to the widespread interference with them by the Chinese government’s policies.
In part, analysts say, Washington chooses to act gingerly out of geopolitical considerations. China is a nuclear power that, unlike Japan, does not depend on the United States for military protection. Yet the United States looks to Beijing for help in coping with problems in countries including North Korea, Pakistan and Afghanistan.
These are all considerations in diplomacy with China, but note that they’re all non-economic reasons for not pressing China to trade liberalization and market forces. They can perhaps be defended, but not on the grounds of “this is free trade at work”. It also illustrates the fact that we’re not simply homo economicus, that considerations other than economic ones influence our decisions. But in China's case, it might be better if economic considerations influenced our policies towards China more than they have, because the price of paying for their diplomatic acquiescence may be too high. This, of course, is in part a function of China having a seat on the UN, and yet another reason to replace the current international system with one more suited to our interests.
No, no, no. I don't mean Al Gore's latest demonstration of how he's a moderate, sensible, mainstream Democrat who we should have leading us in a sober, responsible way. I mean the economy.
Yes, once again it's time to poke fun at Krugman's thesis. Hey, I just lost mine, shouldn't I be singing his praises? Well, it's true that German unemployment is up, and being of Germanic background, that includes me. But U.S. unemployment is down to 5.4%, a rate that is normally considered low. "Hey, but isn't this a jobless recovery? Doesn't that just mean people are giving up on finding work?"
I'll let you know if I give up. In the meantime, I haven't got the time to go into the whole "which employment figures are best at capturing job growth, the business survey or the household survey?" debate all over again. But when even The Guardian is acknowledging that the U.S. is the dynamo generating global economic growth, we can't be doing to bad. After all, you just know they'd have preferred to attribute all global dynamism to Brussels and embrace the Krugmanite thesis that the American economy is on the verge of collapse (they'll do that tomorrow on the editorial pages where facts don't matter).
Update: Speaking of poking fun, Spengler ridicules one of Al Gore's favorite hobbyhorses in the pixels of Asia Times. Check it out.
There's a good review of Jagdish Baghwati's book In Defense of Globalization in Foreign Affairs. Baghwati also has an article in the publication on the Cancun trade talks which is worth reading but, alas, not available online. This is a pretty apt description of critics of globalization:
Bhagwati divides critics of globalization into two basic categories. The first is made up of incorrigible enemies of market capitalism, constitutionally anti-establishment and not open to serious argument. The second consists of well-meaning but ill-informed critics. Bhagwati addresses his book to the latter group -- and takes their charges seriously.
Then there is this observation:
As a young economist at the Indian Planning Commission 40 years ago, he observed that redistributing wealth is not an effective way to reduce poverty; far more effective is to create more wealth. And engagement with the rest of the world facilitates growth. During the three decades that Bhagwati's India was a relatively closed economy, for example, the economy grew at 4 percent a year, and the poverty rate hovered around 55 percent. But in the two decades since it opened its economy to foreign trade and investment, economic growth averaged five percent; by 2000, the poverty rate had fallen to 26 percent.
(Emphasis added). Shades of the Equalities post. Anyhow, check out the whole review.
Paul Krugman's Great Unraveling continues, this time in the banking sector and new home construction is at the highest level since '78, further adding to the urban sprawl and burdening people with debt, no doubt. Things have gotten to the point that even the NYT & IHT have to acknowledge that it may be real:
Even though the U.S. government recently ignited new talk of a jobless recovery by reporting a tiny gain of 1,000 jobs in December, nearly every other measure of the labor market offers a more encouraging picture.
This gap suggests that President George W. Bush may be running for re-election with a stronger economy than is widely understood
Expect everything to be done that can possibly be done between now and November to keep people thinking that the economy is weaker than it is. Not just Democrats, but media outlets will downplay good data and latch onto anything negative and hype it to the Nth degree. The Cause is on the line, after all, and defeating Bush is the focus of more lives than just George Soros'.
But read the whole IHT piece if you're into the "How Many Jobs?" argument.
Following up on the previous post, I don't mean to imply that whatever Bush does in backing off from the "new tone" on agricultural subsidies will be because the Democrats Made Him Do It. What I am saying is that Bush has already shown a willingness to trim on these things for political gain, and I expect the election campaign will bring that out again. Also, separately and for their own reasons, the current Democratic crop ranges from a little worse to very much worse than Bush on this.
The fact is, Clinton had better policies on this subject - up until the Seattle '99 fiasco. It's been downhill ever since, in a bipartisan way. Now, I'm not saying Clinton was perfect on the issue before then - just better. But when he jettisoned it in '99, so did the rest of the Democratic Party, which never was very keen on it in the first place and went along grudgingly. Things are worse now, in a bipartisan way, and Bush hasn't exactly shown unqualified leadership when it comes to trade liberalization. He's said, proposed, and done some good things but then undercut them with bad policies such as the Farm Bill and Steel tariffs. Do I expect him to stick to his guns on going forward with negotiations aimed at reducing or eliminating agricultural subsidies if it will cost him votes in key "toss up" States? Nope, I wouldn't put a dime on that bet and it's not because The Devil Made Him Do It. He's responsible for his own behavior, just as the Democrats are responsible for theirs.
The Summit of the Americas ended with at least some mention of the Free Trade Area. Of course I've made no secret that I think this is right:
Peruvian President Alejandro Toledo criticised Washington for refusing to reduce agricultural subsidies, while asking the region's poor nations "to play ball in the free trade court".
But America, perhaps unlike the EU, is moving in the right direction on that front - though I have my doubts about how well that will hold up this election year. Especially considering how far the Democrats have gone in the wrong direction. Whoever the Democratic candidate is will pound Bush on any concessions of agricultural subsidies, to curry favor with the farm vote - a vote the Dems have been losing and want to regain. This will, I'm betting, cause Bush to go the same route. It's not "All the Democrat's Fault" that he will, though: he's already demonstrated a willingness to do such things for reasons of domestic politics. All I'm saying is that both parties will be pulling each other in the wrong direction, and share the blame for it.
We're also getting on better with Canada, which is good news. Apparently the problem wasn't simply the Evil World-Hungry Americans, as many non-Americans and most American Democrats seem to think. The change in Prime Ministers in Canada seems to have played a role - which shows that not everything boils down to what America does. The attitudes and behaviors of others play a role as well. I'm not saying American leaders never do anything wrong, but I am saying that the governments of other countries are not infallible, nor are they simply receptacles that respond to the stimuli we give them. They act as well, and they too, not just American governments, can either contribute to poisoning relations or improving them. Too many people let them off the hook because it is in their interest to put the onus entirely on us - something that also does nothing to improve relations, by the by.
Brazil's Lula, for example, decided to take the Blame America approach, claiming that widening inequality between rich and poor countries was the problem. His method of solving that seemed to be telling America to change its economic policies so we wouldn't keep prospering so much. Lula's polemics are actually somewhat at odds with his policies, however. For all the Leftist-Socialist rhetoric, in office he's actually governing with some fiscal restraint and trying to improve the business environment - something that has raised the ire of other Leftist pols in Brazil. Lula may be Brazil's Mitterrand. If one thinks back to the early '80s, Mitterrand came into power in France with a full-bore Socialist agenda, but soon moderated his actual policies.
Now, some of the later article sets up a false dichotomy portraying the U.S. as somehow viciously agressive and mean for being willing to negotiate with countries where progress can be made rather than stoping efforts with everyone because a couple of nations are resistant:
His strategy has combined continued commitment to multilateral talks with overt threats that, if the talks flag , the US will pursue new deals only with countries prepared to play on Washington's terms. In an angry commentary in the Financial Times after the collapse of the global talks in Cancún in September, he attacked what he called "won't do" countries such as Brazil and India for blocking the talks, saying the US would not wait. "We will move towards free trade with can-do countries," he said.
Which is a rather pernicious way of characterizing things. Never the less, the piece does at least extend some credit to the effort:
But in the face of growing resistance internationally and domestically, Mr Zoellick is starting the last year of the Bush administration's first term with a humbler tone. "We're trying to provide constructive leadership," he says in an interview with the FT. "I can't dictate."
Of course, going ahead in negotiating deals with other countries doesn't constitute "dictating to" Brazil or India, for example. But recognition of that conflicts with the "Cooperation Is Mandatory" outlook of the EU which is prevalent at the FT, which in the international arena outside the EU is defined as meaning any country can veto progress on an issue, as long as that country isn't the U.S. (c.f. Kyoto). But it goes on in a more positive vein after that section:
In a letter to be sent today to trade ministers of the 148 World Trade Organisation countries, he says he will sketch out some "common sense reflections" on how the Doha Round world trade negotiations may be re-engaged and make considerable progress by the end of the year. That would leave little chance of the talks being finalised by a January 2005 deadline, but could prevent a complete loss of momentum.
The effort to re-start the talks challenges the conventional wisdom that the US is unable to negotiate seriously in a presidential election year. "In the political situation we have limits," he says. Domestic political support for new trade initiatives is lower than at any time since the mid-1980s.
But Mr Zoellick says the administration is still prepared to forge ahead with what could be politically sensitive talks, particularly on subsidies to farmers. He predicts he will retain strong support from the business community, farmers and Congress "if we keep an ambitious focus" and "as long as I'm not seen as conceding major new things".
So that's a good sign. We'll see how well it actually goes once the general election campaign enters full swing and the pressures are skewed. A paragraph in the first piece is both positive but also highlights this:
In the interview with the FT Mr Zoellick said he wanted "to signal a strong US interest in pushing the Doha talks forward and to prevent 2004 from being a lost year." He added: "We're going to go the extra mile."
The letter signals a shift in tactics, with the US moving away from its joint position with the EU on some key agricultural issues that have stalled the negotiations and reaching out to developing countries.
Many have blamed the EU-US agreement on agriculture reached prior to Cancún for poisoning the atmosphere, because it angered developing countries that wanted much deeper cuts to farm subsidies in advanced countries.
Now, that's a really good thing. Nixing, or at least reducing, agricultural subsidies would be a big advance. But I wonder if the Bush Administration will stick to its guns on this when the Democratic Presidential candidate makes an issue of it and threaten's Bush's ability to retain the agricultural vote. Given the degree to which Bush has already violated free trade principles for electorial advantage, I have my doubts. But I want to believe we'll make some progress.
Paul Krugman's Great Unraveling continues to spool forth. Manufacturing grew at the fastest pace in two decades - again. I say "again" because this joins other news:
I say "again", because in November Manufacturing Activity grew at the highest pace since December of 1983 - when Ronald Reagan was President.
Housing starts rose 4.5% in November to the highest level since February 1984, when Ronald Reagan was President (wait, I thought everyone was going homeless then?)
Productivity grew by 9.4% in the Third Quarter - the highest since 1983, when Ronald Reagan was President.
The Business Roundtable's December survey of CEOs showed that 93% expected higher sales in the next six months (up from 71% in October).
The Conference Board revised its projections of 2004 GDP growth to 5.7% - the highest since 1984, when Ronald Reagan was President.
Reuters reported an unexpectedly steep drop in jobless claims, amid rising economic indicators.
Of course, many of these indicators are at their highest level since they were in the wake of Reagan's tax cuts. Reagan's economic policies put a stake in '70s-era stagflation, and as we remember from Calpundit's interview with Krugman (critiqued here, Krugman's progressivism is expressed through nostalgia for the economic condition of the '70s. Reagan's "crazy" policies unraveled Krugman's utopian era (which we all remember with such. . .I guess "fondness" isn't the right word, unless you were ensconced at Harvard). Bush has also cut taxes, and for Krugman it's like deja vu all over again: Reagan-era economic conditions (noted above) are returning with a vengeance, but all the enlightened people know - to paraphrase Krugman's hero, Bill Clinton, giving people a tax cut means they might not spend it right: that is, on things their betters (Clintons, Progressive Harvard Pundonimists, and the rest of the Anointed) think it should be spent on.
And it's happening again. Their worst nightmare is unfolding right before their eyes, just as it did two decades ago, and the only thing they can do about it is spew venom and bile at the sources of their anguish (while patting themselves on the back for being masters of civil discourse, unlike those meanspirited Conservatives), and misrepresent and distort reality in service of their Propaganda Model.
There is, of course, this problem, which the Prescription Drug Bill didn't help and which demands bold steps in reforming Social Security and, especially, Medicare. Bush ran in '00 on a plan, but it got shelved when his political capital was required elsewhere. We'll see what the future holds.
I'm hoping Iraq will implement much of what Hernando de Soto recommends. The USAID involvement in the Peruvian project makes it a promising prospect that it will be pursued in Iraq as well.
So a lot of us remember how during the height of the Enron scandal European pontificators were asserting that such an accountancy problem couldn't happen in the superior European social-market system, because of their tighter regulatory oversight of such things.
Well, a series of scandals, from Eurostat to ELF, to something involving a Duch firm (the name of which slips my mind at the moment) have chipped away of that smugness over the last little while. Now, it's Parmalat in Italy, in a situation that almost exactly mirrors Enron's: accounting slights-of-hand designed to artificially inflate the stock price, and about a 9,000 M$ crater in what they've been claiming. They will likely file for bankruptcy. Even the BBC is reporting it as "Europe's Enron".
Credit where credit is due since I slam their radio World Service News all the time, they were very open and candid in their climbdown from previous smugness on the subject, very explicitly acknowledging that, yes, it can after all happen there and all the previous assertions that EU countries had fixed things so nothing like what goes on in America could take place in European firms was false. So, kudos to them for being able to admit that.
