In recent years, an increasing number of conservatives have become disenchanted with “neoliberal” economic policies, which are seen as leading to unbalanced trade, de-industrialization and even the breakdown of the family. At the same time, they are not willing to accept the big government progressivism of left wing figures like Bernie Sanders. Instead, they seek a “third way”. As we will see, their third way is as mythical as the kingdom of Prester John.
The conservative movement is increasingly drawn to nationalist policies, including protectionism and immigration restriction. Unfortunately, these views on trade are based on a fundamental misconception, the theory that trade deficits are caused by uneven trade agreements with foreign nations.
Peter Navarro is perhaps the most prominent public official making this claim. He also argues that the national income identity:
GDP = C + I + G + (X-M)
somehow proves that trade deficits reduce GDP. This is a very basic error, which freshmen economics students are taught to avoid. Navarro is wrongly assuming that an accounting identity has causal implications. That’s simply false.
Very few heterodox economists are allowed to test their theories with a real world economy, but Navarro is an exception. The mainstream view in economics is that trade imbalances are caused by saving/investment imbalances. That theory predicts that expansionary fiscal policy (bigger deficits) would “worsen” the US trade balance. And that’s exactly what has happened in recent years.
I am often struck by the number of commenters who believe that recent protectionist trade policies have been successful. And it’s not just blog commenters, consider this claim in a LA Times editorial by Joel Kotkin:
The prospects for reprising the country club Republicanism of the past are dim. There is no groundswell for a return of militant neoconservatives to power, or for a restoration of lopsided trade policies, long backed by many corporate leaders from both parties, that has so damaged America’s middle and working classes.
Our trade policies have not been “lopsided”, and they have not damaged America’s working and middle classes. (Scott Lincicome has an excellent new paper puncturing myths about the “China shock”.) Kotkin is making the mistake of confusing intentions with results. Yes, the protectionists that are currently running trade policy intended to improve our trade balance. But they failed. They operated under a false theory, and hence made the deficit “worse”. So why shouldn’t we return to the pre-2017 trade policies, which were more successful than the current protectionism? Kotkin doesn’t say.
This gets at the biggest failing of conservatives seeking a third way—confusing intentions with reality. Both left and right leaning economists have favored free trade for the past 250 years. There is overwhelming evidence that countries that do a lot of international trade do better than countries that are closed to trade. Conservatives are making a huge mistake if they attach themselves to heterodox ideologies based on illogical theories and dubious evidence. In the long run, there is no realistic alternative to globalization.
Another common mistake is to assume that because the US has followed a “neoliberal regime”, and because the US has problems, we can conclude that neoliberalism has failed. Here’s Julius Krein in the American Conservative:
The neoliberal economic system is falling apart under the weight of its own contradictions, while its intellectual and cultural energies appear increasingly exhausted. New policy options and even novel directions in culture are coming into view. New electoral coalitions are emerging to support, for example, more family-oriented economic policies, to strengthen communities from the neighborhood to the nation, and to challenge the moral-cultural dominance of radical liberal individualism.
There are two problems here. First, neoliberalism is not falling apart under its own contradictions. If you look around the world it’s clear that the success of a country is strongly and positively correlated with the extent to which its policies resemble neoliberalism. The top 20 countries of almost any list of free market policies regimes contain almost a who’s who of successful countries. And even within the top 20, the top ten are even more successful. There’s not a single example in the entire world of a country failing because it’s too neoliberal. In contrast, history is littered with examples of countries failing because they are too statist (Venezuela, Greece, Cuba, North Korea, Zimbabwe, etc.) And Deirdre McCloskey showed that neoliberalism promotes the “civic virtue” so cherished by the new conservatives.
The second problem with the new conservative critique is that there’s no plausible alternative being offered. Krein’s essay is actually quite good when he points to problems within conservatism, but when it comes to a new policy approach we are presented with bland and meaningless generalities.
For instance, what does it mean to have more “family-oriented economic policies”? Surely that would include ending the marriage penalty in our tax system and our welfare system. And who has spent the past 50 years advocating that we do so? Neoliberal economists! And who has consistently ignored their policy advice? Progressive and conservative real world politicians.
And how about “moral-cultural dominance of radical liberal individualism”? Perhaps he’s referring to radical proposals to legalize drugs. Unfortunately, the anti-libertarian drug warriors have almost completely controlled US drug policy since 1913. They’ve had their way, and we can all see the result. So in what sense have radical libertarians “dominated” our policy? Our laws on alcohol and sex are some of the most restrictive in the entire developed world. Just to be clear, here I’m not trying to argue for or against any particular policy on individualism, just pointing out that other developed countries regard our attitudes toward alcohol and sex as being extremely puritanical.
To be fair, it is true that cultural liberalism has won some important battles in recent decades, in areas such as civil rights, women’s rights and gay rights. Do the modern conservatives want to go back to previous conservative policies such as banning interracial marriage and criminalizing homosexuality? Of course not. Indeed doesn’t gay marriage “encourage families”? So in the end their “cause” is little more than “we accept the direction of the arrow of history, but please move a bit more slowly”. Not much of a rallying cry.
[Here I exclude the abortion debate, where conservatives actually can claim to have strong and distinctive views. But then just say “abortion”; don’t talk about vague concepts like “radical individualism.”]
And what does the following mean: “to strengthen communities from the neighborhood to the nation”? What is a strong community? Does it merely mean a healthy economy? Strong religious values? Strong civic culture? Preserving manufacturing from import competition? Giving NIMBY’s the power to stop minorities from moving in? It could mean anything. I’d guess that Bernie Sanders would like to see strong communities. (He’d eagerly fund “community groups” and encourage labor unions.) And a “strong nation” is an even more vacuous concept. Does that mean a strong economy? A strong military? Nationalism?
It all sounds so nice, until the new conservatives are forced to come up with specific policy suggestions, at which point we are confronted with poorly thought out proposals based on discredited economic theories. In practice we get old fashioned nationalism, which means trade barriers, immigration barriers, whitewashing of unpleasant parts of our history, bigotry against minorities and foreigners, and all the other attributes of nationalism throughout the ages. On foreign policy, the same conservatives who lament our foolish “neoconservative” adventures in the Middle East are among the most fervent in calling for a new cold war with China.
The nationalists of the 1920s and 1930s made exactly the same complaints about radical individualism, cosmopolitanism, globalization, etc. Let’s not learn the same painful lessons a second time.
READER COMMENTS
John Hall
Aug 11 2020 at 2:11pm
“Surely that would include ending the marriage penalty in our tax system and our welfare system. ”
Can’t speak to the welfare system, but the latest tax reform eliminated the marriage penalty in income taxes for a very large percentage of Americans.
Scott Sumner
Aug 11 2020 at 6:22pm
When married people are allowed to file as “single” there will be no marriage penalty. We are getting closer, but are not there yet.
But yes, the biggest penalty is now in the welfare system.
Shyam
Aug 11 2020 at 3:57pm
It seems to me that the angst around the trade deficit is more about bringing back well-paying manufacturing jobs than the overall balance. I think a smarter conservatism would focus on that instead of slapping tariffs on Canadian aluminum.
Scott Sumner
Aug 12 2020 at 12:04pm
Due to automation, there will be fewer manufacturing jobs going forward (just as what happened earlier in agriculture.) We need to accept that.
Warren Platts
Aug 12 2020 at 1:20pm
Respectfully disagree. If U.S. manufacturing output growth had kept pace with U.S. consumer expenditures on manufactured goods, at current rates of manufacturing labor productivity, we would have had to double the manufacturing employment to meet the demand. We would have more manufacturing workers now than we did at the peak in 1979.
stoneybatter
Aug 12 2020 at 3:16pm
Warren, do you have a source for this claim? I am skeptical but interested, and can’t find “U.S. consumer expenditures on manufactured goods” online.
Warren Platts
Aug 12 2020 at 3:47pm
FRED has charts for “Personal Consumption Expenditures: Durable Goods” and “Personal Consumption Expenditures: Nondurable Goods”. If you add the two, then you get total personal consumption expenditures for manufactured goods.
stoneybatter
Aug 12 2020 at 4:56pm
Non-durable goods includes things like food, tobacco, fuel, and oil. These are not manufacturing. I think your comparison is inaccurate.
Jon Murphy
Aug 12 2020 at 5:10pm
They are. The vast majority of those items are classified in the North American Industry Classification System (NAICS) system as 31-33, which is manufacturing.
So, animal food production is manufacturing, as is refining, tobacco production, etc. The full list is here
stoneybatter
Aug 12 2020 at 7:02pm
Ah, thank you @Jon Murphy.
@Warren I retract my criticism. However, your point still rings false to me. The reason we as a nation can afford more manufacturing consumption is because it has gotten cheaper (both via technology and via offshoring). In your counterfactual, with less globalization and more US manufacturing employment, we would simply be poorer.
Jon Murphy
Aug 12 2020 at 7:25pm
Your intuition is correct here. Demand curves slope downward and resources are scarce. The straight-line estimation Warren makes is incorrect because as more resources are devoted to manufacturing, fewer would be devoted to more productive uses (R&D, finance, education, medical, etc etc). Indeed, we currently have a real-life experiment involving exactly what Warren proposes: the tariffs on washing machines Pierre Lemieux posted on just yesterday. With those tariffs, we as consumers are poorer to the tune of $1.5 billion annually.
Warren Platts
Aug 13 2020 at 12:56am
Stoney, it is not hard to figure out using publicly available information:
https://fred.stlouisfed.org/graph/?g=u6bD
If you’ll look at January, 2020 on that chart, you will see that U.S. consumers spend about $4,591,900,000,000 on manufactured goods but that U.S. manufacturers only produced $2,371,724,529,000 worth of manufactured goods (51.7%).
Do you see? In January 2020, there were about 12,844,000 manufacturing workers (cf. FRED “All Employees: Manufacturing”). The cost to consumers per manufacturing job (aka “labor productivity”) was $184,656/worker (compared to ~$100,000/worker for the average worker). Thus, if our manufacturing output equaled our consumer expenditures on manufactured goods, we would have to increase the manufacturing labor force to 24,867,291 workers.
Meanwhile, “peak manufacturing” occurred in 1979: total workers then was 19,553,000. Thus I don’t buy the narrative that the decline in manufacturing workers is an inevitable result of automation. Automation should not affect manufacturing output unless it increases output. Therefore, automation cannot explain why our output is half our consumption.
Warren Platts
Aug 13 2020 at 1:17am
Jon: Why would a scientist, a Wall Street quant, a high school teacher, a doctor or nurse take a job on a factory floor somewhere starting at $11/hour? People don’t voluntarily move from a highly productive job to a less productive job, tariffs or no tariffs.
Moreover, unless we are at full employment–and by that I mean FULL employment–adding manufacturing workers need not subtract from any other sectors. Workers are not scarce: as Marx said, there is a vast army of unemployed, underemployed, and able-bodied people who are not actively looking for work, but would be willing to work if the right opportunity came along.
To the extent that adding more workers would in fact require subtracting workers from other sectors, those workers will come from less productive occupations: burger flippers, liquor store clerks, dog walkers, nannies. The result is the workers will be better off, and the nation as a whole will be better off because overall labor productivity will be improved.
Jon Murphy
Aug 13 2020 at 7:31am
Only $11/hr? The fast food workers where I live in rural Maryland earn more than that ($16/hr). Factory jobs don’t pay that great, apparently.
As your citing of Marx proves, workers are indeed scarce. Review Chapters 1 and 2 of this intro economics textbook to remind yourself what “scarcity” means. (If your hypothesis was literally true, that workers are not scarce, then there would be no need to choose between being a nurse and being a factory worker. One could be both at the exact same moment in time. Rule #1 of economics: trade-offs exist).
Jon Murphy
Aug 13 2020 at 9:20am
Let me ask you this, Mr. Platts:
If, as you say, there is some Marxian “vast army of the unemployed” that can easily be transferred into manufacturing and, as you say, manufacturing workers are roughly substitutable with fast-food workers (by the way, “substitutable” means there is scarcity), then why are there approximately 336,000 job openings in the US manufacturing sector right now (source: BLS JOLTS survey)?
Scott Sumner
Aug 13 2020 at 3:49pm
I very much doubt this. Our current account deficit is smaller (share of GDP) than in 1987, so there’s been no net loss of jobs from trade in 33 years. We tend to manufacture investment goods and import consumer goods–maybe that affects your claim.
Warren Platts
Aug 13 2020 at 4:32pm
Not in real terms. If you’ll look at this chart, the trade deficit now is over twice as large as it was in 1987.
https://www.financialsense.com/michael-pettis/high-wages-versus-high-savings-globalized-world
And it’s fine if USA kind of specialize investment goods. Moreover, I don’t mind importing consumer goods within reason. But the fact remains that we consume twice as much manufactured goods value-wise as we produce. It is hard to believe that automation has anything to do with that fact. If our manufacturing consumption & production were balanced, we would have more manufacturing jobs than ever despite all the automation.
Jon Murphy
Aug 13 2020 at 5:53pm
That shouldn’t matter. The number is a ratio. Methinks you made a math mistake (also I think wrong link. Nothing in your link talks about the US current account deficit and there are no charts. I think you’re just self-promoting again)
Warren Platts
Aug 13 2020 at 6:37pm
Sorry, that other link went to my reply to Dr. Boudreaux at Pierre’s article that apparently got censored. Here is the real NX chart. As you can see, in 2012 dollars, 2019’s trade deficit is over 4X he size it was in 1987. I doubt real wages for blue collar workers went up by the same amount over the same period.
https://fred.stlouisfed.org/graph/?g=u9bA
Don Boudreaux
Aug 13 2020 at 1:54pm
Protectionists’ arguments about manufacturing jobs are flawed both empirically and theoretically.
Warren Platts
Aug 13 2020 at 4:37pm
That’s easy! In domestic trade, American workers only have to compete against each other. In international trade, American workers must compete against workers making $2/hour, if not $2/day!
Don Boudreaux
Aug 13 2020 at 5:12pm
Mr. Platts:
Is this answer really the best that you’ve got? Really?
Are you unaware of the fact that low wages reflect low productivity? This fact has been pointed out repeatedly, here at EconLog and elsewhere. Every knowledgeable economist understands that the wages level in a country is no advantage in trade to the people of that country; such wages are simply what enable workers there to have any market at all for what they produce.
But even if your ‘logic’ were correct, you reply still doesn’t answer my question. The reason is that in America there is a wide range of wages. If your ‘logic’ were correct, then skilled 45-year-old welders earning $30 per hour would have to compete against 16-year-old teenagers earning $7.25 per hour – and by your ‘logic’ the latter would enjoy an advantage!
Try again, sir.
Jon Murphy
Aug 13 2020 at 5:30pm
He’s perfectly aware. He just has selective memory. When yesterday high wages = high productivity was convenient for him, he shouted it from the rooftops (granted, he confused productivity with cost to consumers, but that’s a different story). Today, when it no longer fits his narrative, he forgets.
Warren Platts
Aug 13 2020 at 5:32pm
Low wages are a reflection of a country’s average productivity. In Mexico, auto workers there make GM pickup trucks doing the same job, using the same equipment, and producing a product of the same quality and value as U.S. autoworkers. Yet they only get paid $2.50/hour. Why? Because if they complain, there are a million Mexican strawberry pickers breaking their backs for $2/hour, who would gladly work in the automobile factory.
This is why I wince whenever somebody says U.S. workers need to become “more competitive.” That is code for being willing to accept even lower wages. This is why globalism is doomed. The race to the middle is bad deal for those who were on top.
Jon Murphy
Aug 13 2020 at 5:55pm
That’s obviously not true (unless we’re assuming all workers and all jobs are perfectly identical). If it were true, all wages would be the same.
And it still leaves the question unanswered. American workers are competing with each other over large wage differentials. Why doesn’t Microsoft fire their CEO and hire some teen for minimum wage?
Warren Platts
Aug 13 2020 at 7:07pm
You are shooting from the hip again. Please review Baumol’s Cost Disease.
Jon Murphy
Aug 13 2020 at 8:56pm
You’re shooting your mouth off again. Cost Disease is irrelevant here.
Warren Platts
Aug 13 2020 at 11:50pm
Thanks Jon, but you are quite wrong–again. Wages do in fact depend on a country’s preponderant level of productivity. A Mexican GM factory is every bit as efficient as an identical American GM factory by every measure. Their workers are as productive as ours. Yet the Mexican workers get paid a fraction of what the American workers make.
Again, that is because the prevailing level of productivity in Mexico as a whole is much less than USA. Conversely, American janitors in USA make much more compared to janitors in Mexico doing the identical job. This is the Baumol Effect.
Cf. Alex Tabarrock: “Growth in average labor productivity has a surprising implication: it makes the output of slow productivity-growth sectors [like string quartets] (relatively) more expensive.”
Similarly, Krugman has written extensively on this subject: “What you need to ask is why wages are so much lower in some countries than they are here. The answer is that they have much lower overall productivity. So when you look at low-wage countries, they have a big cost advantage in sectors like clothing where their productivity isn’t too much lower than ours.”
Don Boudreaux
Aug 14 2020 at 7:21am
If protectionists, such as Mr. Platts, are so smart, why ain’t they rich?
Jon Murphy
Aug 14 2020 at 8:38am
Warren-
You cannot just pull random economic terms off the shelf and merely assert they apply. When you do, you often show you do not understand the terms you are using (as evidenced by the fact that both the Krugman and Tabarrok quotes support me and not you).
Baumol doesn’t apply for two reasons:
1) it does not answer the question posed (which is referring to differences between what you call identical industries and not between differing sectors. Cost disease can explain why Mexican agricultural workers may get pay raises when a factory opens in town, but it does not explain why Mexican auto workers are paid so much less. You try to change the topic to efficiency, but that just further adds to your confusion).
2) Your own previous claims. You assert “scarcity only exists at full employment.” You also claim we are not at full employment currently and further imply Mexico is neither (though, at other times, you claim we are at full employment currently or even beyond as you state below, so it is confusing to know where exactly you stand). If scarcity only exists at full employment, then outside of full employment there is no scarcity. If there is no scarcity, there are no costs. If there are no costs, there is no cost disease, QED. Furthermore, if there is no scarcity, then American factory workers are not competiting with Mexican factory workers, which only further undermines your supposed proof.
One final point: you claim that international competition is unique because of the wage differential, but that is factually incorrect. If we take your calculations as accurate, the Mexican factory worker’s wage differential is about 90% that of the American factory worker, give or take. But domestically, far greater wage differentials exist. The difference between an American factory worker and an American fast-food worker (which you say are “roughly subsitutable” jobs) is about the same, depending on the industry. Between fast-food and CEOs, it’s almost 99%. Professional sports players is the same. According to you, these differentials cannot exist nationally, or if they do, have no effect compared to international trade. But lurkers are to wonder why competition internationally is unique when there are bigger differentials domestically (and remember, you cannot appeal to differences in productivity; you explicitly claimed productivity cannot affect wages above).
Jon Murphy
Aug 14 2020 at 8:41am
Indeed, Don. When scarcityists try to act according to their ideas, they end up substantially poorer!
Warren Platts
Aug 14 2020 at 10:08am
lol! Where have I heard that one before? Oh yeah: Deirdre McCloskey–except she was talking about economists!
Indeed, it seems the only economists who become multimillionaires are the one’s who write overpriced, popular textbooks they sell to a captive market, guys like Samuelson, Krugman & Mankiw. I’m trying to think of one economist who became a billionaire. The only one I can think of is Trump himself. The supposed economics nincompoop was in fact an economics major, albeit, he never got his PhD. I guess he is the exception that proves the rule.
Anyways, my point still stands: Mary T. Barra–CEO of GM–and her predecessors have taken your advice and set up factories in Mexico that are every bit as productive in terms of number of pickup trucks produced per worker (probably more so since they are newer factories), and the quality and value is identical to a pickup truck made in USA or Canada. In fact, the only complaint about an hecho en Mexico pickup that I have heard from a car dealer is that the Mexican vehicles are not quite as clean as vehicles that come from an American factory; thus the detailer boy making $9/hour may have to spend an extra 20 minutes getting the truck spic & span for the showroom floor.
Yet the Mexican workers get paid a small fraction of what the American workers make. Again, that is because of the preponderating wage level in Mexico. As I said, if you are smart enough to be able to tell the difference between a perfectly ripe strawberry and ones that are not quite ripe and ones that are overripe, and you got enough gumption to show up every day on time and break your back for 10 or 12 hours, you can probably hold your own at a station on an assembly line. Therefore, if a Mexican autoworker gets too uppity, he or she can easily be replaced by a strawberry picker who is happy to take a 25% raise over their former $2/hour wage and secure in the knowledge that if only they stick it out for 10 years, they will be able to make $4.50/hour.
Because of NAFTA, Mexican pickups are not subject to the standard 25% “chicken tariff” that Japanese or European carmakers are subject to. So again, you asked what is the difference between domestic trade & international trade, and the answer is obvious: massive wage differentials for doing the same work that give 3rd world countries a HUGE cost advantage.
Don Boudreaux
Aug 14 2020 at 10:31am
Mr. Platts:
I’ll engage with you no further. You argue like a cartoon lawyer rather than as someone who grasps lines of reasoning and addresses these cogently. You yank into your discourse whatever disconnected phrase or fact or piece of jargon you find in front of you and that you feel will support your point of the moment. I will leave EconLog readers only this warning: You confidently pose as someone who has studied economics and who knows the subject, but it’s only a pose. Your knowledge of economics consists only of jargon – and even then you typically fail to understand the economic theory to which each piece of jargon refers.
(By the way, in If You’re So Smart, Deirdre McCloskey does have among her intended audience some economists, but her audience is not limited to economists. Her argument is addressed to all of those many people who are fond of pointing out market failure but who refuse to put their money where their mouths are.)
Jon Murphy
Aug 14 2020 at 10:33am
So why is Mexican production 1/3 that of the US?
Warren Platts
Aug 14 2020 at 10:53am
Wrong again! The Baumol effect (to call it a disease is a misnomer–it really should be called a blessing, as Tabarrok points out) cuts in both directions. In a country that has a high average productivity like the USA, the wages of janitors will be pulled up. The obverse of that same coin is that in a country with low average productivity (Mexico) wages for new, highly productive jobs manufacturing pickup trucks will be pulled down, relative to the high-productivity country despite being identical jobs with identical productivity measured in terms of quantity and value per unit per worker.
Note that wage levels in Mexico have not risen much since NAFTA began despite the fact that exports there have gone through the roof. Probably because for every new factory job created, there were at least two agricultural workers who got displaced because of NAFTA induced imports of subsidized American GMO corn…
Your point #2 is mere gobbledegook: nonsensical word salad.
Your point #3 is a red herring. The key to understanding Baumol is substitutability. A person working at Pizza Hut who can show up on time, pass a drug test, and follow directions well enough to make different kinds of pizza all day long can probably hold their own at a station at the local Victory-Beverage Air cooler factory. The same people, however, will not be able to substitute for CEO’s or professional athletes, or doctors and lawyers and such. Thus the wages at Pizza Hut & Beverage Air will be roughly comparable, despite the fact that the cooler workers are putting out units that in total will retail for much more per worker than the pizza workers put out, but not comparable to professional athletes, CEOs, or even lawyers.
Don Boudreaux
Aug 14 2020 at 10:54am
And to add further to Jon Murphy’s latest probing question, we must also ask: Why is the world’s single largest recipient of foreign direct investment the United States? Surely if Mr. Platts were correct, the great bulk of FDI would be pouring into low-wage countries.
Jon Murphy
Aug 14 2020 at 11:18am
So, why aren’t they? The wage differentials between factory workers and fast-food workers is rather large (Approx $40/hr versus $10/hr, source BLS OES). This differential is pretty comparable to the difference between Mexican factory workers and comparable US factory workers.*
Besides, all of this still ignores the fact that wage competition is not unique to international trade.
According to you, that is irrelevant. Average productivity matters, not marginal or occupational productivity. So, your explanation does not apply.
That you consider Chapter 1 of any intro econ textbook as “nonsensical word salad” explains why your theory is not even internally consistent.
*Usual representation of Mexican wages are described too low. Mexican hour wages are calculated assuming 10 hour days, 365 days a year. US wages are calculated by number of actual hours worked. Making the adjustments, the Mexican factory worker is roughly equal to the US fast-food worker.
Warren Platts
Aug 14 2020 at 12:06pm
This is pettifoggery. FYI it is perfectly acceptable to write “3rd world” cf. New York Times headline “U.S. Resists Bid To End Tariffs For 3rd World“. As for cost advantage, if you will recall the Krugman quote above, he wrote, “when you look at low-wage countries, they have a big cost advantage.” I will assume the writing of the actual professor with the Nobel Prize is the correct usage.
As you well know, Dr. Boudreaux, the current account deficit is the obverse of the capital account surplus. These countries that are pursuing export oriented growth strategies must park their excess savings somewhere, typically a safe place that has no restrictions on capital inflows combined with a favorable tax structure. Besides that, they need U.S. dollars so they can settle their trades with other countries.
Anyway, while it is the case that foreign owned investments in the USA exceed American overseas investments, you might want to note that American-owned foreign investments generate both a higher rate of return, and generate a higher absolute annual income than foreign owned investments in USA.
No it is not. A Pizza Hut worker in Brookville PA can expect to make around $9/hour. A factory worker at the Victory-Beverage Air plant can expect to start at $11/hour for the day shift. The main difference is hours at Pizza Hut are much more flexible. At BevAir, you better be prepared to show up at 6AM every day and not be one minute late, and be prepared for mandatory Friday overtime.
And you all want to drive these wages down even lower. And you wonder how Trump got elected…
You are always citing “any intro econ textbook,” yet you never provide an actual quotation. Why is that Jon?
Anyway, your personal, idiosyncratic definition of “scarcity” is off topic. I will say this, however: your definition isn’t very useful because it is qualitative only, does not allow for relative differences, and renders the term ‘abundance’ meaningless.
Jon Murphy
Aug 14 2020 at 12:08pm
By the way, a quick point of fact, Mr. Platts:
According to the BLS and Statista, the US and Mexican labor productivity and wages of automobile manufacturing workers (excluding supervisors) is as follows:
Mexico: 40 vehicles per worker (2019)
US: 57 vehicles per worker (2019)
Difference: The US worker is, on average, 42.5% more productive than the Mexican worker.
Mexican automotive wage: $16/hr
US automotive wage: $30/hr
Difference: the US manufacturer is paid about 87.5% greater than his Mexican counterpart.
So, we have data that proves two of your conclusions wrong:
It is incorrect that “A Mexican GM factory is every bit as efficient as an identical American GM factory by every measure. Their workers are as productive as ours.” The Mexican factory is about half as productive as the US factory
It is incorrect that “American workers must compete against workers making $2/hour, if not $2/day!” at least insofar as Mexico goes.
You seem to be laboring (pun intended) under a perception of wages that is about 40 years out of date.
Jon Murphy
Aug 14 2020 at 12:31pm
I have. Every single time I bring it up (you’ll note I linked to this precise quote just yesterday). The fact you ignore it says a lot. See Chapter 1 of Openstax’s Principles of Economics (“Economics is the study of how humans make decisions in the face of scarcity…Scarcity means that human wants for goods, services, and resources exceed what is available…At any point in time, there is only a finite amount of resources available” pg 10). See Chapter 1 of Mankiw (“Management of society’s resources is important because resources are scarce. Scarcity means that society has limited resources and therefore cannot produce all the goods and services people which to have…Economics, therefore is the study of how people make decisions” pg 4). Or Chapter 1 of Stigliz (“Scarcity figures prominently in economics: choices matter because resources are scarce. Imagine an enormously wealthy individual who can have everything he wants. We might think that scarcity is not in his vocabulary until we consider that time is a resource, and he must decide what expensive toy to devote his time to each day. Taking time into account, the, scarcity is a fact in everyone’s life” pg. 10). Consider Chapter 1 of Heyne, Boettke, and Prychitko (“The focus on actions emphasizes economizing and trade-offs, or sacrifices. To economize means to use resources in a way that extracts from them the most of whatever the economizer wants. Scarcity makes economizing necessary…scarcity means making a sacrifice, a trade-off, to get more of what you want” pg. 5). Consider Chapter 1 Cowen and Tabbarok (“The inevitability of trade-offs is the consequence of a big fact about the world, scarcity. We face trade-offs because we don’t have enough resources to satisfy all our wants – more of this means less of that…Every choice involves something gained and something lost” pg. 4).
I can go on. This is literally the first thing covered in every since econ class.
Now, then, can you provide a quotation for your claim that scarcity exists only at full employment?
Warren Platts
Aug 14 2020 at 6:33pm
Dr. Boudreaux, that is really unfair. You asked if protectionism could identify at least one economically relevant distinction that separates domestic commerce from international commerce.
I provided the standard protectionist answer: In domestic trade, American workers only have to compete against each other. In international trade, American workers must compete against workers making $2/hour, if not $2/day.
You stated that is because those workers are proportionately less productive that U.S. workers.
I countered with what I thought was the mainstream economics theory, stating that such workers wages are low because of the average productivity of their nation, and not because a given factory is necessarily less productive than a U.S. factory producing an identical product.
Yet you and Mr. Murphy seem to be mystified as to how that could be.
Again, nothing I have written here is original to me. Everything I know about economics, I have read somewhere. In particular, Krugman explains this clearly in his “Ricardo’s Difficult Idea,” an essay that you are familiar with. Here is the relevant section:
Dr. Boudreaux: Do you see? You and Jon are committing the typical non-economist’s error of conflating factory-level productivity with national-level productivity. You seem to think that if a foreign factory worker is half as productive as a U.S. worker making the identical product, then that foreign worker’s wage should be half that of the U.S. worker.
Yet in Krugmans’s example, the Bangladeshi factory is half as productive as the American factory, yet those foreign factory workers only make 10% of U.S. standards–because the Bangladeshi national-level productivity is 5% of USA’s.
Warren Platts
Aug 14 2020 at 8:04pm
OK, I have spent the afternoon delving into these numbers. I guess the idea that the Mexican GM factory is as productive as a U.S. factory is apparently a stylized fact one learns in publications like the Washington Post that say stuff like “Mexican auto factories and Mexican manufacturing offer First World productivity and quality at Third World wages.” As for the GM factory itself, it might be as productive as a U.S. factory–we can’t tell from the aggregate data. However, as I shall show, that doesn’t matter.
As for your numbers, I came up with roughly the same units/worker using pre-Trump 2017 data and get ~40 units per Mexican worker versus ~52 units per American worker. (Note these are final assembler workers; if you look at the total automotive sectors, including parts makers, it is more like ~5.3 units per Mexican worker versus ~11 units per American worker.)
However, your estimate of Mexican autoworker wages are way off the mark. I found a detailed study by Alex Covarrubias, a professor at the Colegio de Sonora, “The Boom of the Mexican Automotive Industry: From NAFTA to USMCA” in New Frontiers of the Automobile Industry, Edited by Alex Covarrubias V. and Sigfrido M. Ramírez Perez (2020).
According to Covarrubias:
These numbers demonstrate the protectionist contention that foreign trade is fundamentally different than domestic trade. Mexican final assemblers are only marginally less productive than U.S. final assemblers, yet the Mexicans make a tenth of what the Americans make.
We can calculate the “benefit to consumers per Mexican worker.” Assuming 2000 hours per year, and a total compensation of $3/hour, and 40 units per year, the labor cost to assemble a unit is $150. Meanwhile, the “cost to consumers per American worker”, assuming 2000 hours per year, total compensation = $47/hour, and 52 units per year is ~$1800/unit. Thus the savings per unit is ~$1,650/unit. Since Mexico made 4 million units, the total “benefit to consumers” because of the “near-shoring” is $6.6 billion per year. Assuming 100 thousand Mexican final assemblers, the “benefit to consumers per Mexican job created” is $66 thousand.
This is not, however, the end of the story: U.S. wages and employment for autoworkers declined significantly in the post-NAFTA era. According to Covarrubias, average American autoworker wages declined from $36/hour in 1994 to $27/hour in 2017.
Moreover, Mexican autoworker wages have not gone up much and in fact have declined in recent years. Wages rose to a peak in 2007 of $3.95, and then shrank back down to $2.30 in 2017, leaving the Mexican wages essentially flat since 1994.
What is going on? Well, it is not just the free market, national-level productivity, reverse-Baumol effect. There is also industrial policy going on: the Mexican Leviathan has decided to go for full-on mercantilism. As such, they actively suppress wages in order that Mexico be “competitive” on the world market. And it is working. Practically the entire USA/Mexico bilateral trade deficit is due to the automobile industry.
Yet, we are told by Scott Sumner that us conservatives have only two choices: radical socialism, or a continuation of the “libertarian”, laissez faire, country-club Republocrat, free-market globalism!
Nuh uh. There is a 3rd way: the American System, protectionist, high-wage model.
Warren Platts
Aug 14 2020 at 8:15pm
Thanks for all the quotes Jon. I get it; everybody gets it: even billionaire playboys have to deal with scarcity because there is only so many hours in a day. Even I have to choose between tending my own garden and correcting people who are wrong on the internet.
That said, when new factories are created, it is not necessarily the case that other businesses must do with fewer workers, and even if the new factory jobs are filled with poached workers, it certainly is not the case that such poached workers must come from sectors more productive than manufacturing. Surely you can find a more important hill to die on..
Jon Murphy
Aug 14 2020 at 8:42pm
Man, you do not understand how the laws of physics work, do you? Yes, if a workers is employed doing a job, then he cannot be employed at a different job in the same hours. If it were the case that “it is not necessarily the case that other businesses must do with fewer workers” then factories in Mexico would pose no threat to factories in the US because there would be no choice between the different wage levels.
Which is why one must look at the actual data. Newspapers are not subject matter experts, and advertisements like the one you link to are not reliable sources of data. One must wonder what other stylized “facts” that simply are not so bounce around in your head?
Ha! I love it. You spent the past 3 days proclaiming that productivity matters and as soon as I prove your “stylized facts” are wrong, you proclaim it doesn’t matter. In the past three days, you’ve claimed: 1) productivity matters for wages and protectionism increases it, 2) productivity matters for wages and protectionism prevents unfair competition, and now 3) productivity doesn’t matter for wages.
You have a brilliant way of completely surrounding an issue.
Warren Platts
Aug 15 2020 at 12:14pm
Jon, sorry, but that is total non sequitur. Also, your notion that new jobs created by a new factory necessarily demand that other businesses must make do with fewer workers even when the economy is not at full employment is not logically coherent, there is no economic theory that says that, not to mention empirically false.
Anyways, as for the productivity of Mexican factories, you still don’t get it. First of all, neither one of us knows the productivity that Mexican GM factory. All we have are aggregate data. But for the argument at hand, it does not matter if the Mexican factory is half as productive, marginally less productive, as productive, or even more productive (in terms of units produced per worker) than the American factory.
Even if Mexican factories started pumping out 60 units per worker per year while American productivity dipped to 50 units per year, the Mexican workers would still be paid a small fraction of what the American workers make. Their wages might go up somewhat, but it would be going from $2.30 with a raise to $3.45 at best. There is no way would it get comparable to U.S. wages. At least not for many, many decades.
That is the fundamental difference between international trade and domestic trade, and also why globalism must be resisted by a 3rd way that doesn’t include radical socialism: American workers must compete against foreign workers doing the same job for a tiny fraction of the pay. This is a democracy. We don’t have to settle for that.
I don’t know why you have such a hard time wrapping your head around the concept that national wages levels are largely determined endogenously. You and Dr. Boudreaux are committing an error typical of non-economists: you are conflating factory-level productivity with national-level productivity.
Again, overall wage levels within a country are determined by national-level productivity. Yes, of course, wages vary within a country largely based on differences in productivity within that country (so no need to bring that up again), but between countries, workers can be equally productive, even though their real wages can be radically different.
The standard economics fable is that a barber in San Diego will make much more than a barber in Tijuana even though they perform the same number of haircuts of the same quality every day. Why? Not because of their individual productivity (that is the same in both places) but because the San Diego barber happens to live in a country with a relatively high national-level productivity.
I recommend you reread Krugman’s “Ricardo’s Difficult Idea”, especially the section labeled “Wages are determined in a national labor market”.
Mark Z
Aug 11 2020 at 7:22pm
Isn’t Navarro’s error more basic even than that: he ignores that imports are counted in consumption, so reducing imports, even in the identity, does not increase GDP.
Much of what you describe (Kotkin and Krein’s writings) seems like “the grass seems greener on the other side” error. Many immigrants or children of immigrants from hyper-conservative, communitarian cultures that I’ve known have seemed miserable about being shackled to their customs and expectations of their families. The parents and grandparents often lament the ‘Americanization’ of the younger generation, but they ‘Americanize’ because once here they are no longer as trapped in their old cultures. There doesn’t seem to be much movement in the opposite direction. Not many paleo-conservatives seem eager to move to more communitarian countries (Poland maybe?), which suggests a revealed preference contrary to the stated one. If they want to live in tight-knit culturally conservative communities, maybe they should take the “Benedict option” and form their own communities in selected towns or neighborhoods, like Hasidic Jews do. Maybe it’ll work out. Communitarianism sometimes can work for some people, at the level of the Kibbutz, but not at the level of the nation-state imo.
Scott Sumner
Aug 11 2020 at 8:16pm
Mark, Yes, that’s another way of explaining the error. Imports are either in C or I. But then some will always argue “if we didn’t import the consumer goods, then C + M would be larger”. That’s why I sometimes use the “identities don’t describe causality” argument.
Your other points are also quite perceptive.
Richard A.
Aug 11 2020 at 9:26pm
Net imports are in C, I, and G. This link gives a good writeup.
The above link expands the national income identity to;
GDP = (CD + CF) + (ID + IF) + (GD + GF) + (EXD + EXF) − IM
art andreassen
Aug 12 2020 at 10:19am
Scott: Imports are in C, I, X and G since they are imbedded in the inputs that are used in the production process of all the demand components. GDP=(C+I+X+G) less M. Economists divide PCE by GDP and get 70%. This ignores that M has been removed from the GDP total but not from PCE. Every dollar of Imports is not Exported.
Scott Sumner
Aug 12 2020 at 12:06pm
I did a post a few weeks back pointing out that consumption is not a part of GDP.
bill
Aug 12 2020 at 1:02pm
Link? Thanks!
Travis
Aug 13 2020 at 1:21am
bill, I am not sure what post Scott is referring to as far as consumption isn’t part of GDP, but I found this older post of his that I thought was great:
https://stageeconlib.wpengine.com/dont-confuse-accounting-with-causal-relationships/
Scott Sumner
Aug 13 2020 at 3:54pm
Oops, I have not posted it yet. I’ll do so this weekend.
Ivan Tcholakov
Aug 12 2020 at 11:22am
In very long run globalization will go on again. But the status of USD as the reserve world currency will be a setback for a while, because this status is abused. Gold is to be the driver in the future if you really want free and fair trade.
Warren Platts
Aug 12 2020 at 3:20pm
Yes, but whose saving/investment imbalances? In an open economy like USA’s, S = I + NX; hence NX = S – I. Since NX < 0, then all we have to do is increase our national savings rate until S = I, then NX will go to zero. Right?
Wrong. First of all, who does the most saving in USA? A: rich people. So the proposed "solution" of increasing savings entails even more transfers from workers to owners, hence even more inequality. Not desirable.
More importantly, in a closed economy, S = I. How is that relevant in a world where all economies are open? A: because Planet Earth itself is a closed economy. Therefore, global savings must equal global investment.
Surplus countries, by definition, have national savings that exceed their national investment. Therefore, that excess savings must go somewhere. That somewhere is places like USA that is a combination of a safe haven to plunk money, as well as lacking any capital controls on capital inflows.
Therefore, tariffs alone will never end the trade deficit. Even devaluing the USD will not end the trade deficit, and might even backfire: if you lower the price of assets, you can expect to sell more of them.
Thus, the solution–a possible example of a 3rd way contemplated neither by neoliberals nor country club “conservatives”–is obvious: use legislation/executive orders to end USA’s role as the capital dumping ground of the world.
Mark Z
Aug 12 2020 at 10:55pm
How would preventing foreigners from investing in US firms create jobs for Americans? As opposed to doing the opposite.
Warren Platts
Aug 12 2020 at 11:30pm
Because only a very tiny amount of the foreign investment (<1%) goes for greenfield factories & other businesses. The rest is invested in cash, T-bills (same as cash), stock market casino (38% of U.S. stock market is foreign owned–and they don’t have to pay capital gains taxes), real estate plays, etc.
It would be one thing if we were a developing country and a dearth of capital was constraining our economic growth (19th century USA). Then running a trade deficit can be a good thing because the foreign capital will go for desired (productive) investment, thus growing your economy.
But in the 21st USA, our growth is constrained, but not because there is dearth of capital. We have a surfeit of capital. What is in short supply relative to the amount of capital is desired (productive) investment opportunities. If you really have a good idea, the VC guys will find you.
Hence the trade deficit. Scott says trade deficits don’t affect GDP growth. That is only half true. We can maintain growth if we go into debt. And if we can grow fast enough, then paying off that debt is no problem. But if the debt grows faster than our ability to pay off that debt, then unemployment (that equals slow growth) must ensue.
So that’s where we’re at. We have slow growth. So we create jobs by ending the trade deficit, and we end the trade deficit by ending needless capital inflows.
Jon Murphy
Aug 13 2020 at 7:32am
Part of your problem is highlighted right here. You apparently do not see how these various investments generate jobs and value.
Scott Sumner
Aug 13 2020 at 3:59pm
There are a lot of mistakes in that comment. As far as the impact on domestic investment, it makes no difference whether foreign savings go into T-bills or greenfield investments.
I recommend taking a look at my recent Mercatus paper on currency manipulation.
https://www.mercatus.org/system/files/sumner-currency-manipulation-mercatus-working-paper-v1.pdf
Warren Platts
Aug 13 2020 at 5:20pm
Thanks for the link, Scott. 60+ pages–I’m still reading it, very interesting. In the conclusion you wrote:
Agreed 100%. If we have a current account deficit, it is because we allow it to happen.
(PS on pg 28, I think there is a minor typo: “currency account” s/b “current account”.)
Jon Murphy
Aug 12 2020 at 3:35pm
So, the problem is the American economy is too good compared to the rest of the world?
Jens
Aug 13 2020 at 4:32am
I suspect in some ways this is correct. And my NASDAQ100 index stocks see it the same way. There is also no other sector that benefits so much from international migration. But the sector is not only too strong for the rest of the world. It’s too strong for the rest of the US too. (No discussion about the term “too strong” necessary, i know myself that it is more than fuzzy ^^).
Jon Murphy
Aug 13 2020 at 10:21am
Which would explain why I am completely fuzzy on your comment. I do not know what you are trying to say.
Warren Platts
Aug 13 2020 at 12:20pm
And this is really unfair. The 3rd way–aka the American System–used to be the standard modus operandi for this country for 200 years; albeit, it was steadily diluted by Democrat progressives, starting with the son of the Confederate, free-trading planter class, Woodrow Wilson.
‘Conservatism’ can roughly be defined as the doctrine that if there is no need to change, there is a need not to change. There was never a need for the laissez faire, free-trade mania that gripped the country once Friedman managed to insinuate himself with Ronald Reagan. There is nothing conservative about free trade. Thus an authentic conservatism would return to the old system that served this country well for 200 years.
Moreover, “a lot of trade” versus “closed to trade” is a false dichotomy. In the 19th century, we had high tariffs (Trump’s tariffs are puny in comparison), yet we still traded (and indeed ran chronic trade deficits practically the entire 19th century, despite the high tariffs). After all, the government was mainly funded by tariffs: if there is no trade, there is no tariff revenue.
Thus, although there was much trade in the 19th century, it was not emphasized as an important mechanism for economic growth. The American System rejected the idea that a large and expanding, continental-sized economy ought to specialize at the national level. Why? Because we were a land-rich, but people-poor, and at the time, capital-poor country. Therefore, according to the real (Anglo) economists (Smith/Ricardo et al.), the U.S. economy should have specialized in agricultural exports, thus condemning the USA to eternal, 3rd-world status.
Of course, Hamilton, Clay and the rest rejected this line of thinking. Consequently, I guess they never counted as “economists.” So much the worse for economics.
Because labor was the scarce factor of production, wages were very high compared to Europe, and especially compared to China and India. But the American System turned that apparent bug into a feature. Unlike land or machines, workers buy stuff. The higher their wages, the higher their consumption, the more the economy grows.
Moreover, although it is now fashionable to paint 19th century protectionists as evil crony capitalists, if you actually look at the popular literature at the time, the argument for tariffs very much was to protect the wages of the common man. The intuition that tariffs will protect wages in a land-rich, labor-poor country was of course later proved mathematically by Stolper & Samuelson in 1940.
High wages also improve the 4th factor of production: knowledge. High wages provide a powerful incentive to invent labor-saving devices (aka automation). Hence the famous “Yankee know-how”.
Therein lies the 3rd way: we will have trade, but it will not be emphasized. Instead, what will be emphasized is high wages for the working class. Rather than engaging the worldwide race to the middle, we instead manage for a tight labor market. Minimum wage laws, if they exist at all, would be superfluous. As Ricardo himself said, “A tight labor market is a happy labor market.”
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