Tuesday, May 31, 2016

When countries do have trade surpluses or deficits, they reflect shifts in savings/investment propensities, and are essentially unrelated to globalization

See Random thoughts on globalization by Scott Sumner.
"Here's Scott Alexander:
An article by Freddie deBoer in this month's Current Affairs proposes "Journalistic Self-Outsourcing". DeBoer notes that lots of journalists and intellectuals suggest that protectionism and other anti-globalization policies are immoral. For example, Zack Beauchamp of Vox calls Bernie Sanders' skepticism of free trade "screwing the global poor"; Brad deLong calls the same "a call to keep China a society of poor subsistence rice farmers as long as possible - keep them poor, barefoot, uneducated, and by no means allow them to work at any of the high-value manufacturing occupations we want to keep in the United States."
Here's how Fredrik deBoer begins his response to DeLong:
We have entered another phase of journalists, raised in affluence and currently enjoying at least middle class incomes -- who are thus, according to their own moral calculus, very economically privileged -- telling Americans devastated by the collapse of the uneducated labor market that their poverty, marginalization, and hopelessness is Actually Good, because people in Bangladesh can now move from absolutely abject poverty to slightly-less-abject poverty. Provided the sweatshop where they work doesn't collapse on them. And provided they are willing to endure a nightmare of nonexistent labor power, terrible health and safety standards, total impunity from their bosses, and for the women, an atmosphere of near-constant sexual threat and exploitation.
I'm not familiar with deBoer, so I have no idea whether he's being dishonest or if he's simply unaware of global realities. But he's got things exactly backwards. The gain in living standards in recent decades (due to neoliberalism, including globalization) is one of the best things that has ever happened. Yet look at the adjectives that deBoer uses:
Americans devastated by the collapse
and
people in Bangladesh can now move from absolutely abject poverty to slightly-less-abject poverty
The losses to certain segments of America, while large in an absolute sense, are utterly trivial compared to the gains in living standards seen in places like Asia. And yet deBoer makes it seem like it's the Asian gains that are trivial. Does he not know what it means to see per capita income rise from say $1000 to $2000, or $5000, or $10,000? Or is he just trying to score debating points? I don't know. I basically agree with Scott's take on all this, but I'd like to comment on this paragraph in Scott's long post:
Again, there's a contingent argument otherwise. If you're really pro-globalization, you might believe that it's impossible for the Chinese to take all our jobs, in the same way that the Luddite Fallacy says it's impossible for robots to take all our jobs. The more Chinese take manufacturing jobs, the more Americans will have lots of money which will encourage new service jobs that the Chinese can't easily take. If this is Beauchamp's argument, he could say that we should globalize all the jobs that can be globalized, including his if possible, and then he will just move to an unglobalizable job. Since his job hasn't been globalized yet, maybe he's already in an unglobalizable job, so people should just stop bothering him.
I don't think that's a useful way to frame things---it makes it seem like rich countries simply outsource tradable goods jobs to poor countries, which is not at all what's going on. When thinking about the impact of globalization on the US it's useful to view the US trade account as balanced. You might find this claim strange, as we actually run a large deficit. So let me explain in 4 steps: 
 1. I am fairly confident that for the developed world as a whole, trade is roughly balanced. The rise of manufacturing in developing countries does not cause significant trade deficits in the developed world. Some developed countries, especially English-speaking countries such as the US and Australia, run trade deficits, while other developed countries such as Germany, Japan and the Nordics run big trade surpluses. But overall you have a roughly balanced trade account for rich countries. Thus even if you believed that trade deficits destroyed jobs in manufacturing (I don't), the argument would be very hard to apply to the developed world as a whole, because we export about as much as we import. So when we import more, we also export more. If there are fewer jobs in manufacturing in the developed world (and there are) it's due to automation, not trade.

2. I hope you are with me so far, as the preceding argument isn't particularly controversial. The next step may be controversial. When countries do have trade surpluses or deficits, they reflect shifts in savings/investment propensities, and are essentially unrelated to globalization. Because the US invests more than it saves, it would run a big trade deficit even if China were not a big factor. In fact, before China became a big factor we did have big deficits with places like Taiwan, Japan, Germany, etc. Germany has labor costs comparable to the US, but doesn't see their manufacturing jobs being taken away by China. They run trade surpluses because they save more than they invest. 

3. I was unable to get good data on manufacturing, but for what it's worth one source claimed the US exports $1.4 trillion in manufacturing goods each year, and various sources had total manufacturing output in the US as just above $2 trillion (I am not certain this data is correct.) The point is that workers in the export part of the manufacturing sector are actually helped by trade liberalization. Given a trade deficit of say 3% of GDP, any big boost in imports will lead to an equally big boost in exports, and in jobs manufacturing those exports. Less that 9% of American workers are in manufacturing, and most of those seem to be in sectors helped by trade. 

4. To summarize, trade deficits are not a problem, and don't cause a higher unemployment rate. But even if I am wrong about deficits, globalization is not causing our deficits, as indicated by the fact that the entire developed world has been heavily impacted by globalization, but has roughly balanced trade. It's (almost) all about automation.

Some commenters claim that economists are hypocrites because they don't advocate outsourcing their own jobs to Asia. DeBoer makes a similar accusation against DeLong. I'm not sure that's true, as I see increasing numbers of Asian job candidates at the AEA meetings, looking for academic jobs, and I approve of that trend, as do most economists that I know. On the other hand, I suppose economists might be opposed to an otherwise desirable policy change that immediately took away 100% of our jobs, so perhaps in that sense the accusation is true. But beside the point. I am pretty sure that DeLong doesn't complain when factory workers fail to advocate the outsourcing of their jobs.

Our models predict that trade will hurt people in some industries, and that the losers from trade will lobby Congress to prevent open markets. If I were an American textile worker I'd be pissed off right now. And yet cynics who contrast the views of economists and unemployed textile workers are missing the point. The really interesting divergence is between economists and those non-economists who have the same economic interest as economists.

Doctors, lawyers, plumbers, and electricians, are all helped by free trade, as their jobs are not threatened by imports, and they gain as consumers. Just like economists. However their views on trade are very different from the views of economists, in two ways:

1. Most people believe that if you like a domestically built car almost as much as an import, the patriotic thing to do is to buy the American car. Economists believe that if the imported car makes you a tiny bit happier, the patriotic thing to do is to buy the BMW. (Or at least good economists, who probably account for at least 37% of the profession.)

2. Most people view trade and automation as being radically different issues. Technological progress is viewed as good; trade is viewed with some suspicion. Economists see the two issues as being quite similar; creative destruction that improves overall welfare at a cost of painful dislocation for some workers and companies. Just imagine if Trump started railing against technological progress---even his supporters would be perplexed. Belief in "progress" is almost a religion in America. And yet it's automation, not trade, which is destroying millions of manufacturing jobs all over the developed world. Again, for the developed world as a whole, trade is roughly balanced. It's automation that destroyed factory jobs in the developed world.

The bottom line is that it's too easy to dismiss the views of economists by pointing to their comfy position, unthreatened by Chinese imports. For better or worse, we really do have a radically different view of how the world works. I can respect someone who goes full bore Luddite. I won't agree with them, but I can respect them. I cannot respect anyone who becomes an anti-globalization activist without also railing against technological progress. Instead, I assume they don't understand the issue---they haven't yet absorbed the message in Paul Krugman's Pop Internationalism. They aren't rejecting comparative advantage and trade; rather they don't yet understand the concept.

PS. I am not certain about my trade account claim. I found some recent current account data that seemed to show a net surplus for the developed world, defined as Western Europe, plus the US, Canada, Australia and the rich parts of East Asia. I'm pretty confident that if the trade balance is smaller than the CA balance, the difference is not dramatic enough to affect my claim that trade is roughly balanced for the developed world. In any case, the Swiss will tell you that service exports are nothing to sneeze at.

Update:
Tyler Cowen has a new post reminding us that reduced employment in manufacturing is about automation, not trade. However contrary to the title of his post, China is not really deindustrializing (prematurely or not), it is becoming more efficient at a rapid rate--the mark of a successful economy. Manufacturing output in China, already the world's largest, continues to rise rapidly."

Five Facts about the Minimum Wage

By Alan Reynolds of Cato.
"1. A dozen California metropolitan areas – including big cities like Fresno, Stockton, Bakersfield and Modesto – already have unemployment rates from 8.0% to 18.6%. Yet California’s statewide minimum wage is now scheduled to rise every year through 2022.
2.  News reports imagine that raising the minimum wage will push up other wages, so average wages would supposedly rise more quickly. On the contrary, three of the four most recent increases in the federal minimum wage were quickly followed by prolonged stagnation in average wages.
 
change in avg and min wage

3. In 2015, twice as many earned less than the $7.25 federal minimum wage (1,691,000) as the number paid that minimum wage (870,000).

4. Every time the federal minimum wage has been increased the number earning less than that minimum always increased dramatically.  This was not just true of teenagers but (as the graph below shows) also for those over 25.  When the minimum wage is pushed up faster than the market would have moved it, the effect is to greatly increase the proportion of jobs paying less than the minimum (including working for cash in the informal economy).  Employers offering less than the minimum, legally or otherwise, then enjoy a flood of unskilled applicants unable to compete for scarcer opportunities among larger businesses subject to minimum wage laws. Such intensified rivalry for sub-minimum-wage jobs then pushes the lowest wages even lower.

more were paid less than min when min wage went up

5. Regardless of federal, state or city laws, the actual minimum wage is always zero."

Monday, May 30, 2016

No, legal weed is not ‘dumbing down’ the nation’s teens

By Christopher Ingraham of The Washington Post. Excerpts:
"Given the widespread liberalization of marijuana laws and huge changes in public acceptance of the drug, you might expect that by now we'd be seeing more marijuana use — and more problematic use, such addiction and dependency — among the nation's teens. But in fact the exact opposite has happened, according to a new study from Richard Grucza and colleagues at the Washington University School of Medicine in St. Louis.

The number of American teens with marijuana-related problems — such as dependency on the drug, or troubles with family and school due to marijuana use — fell by 24 percent between 2002 and 2013. The overall number of teens using marijuana fell, too. And the teens who do use marijuana are less likely to experience problems due to the drug.

"We were surprised to see substantial declines in marijuana use and abuse," Grucza said in a statement. "Whatever is happening with these behavioral issues, it seems to be outweighing any effects of marijuana decriminalization.""

"The reduction in the past-year prevalence of marijuana use disorders among adolescents took place during a period when 10 U.S. states relaxed criminal sanctions against adult marijuana use and 13 states enacted medical marijuana policies," the study found. "During this period, teenagers also became less likely to perceive marijuana use as risky, and marijuana use became more socially acceptable among young adults."
"the number of adolescents experiencing a broad array of non-drug-related conduct problems — fighting, stealing, arguing with their parents — was declining, too. And so they divided the kids experiencing marijuana-use problems into two groups: those who exhibited marijuana-use disorders alongside other conduct problems and those who had marijuana-use disorders but otherwise experienced no other conduct problems.
They found that the decline in marijuana-use disorders was concentrated almost exclusively in the kids dealing with other problems on top of their pot use: "We observed a decline in the proportion of adolescents who both reported conduct problems and met criteria for marijuana use disorders. In contrast, the proportion of adolescents with marijuana use disorders who did not report conduct problems remained relatively constant."

Researchers know that bad behavior and drug use often go hand in hand among teens. While the causality can go either way — bad behavior causes drug use or vice versa — a reduction in one usually accompanies a reduction in the other. So if teens are becoming better-behaved overall, it stands to reason that drug problems will decrease, too.

"Other research shows that psychiatric disorders earlier in childhood are strong predictors of marijuana use later on," Grucza said in a statement. "So it's likely that if these disruptive behaviors are recognized earlier in life, we may be able to deliver therapies that will help prevent marijuana problems — and possibly problems with alcohol and other drugs, too."

Again, the research here does not at all show that liberalization of marijuana laws caused these reductions in teenage marijuana abuse. But it does strongly suggest that other factors — such as broader behavioral and mental health trends — are much more likely to drive changes in teen marijuana use than other factors, such as laws or attitudes toward pot.

Grucza's study adds to a growing body of research showing that changes to marijuana policy have had a much smaller effect on teenage drug use than once feared. A paper published in Lancet Psychiatry last year found that passing medical-marijuana laws had no effect on teen marijuana use at the state level. Other large surveys of adolescents, such as the Monitoring the Future Study, find that in recent years teen marijuana use has been flat. State-level federal survey data shows little change in teen marijuana use, even in states that have legalized it for adults."

The other great accomplishment of markets is that they reconcile the choices people make for themselves with the choices other people are making

From Cafe Hayek.
"from pages 73-74 of NYU economist William Easterly’s superb 2006 book, The White Man’s Burden – a book that explores the differences between economic ‘development’ that is designed and imposed by “Planners” and economic development that is undesigned and generated by “Searchers”:
The other great accomplishment of markets is that they reconcile the choices people make for themselves with the choices other people are making.  Back at the dinner table we find that no Planner is necessary to process the enormous amount of information that is required to decide how much pasta, rice, cheese, and takeout cuisines of various cultures to supply to the people of New York.  This great achievement of markets is achieved through Searchers.  The suppliers search for customers, the customers search for suppliers, and the price adjusts up or down to equate supply and demand.  So the market determines prices and quantities to reconcile the needs and abilities of suppliers and consumers.  The price reflects both the additional cost that the supplier incurs to supply an additional item and the additional benefits that the customer gets from purchasing one more of each item.  Hence, the market matches the additional cost to society of producing each item to the additional benefit to society of consuming that item.  The market comes up with a basket of commodities produced at the lowest possible price for the highest possible benefit.
Does this competitive, decentralized market pricing system work perfectly in reality – as in ‘never failing to maximize benefits at some given cost, or never failing to minimize the cost of generating some given benefits’?  Does this market system always and at every moment ensure that all willing buyers have all of their needs that can be met at appropriate costs actually met at appropriate costs?
Answering these questions can be surprisingly difficult depending on how “benefits” and (especially) “costs” are defined.  But my answer is “no.”  No: real-world markets, even in ideal institutional and cultural settings, never achieve maximum maximization of human well-being.  Genuine opportunities for improvement are always present.  (These opportunities are a chief fuel for the on-going market process.)

But the reality that deserves our attention and admiration is that markets, where they are allowed to work, work as well and as smoothly as they do.  The failures of markets when private property rights are at least reasonably secure and most prices are allowed to rise and fall in response to market forces are nothing as compared to the successes.  And a great danger is this: efforts to tax, subsidize, or regulate a market in ways meant to correct whatever failures currently exist are far too likely not only themselves to fail to correct those failures, but that these efforts will also so disturb the complex interactions of the market that the net result is a worsening of the overall market outcomes."

Sunday, May 29, 2016

Did increased trade with China from 1990-2007 cause employment problems or was it government-program changes that made being unemployed a bit easier?

See Getting Trade Straight by Don Boudreaux.
"Here’s a comment that I left this morning on this EconLog post by David Henderson:
David: Thanks for the pointer to Feenstra’s paper.
Here’s one elaboration on the point you make – and that Scott made in an earlier post – about the Autor, Dorn, & Hanson paper on American trade with China. Specifically, I’m led to offer this elaboration by your admission that you’re “a little surprised at the long-term reduction in U.S. employment.” (Note that what I say here is not meant to suggest that such surprise is inappropriate or, well, surprising. I share that surprise. And I agree with all that you write above.)
All predictions, even those that Hayek called “pattern predictions,” of course rest on ceteris paribus assumptions. When an economist predicts that increased imports will have no long-run effect on the number of jobs (or rate of unemployment) in the domestic economy, the empirical prediction that the data will reveal this theoretical prediction to be correct rests on countless assumptions about policies, preferences, physical constraints, even culture, remaining sufficiently unchanged so as not to prevent the creation of a large-enough number of new employment opportunities in the long-run to offset the jobs ‘destroyed’ by the increased imports. So stated, the above seems to be trivially true.
Yet over the course of the 17-year period studied by Autor, et al., ceteris was not paribus. It never is, of course. But when Russ, in his podcast with Autor, asked Autor about government-program changes that made being unemployed a bit easier – and, hence, perhaps explains much, or all, of Autor, et al.’s findings – Autor dismissed this possibility. Autor chose to conclude from the data that the cause of the increase in long-term joblessness that he and his co-authors found was Americans’ increased trade with China.
Perhaps Autor’s conclusion is correct, but note that not only is it not one that is ‘proven’ by the data, it demands some supplemental theoretical account to make it work. The very nature of the economists’ case for free trade – namely that free trade is simply one manifestation of economic competition, and that economic competition causes no lasting unemployment because the economy is assumed to be sufficiently robust to ‘create’ enough jobs to replace those that are ‘destroyed – demands that an observation that long-term unemployment increased following a change in trade patterns be explained by some account of a change in the economy or in government policy (and not just by a change in the intensity of trade).
Because international trade is just one particular manifestation of economic competition – and because economic competition incessantly changes the patterns of economic activity – why in the years 1990-2007 do we suddenly get an economy that apparently cannot create employment opportunities, in response to changes in trading patterns, as well as it did in the 200-plus years earlier? And why focus on increased trade with China? The 1990-2007 period was famously one of great technological change – change that itself ‘destroyed’ many jobs and that altered the manner in which people are able to earn livings. Is it really possible, empirically, to determine that the increased long-term unemployment is only of American workers who were competing with Chinese imports rather than also of American workers who lost jobs to new technologies – or, even, to changing demographics within the United States?
Pointing out, as Autor did, that the workers affected by increased trade with China were generally low-skilled and poorly educated is insufficient to conclude that the economists’ case for free trade now no longer holds. The 19th and 20th centuries were filled with many workers just as unskilled and as ill-equipped for ‘new’ jobs as were the years 1990-2007.
So, the surprising long-term unemployment [or reduction in jobs] that occurred in the U.S. just as American trade with China intensified cannot be explained simply by pointing to this increased trade with China (and then concluding that the standard economics of trade no longer applies). Its explanation demands some account of changes in the economy or policy that, for the first time in American history, make the economy unable to create, and to create in ‘good’ time, a sufficiently large number of new employment opportunities to replace those that are ‘destroyed’ by foreign trade.
The surprise about unemployment, in short, must be due, not to increased foreign trade, but to some underlying change in the economy. And this change, whatever it might be (call it “X”), means not only that we should now start to fear increased competition from imports but also fear any changes in production technologies and in the pattern of consumer expenditures. The reason is that these changes, too, will interact with X to create undesirable, long-lasting unemployment.
I’m not yet ready to conclude that the U.S. economy has changed in this way, although I might well be mistaken. But if the U.S. economy has indeed changed in this unfortunate way, the problem is not trade per se – and protecting ourselves from long-term unemployment will involve a great deal more than higher tariffs on imports.
At the risk of being too repetitive, I emphasize, as I said in this post from March, that if Autor’s, et al.’s, key finding is that many actual, flesh-and-blood workers were left permanently worse off by increased trade with China than these workers would have been, ceteris paribus, had Americans’ trade with the Chinese people not increased, then this finding is not in the least inconsistent with conventional economic theory or with standard economic policy prescriptions that are based on conventional economic theory.  Such a finding is simply not newsworthy.  And a main reason why such a finding isn’t newsworthy is that the economic case for market competition – of which the case for free trade is simply a part – does not assume that actual, flesh-and-blood individuals are never made permanently worse off, ceteris paribus, by the many changes that are incessantly wrought by competition.

If instead the main finding of Autor, et al., is taken to be that Americans’ trade today (unlike in the past) with large, low-wage, and liberalizing countries such as China leads to a permanent reduction in jobs below what the number of jobs would otherwise be – or that such trade causes, now for the first time in U.S. history, an increase in joblessness that lasts so long as to be a genuine problem – then the culprit is not increased trade.  The culprit is some change in the economy – the “X” that I refer to in my EconLog comment – that today interacts with increased foreign trade to cause these problems.  But note, again, that if the problem is some “X” in the nature of the domestic economy (including the government policies that influence that economy), then it is inaccurate to say that “‘X’ has caused economists’ traditional case for a policy of free trade to no longer hold.”  A more accurate statement is that “‘X’ has caused economists traditional case for competition and consumer sovereignty to no longer hold.”

My plea, amidst all these many words, is for a clearer understanding that trade is simply competition.  My plea is for people to understand that any complaints about trade, or any findings that trade sparked this or that problem (be the problem real or illusory), are really complaints about competition and findings that competition sparked this or that problem.  If politicians and pundits (and, especially here economists) really have found some good economic reason to restrict people’s freedom to trade with foreigners, then these politicians and pundits (and economists) have in fact found some good economic reason to restrict people’s freedom to compete economically in whatever ways economic competition might be manifested.  Such a finding has implications that go well beyond the case for international free trade.

Put differently, if someone insists on making a case against free trade, I want that case to be made more honestly and consistently with the underlying argument: make it openly, not as a case merely against international trade, but as a case against all competition and economic change."

Productivity and Pay: Do Workers Enjoy the Fruits of their Labor?

From The Heritage Foundation.
"Do workers enjoy the fruits of their labor? Economic theory predicts that firms pay workers according to their productivity. Some analysts argue this no longer happens in the United States. They contend that workers’ pay has stagnated for the past generation despite large increases in productivity. This belief drives much of the Obama Administration’s regulatory agenda. Labor Secretary Tom Perez explains the newly released salaried overtime regulations are intended ensure that “as we have productivity and profitability in this country, that is shared between business and workers.”

New research from The Heritage Foundation finds that is already happening. Since 1973 average hourly labor productivity has grown 81 percent. Over the same period employees’ average hourly compensation has grown 78 percent. Employee pay closely tracks productivity growth. The studies finding otherwise compare the productivity and pay of different groups of workers, adjust pay and productivity for inflation differently, and contain mathematical errors. These factors cause the apparent gap between pay and productivity reported."

Pizza Hut just signaled a terrifying reality for fast-food workers

By Hayley Peterson of MSN.
"A former McDonald's CEO warned this week that companies will replace human workers with robots if the minimum wage is raised above $15.

But that possibility has already become a reality for Pizza Hut waiters.

Pizza Hut has partnered with MasterCard to deploy robotic waiters to its restaurants in Asia.

A digital tablet displayed on the robots' chests show menu options.

In order to interact with Pepper, customers must have a MasterPass account on their phones.

Here's how it works: Customers will greet the robot, then pair their MasterPass account by either tapping the Pepper icon on their phones or by scanning a QR code on robot's tablet.

Then the robot will be able to help customers order and pay for their food.

Pizza Hut executives said Pepper will make it easier for people to customize their orders and it will speed up customer service.

"We are excited to welcome Pepper to the Pizza Hut family," said Vipul Chawla, managing director of Pizza Hut Restaurants Asia. "Core to our digital transformation journey is the ability to make it easier for customers to engage, connect and transact with Pizza Hut. With an order-and-payment-enabled Pepper, customers can now come to expect personalized ordering at our stores, reduce wait time for carryout, and have a fun, frictionless user experience."

Click here to watch Pepper in action

The addition of Pepper to Pizza Hut represents a new threat to fast-food workers.

Wendy's, McDonald's, and Panera have all started rolling out digital ordering kiosks to restaurants across the US to speed up customer service and reduce labor costs.

Robots haven't been piloted in US restaurants yet, but it might not be long before they become mainstream, at least according to former McDonald's USA CEO Ed Rensi.

Former McDonald's USA CEO Ed Rensi warned on Tuesday: "It's cheaper to buy a $35,000 robotic arm than it is to hire an employee who's inefficient making $15 an hour bagging french fries," Rensi warned in a Fox Business interview on Tuesday. " It's nonsense and it' s very destructive and it's inflationary and it's going to cause a job loss across this country like you're not going to believe."