The tendency to attribute outright magical powers to government spending has gotten slightly out of control. It's appropriate to ask the same question that should have been asked of Republicans in 1980: if all this is so marvelous, why don't we just do it indefinitely--slash tax rates to zero, borrow and spend forever?Is it just me, or is this argument for government spending starting to sound just a bit like the Democratic version of the Laffer Curve? i.e. more borrowing means more tax revenue, instead of lower tax means more tax revenue !
The answer is that there are declining returns to all of this. At some point, the Laffer Curve maximizes, and any further cuts cost the government money. Similarly, the trillionth stimulus dollar probably isn't nearly as effective as the first.
I'm becoming extremely concerned about the stimulus, for the following reasons:
1) Where is the strong evidence that the kind of truly massive stimulus people like Krugman are pushing for will do anything but provide a very temporary respite before the economy slumps back, more indebted and no better off than before? The chief complaint about the two historical examples we have, the Great Depression and 1990s Japan, is that such stimulus was not sufficiently tried.
2) What about the permanent income hypothesis? If we make the stimulus spending temporary, I presume we have the same problem we do with tax cuts--rational consumers will save most of the extra income. If we make it permanent--that's a different, but bigger, problem than we have now.
3) We are a nation of net dissavers, which contributed greatly to the bubble. Can we really prolong this?
Most of the stimulus is being pushed through the banking system. That's probably the most efficient place in which to focus resources, given the size of the multiplier and the speed at which it could push the money out there (assuming that the lenders actually bother using the money for that purpose.)
The infrastructure proposals are window dressing, everyone knows those would create minimal short-term benefit. The real gambit here is the drive to push the mortgage and equity markets. The hope is that if housing bottoms out, lending increases and retirement accounts see some upside that we can all quit worrying and get back to shopping, which will prompt businesses to rebuild their payrolls and resume their efforts to build a better cappuccino. By the time things have recovered, the shiny new infrastructure would just be icing on the cake.
The tendency to attribute outright magical powers to government spending has gotten slightly out of control.
It's a very dangerous trend. People tend to forget that gov't seizes wealth as opposed to creating it. Debt spending must, at some point, be seized from taxpayers who create wealth in the private sector.
We're now probably looking at something like $4T in deficit spending, which is a truly frightening proportion of the eocnomy. Eventually there won't be enough of a private sector left to create the wealth to fund the ever-larger public sector.
"It's appropriate to ask the same question that should have been asked of Republicans in 1980: if all this is so marvelous, why don't we just do it indefinitely--slash tax rates to zero, borrow and spend forever?"
Well, because without taxes government has no way to raise real (i.e. non-borrowed) revenue. And without the means to raise the revenue to repay loans, no one would actually lend to the government.
I suppose next you'll be asking why we can't just print money to make up the deficit?
Megan,
I actually am beginning to think that the most prominent proponents of borrow-and-spend-even-more, like Krugman and others, are simply practicing cover-their-asses here. If Obama had promised 2 trillion, Krugman would have called for 4 trillion. In the end, Krugman simply wants to have an excuse ready if the economy simply limps for years and years in despite/because of the insane policies being proposed. If Obama's stimulus fails, Krugman and DeLong can always claim the failure was due to it not being big enough.
Also, not to be a broken record, but people need to realize recessions serve some useful purposes. For instance, Google and Craigslist threw the entire news business into severe recession, but few are arguing we'd be better off without the Internet. Deflationary pressures in a recession are of enormous benefit to consumers, particularly the poor.
The solution to any problem is rarely, if ever, more of what caused the problem in the first place.
One day we will learn this lesson.
Or not.
Did you hear that sound Brien? That was the sound of Megan's rhetorical going way over your head.
"I actually am beginning to think that the most prominent proponents of borrow-and-spend-even-more, like Krugman and others, are simply practicing cover-their-asses here."
No question about it. They're framing their argument in a way that makes it bulletproof. Krugman's primary concern in all of this is to make sure that his ideological preconceptions are never challenged. He's got a Nobel prize, don't-cha-know!
Saith the blogger Shuggy:-
'..I'm concerned that the government's policies might not work because of the way people's expectations of the future tend to take hold. I feel this myself. Twice in my incompetent life I've made sensible financial decisions - rare things for me. Got myself a fixed-rate thingy just before interest rates started to rise - then got myself a variable one just before they started to fall. I wouldn't like to tell any London readers how cheap my mortgage is right now because they would probably cry. But the thing is, I'm not thinking, "Hooray - think I'll go out spending for Queen and country". I'm thinking, "Better not get used to this - this ain't going to last".'
"Also, not to be a broken record, but people need to realize recessions serve some useful purposes. For instance, Google and Craigslist threw the entire news business into severe recession, but few are arguing we'd be better off without the Internet. Deflationary pressures in a recession are of enormous benefit to consumers, particularly the poor."
Catching a virus can boost your immune system as well once it's gone. But you don't want to get Avian Flu because, well, it kills you.
"Did you hear that sound Brien? That was the sound of Megan's rhetorical going way over your head. "
Likewise.
TallDave nailed it. Our recent cry-baby aversion to "creative destruction" is killing capitalism and all that's good about it.
The housing bubble was SUPPOSED to crash! That's what bubbles do. Home prices are absurdly higher than they are supposed to be as a result of too-easy credit.
Let the market crash, and suddenly modest-income families can afford homes without massive assistance anymore. Borrow $8 Grand from you parents and you can move into a foreclosed McMansion in the exurbs of a midwestern city. The house which once cost half a million can now be had for a mere $150K... which is about what it was worth all along.
But as long as we keep trying to prop these messes back up, the economy can't correct itself, and we continue to throw money down a rat-hole to maintain a market distortion which doesn't belong there in the first place.
Also, not to be a broken record, but people need to realize recessions serve some useful purposes. For instance, Google and Craigslist threw the entire news business into severe recession...
No, new companies with newer technologies replacing older ones is NOT a recession. A recession is when the output of the whole economy shrinks. And that's never a good or useful thing. It may be a temporarily unavoidable thing, but not a good one. It may also be a mistake to try to 'paper over' the recession with a huge blizzard of government money (I agree that probably is a mistake), but that still doesn't make a recession a good thing.
"The housing bubble was SUPPOSED to crash! That's what bubbles do. Home prices are absurdly higher than they are supposed to be as a result of too-easy credit.
Let the market crash, and suddenly modest-income families can afford homes without massive assistance anymore. Borrow $8 Grand from you parents and you can move into a foreclosed McMansion in the exurbs of a midwestern city. The house which once cost half a million can now be had for a mere $150K... which is about what it was worth all along.
But as long as we keep trying to prop these messes back up, the economy can't correct itself, and we continue to throw money down a rat-hole to maintain a market distortion which doesn't belong there in the first place."
And people wonder why libertarians aren't taken seriously.
A few questions:
1. Whose "parents" are, in a recession of substantial magnitude, going to have $8,000 to loan out to a child who either doesn't have $8,000 to put up themselves or can't get a loan from a bank or other financial institution?
2. How is this person likely to be able to afford the bills for the house, or the commuting expenses of living in the exurbs, especially when the recession ends and energy prices increase again?
3. How exactly does this relate to the stability of some of the biggest and most important financial institutions in the world?
4. At what point does "creative destruction" just become destruction?
Ok,
It's easy to raise arguments as to why the stimulus is a bad idea and why TARP and the auto bailout are bad ideas, too.
It's easy to say Krugman, et al. have a built in excuse if the stimulus fails.
But Krugman, et al., have at least put their proposed solutions on the table. We know where they stand, rightly or wrongly.
Since you do not like the stimulus, then what actions do you propose in lieu of a large stimulus? Do you believe there is no economic crisis, and, therefore, we need do nothing? Do you believe there is an economic crisis, but there is nothing worthwhile to do, that all actions will only make it worse?
Be brave. Be like Krugman. Take a stand.
Isn't this standing on the sidelines calling foul every once in a while just a bit boring?
If the government can't create wealth by distributing resources in a better way than they would have been distributed otherwise, then banks certainly can't, as they also just move money around. I know that some people really do believe this, but they are wrong.
When is someone going to ask why we expect this stimulus package to work now when it didn't work in the 1930's......?
I actually am beginning to think that the most prominent proponents of borrow-and-spend-even-more, like Krugman and others, are simply practicing cover-their-asses here.
You'd be wrong to believe that. Krugman is simply being consistent. During the Japanese permarecession, he was advocating a devaluation of the yen and other drastic measures. Rightly or wrongly, he maintains this position because of the depths of the current problem, which are clearly worse than the norm.
Krugman also warned of the housing bubble as early as 2002. He pointed out how the Fed was not only complicit in its creation, but engineered it by design. It would seem that he had a point, at a time that many conservatives didn't see a bubble at all and were quick to ridicule anyone else who did.
As does lxm above, I, too, would like to see what the libertarians suggest that we do. Before you scream out "tax cuts!" in unison, I'd like to see some support for the argument that those tax cuts will actually create results that would create a recovery.
Keynesians would agree with cutting taxes during times like these. But a Keynesian would go further by noting that tax cuts in the absence of other measures may not be enough. Last year's Bush stimulus checks clearly didn't do the trick, which would suggest that the tax cut mantra has more populist appeal than actual real world value.
"Is it just me, or is this argument for government spending starting to sound just a bit like the Democratic version of the Laffer Curve?"
I've been thinking for a while now that the Democratic version of the Laffer Curve (or maybe it's the environmentalists' version) is the idea that forcing everyone to adopt green technology is a huge net gain for the economy, creating jobs and prosperity galore with no costs or anything, just benefits. Stimulus, you know?
One might question why, if this green research is so guaranteed to pay off, the private markets haven't already taken these huge net gains. But clear-thinking people know that capitalists are too greedy to go for investments that are likely to pay huge returns, especially if those investments will help society and thus might bring good PR, as well.
Hi Megan,
I have the same concern, but I arrive at it from a slightly different angle. We all agree that some sectors (finance, auto, etc...) were bloated and needed to contract--and that a return to sustainable, organic growth means the economy will have to reorient itself.
I understand that the stimulus is meant to plug a hole, to match unemployed workers capable of being productive with the demand for something they can produce. Samuel Brittan recently wrote that it's "a logical absurdity that there should exist unsatisfied wants side by side with idle workers willing to supply them".
But when the government chooses to spend all this money on things like infrastructure, construction programs, etc*...isn't it playing a guessing game? How can it know what "unsatisfied wants" people have?
My worry is that by directing money and workers to these projects, the government will ultimately slow, if not actively hinder, the necessary reorientation of the economy. Won't new businesses, for instance, or existing companies that return to profitability and wish to expand, be forced to compete with the government to hire workers?
I read as much as I can about these things, but I have little formal economics training, so maybe you can address this better. I'm aware of the paradox of thrift and its consequences, so I can understand the need for something to be done. But at some point people will have to get their personal balance sheets in order, and the market will have to realign itself. I guess I'd be more comfortable, if we insist on spending boatloads of taxpayer money, simply offering it directly to people, perhaps as temporary unemployment insurance, until the economy sorts itself out.
* I'm not saying infrastructure spending and the like is always a bad idea. I just don't agree with tying it to the stimulus.
"One might question why, if this green research is so guaranteed to pay off, the private markets haven't already taken these huge net gains. But clear-thinking people know that capitalists are too greedy to go for investments that are likely to pay huge returns, especially if those investments will help society and thus might bring good PR, as well."
I think you're confusing capitalism with corporatism.
I guess my stupid question is, what alternative do you propose.
C,
I'm starting to think we as a society won't be able to get our personal balance sheets in order until we are all equal and can for all intents and purposes "start over from scratch."
So look for wealth to continue to evaporate in that case as we try to pile on more and more debt to fix the problem.
Once our money becomes so worthless that whatever we have is indeed worthless, then we'll realize the need to start over.
Maybe that means one should buy gold and wait it out. But I'm guessing someway or another that gold will ultimately get taken by someone else claiming you had/have an unfair advantage.
Guns, ammo, water, and crop seeds I guess would be of most benefit...
"I think you're confusing capitalism with corporatism."
Are you saying that corporations aren't greedy? Or that only corporations, and not entrepreneurs, can investigate this technology?
It's conceivable that there's some reason why the private sector hasn't already done this investing. The uncertainties of the political process and fear of arbitrary government intervention are the most likely impediments. But environmentalists aren't even trying to argue this - many liberals are claiming that energy-efficient green technology will magically make us all richer. They need to explain why the US suddenly is facing such a greed vacuum that there are no corporations or entrepreneurs already capturing these virtually guaranteed profits.
"They need to explain why the US suddenly is facing such a greed vacuum that there are no corporations or entrepreneurs already capturing these virtually guaranteed profits."
Maybe it can't be done profitably. Or maybe corporations and entrepreneurs don't have the capital after leveraging themselves up to purchase assets backed by debt that can't possibly be paid back.
People tend to forget that gov't seizes wealth as opposed to creating it.
Do they forget it? Or do they dismiss it because any thinking person can determine that it is false in about 30 seconds?
Maybe it can't be done profitably.
In which case, it won't make us all richer to do it because the costs exceed the value.
That said, there is in fact a tremendous entrepreneurial push right now for green technology; everyone is trying to jump in. (I'm an IP lawyer who stalks entrepreneurs as potential clients, so I see a lot of it). As with most fads, most of the ideas stink, but some of them will be major winners and will in fact make all of us richer. It's a high risk/reward situation right now. The trick is to identify which are the good ones; I see no reason to think the government is any better at it than VCs.
Expect a "green" bubble to parallel the dot-com bubble, and pray the government doesn't make it worse. Ann is certainly right that fear/hope of government intervention is driving at least some investment activity already.
There are several reasons that companies aren't making green investments themselves. The most important is that they don't have to pay the costs that Climate change causes. In addition capitalism isn't perfectly efficient so incumbent industries can remain in place even though in the long run a different industry would be more efficient. Another thing is that research and development frequently enriches different people than the ones who invested in and developed the original technology. Also there is a fairly heavy involvement of Government in the energy sector and the government has in a variety of ways favored the current industry. Finally there are economy of scale problems. The cost of a solar panel is a lot cheaper if you can make lots of them, but the risks of trying to create a large scale solar industry are very high unless CO2 emissions are priced. A price on carbon lowers these risks and transforms a potential business success into a very likely one. Overall I bet that in the short run a cap and trade system will be a very slight drag on the economy. In the long run it will save humanity from certain destruction.
"Expect a "green" bubble to parallel the dot-com bubble"
I've suspected the same thing, a whole bunch of companies with trendy ideas but truly terrible business models.
"Maybe it can't be done profitably."
Exactly. But if it can't be done profitably, it doesn't promise huge profits, does it? My point is that I've heard many liberals talk about green technology in the same way that some conservatives supposedly talk about the Laffer Curve - as a magical fix.
Perhaps their economic analysis is that the profits will be huge, as long as we only count the revenues without considering the costs. If the government pays, then it doesn't really cost anything, does it?
"Are you saying that corporations aren't greedy? Or that only corporations, and not entrepreneurs, can investigate this technology?"
Corporations are short sighted an unimaginative, because corporations are entities, but *corporate executives* make decisions. And corporate execs have an incentive to stick close to the conventional wisdom, and to try to pump up the short term earnings to maximize their take home pay as opposed to the take home pay of the guy who has their job in 20 years. If that means the company is broke in a few decades, well that isn't their problem is it?
1.) The massive government project idea isn't whats actually going to resolve this. Its the limping along it allows the economy to do. By limping through this, debt as a whole will be reduced, because revenue is still being generated. We could've done nothing and just taken a huge hit, and expedite the foreclosure, and void-filling that would've occurred, but that would have hurt big. I mean bread and soup line big.
2.)Feeds into number 3
3.) Not if it becomes harder to lend and borrow money. Credit card agreements could be regulated so that a bank is only going to give them to 25+ payed well enough, customers. But the big thing is huge loans and lines of credit, and they will be much harder to get, even as banks regain serious solvency.
So if you can't get credit, you have to spend money (can't save it) and you have to save better. I suspect that given the utter dependency on spending we have, this is not going to allow us to recover what we lost.
I would submit that our reach long exceeded our grasp, and now our arm is retracting to accommodate our grasp. Financially speaking. Better said, we never really had all that money to begin with, while not wholly financial trickery, it only worked as long as the house of cards (bad loans, derivatives, reported profits)stayed intact. Its no coincidence we're back to what 1997 levels?
Time is our best ally in pushing through this crisis. The real questions come at its conclusion.
And corporate execs have an incentive to stick close to the conventional wisdom, and to try to pump up the short term earnings to maximize their take home pay
Publicly traded corporations are not the only kind in existence; there are innumerable corporations and LLCs which are privately held and employ only a small number of people, often family members. They frequently do not fit this particular stereotype. When "the guy who has their job in 20 years" is one of the current CEO's sons, he takes the long term rather seriously.
"When is someone going to ask why we expect this stimulus package to work now when it didn't work in the 1930's......?"
jwh, the gross domestic product (in year 2000 dollars) was 635.5 in 1933 and 950.7 in 1939. In 1950, after the stimulus of WW II spending but before the onset of Cold War military spending, it was 1777.3. What exactly do you define as "work"? And for those saying Krugman is just covering his ass, what exactly are Greg Mankiw and David Brooks doing? They're "skeptical" about the Obama stimulus package, but of course they don't say why and they don't suggest anything themselves.
"Publicly traded corporations are not the only kind in existence; there are innumerable corporations and LLCs which are privately held and employ only a small number of people, often family members. They frequently do not fit this particular stereotype. When "the guy who has their job in 20 years" is one of the current CEO's sons, he takes the long term rather seriously"
I'm going to go out on a limb and venture that the odds of one of those companies pioneering a massive alternative energy system that displaces Exxon's massive earnings are probably pretty slim.
Brien is correct about many or most public-traded corporations. Additionally, today's stockholders will probably "be around" even shorter time than the current executives, so they too are biased towards profits now vs. future profits. One "solution" offered is to not vest executive options until years after they retire or leave the organization, so that they are interested in
long term profits. The problem is: how to get shareholders to push through these reforms that aren't in the interest of most current shareholders?
I'm going to go out on a limb and venture that the odds of one of those companies pioneering a massive alternative energy system that displaces Exxon's massive earnings are probably pretty slim.
Yeah, the IBM typewriter juggernaut sure crushed Microsoft and Google, huh?
But more to the point, there will be no massive alternative energy system. Industrial consumers and their highly inductive loads will continue to rely on steam turbine plants for electricity because wind and solar can't take the reactive currents. Residential customers likewise, unless they learn to tolerate unplanned outages and brownouts. Transportation will continue to rely on liquid hydrocarbons for at least a while because nothing else has the energy density. The dream of distributed generation will crash headlong into the reality of reduced efficiency and increased emissions.
What is actually possible is incremental improvements which can make a difference when aggregated, such as plug in hybrid cars combined with differential pricing of electricity, (perhaps) swap-out battery networks powered by intermittent green sources, and really long term, hydrocarbon fuel cells. And those sorts of improvements are being created right now by entrepreneurs and tinkerers all over.
Megan,
1. I'd note that #2 and #3 contradict each other. If we are a nation of spenders then we will spend the stimulus creating the intended effect. If #2 is true, you partially contradict #1. If consumers save the income they get from the stimulus (tax cuts, or jobs....which begs the question of how do consumers know what income is permanent? How does someone running a begal shop know that 40% of his income is coming from construction workers working on a stimulus project and taxpayers getting a tax cut?) then consumers at least would emerge less indebted than before. True the gov't would be more indebted but since it can borrow at 0% short term and less than 3% long term how bad is that really?
2. #1 sounds a bit like a post-Keynesian case. Is the economy going to be in a permanment slump forever? That almost sounds like a 'have your cake and eat it too' case...or what Krugman is talking about with a liquidity trap. You're saying that the economy will always be slumping even if the Fed is pumping money like mad and the gov't is spending. If that's the case then wouldn't the gov't be able to run a trillion dollar deficit year in year out forever without inflation or interest rate increases.
No, new companies with newer technologies replacing older ones is NOT a recession. A recession is when the output of the whole economy shrinks.
That's precisely what happened. Google and Craigslist offered advertising at much cheaper rates than the older media outlets; the total output ended up being lower (but consumer utility rose). Creative destruction does create reductions in total output in dollar terms.
Something similar happened with telcos over the late nineties and early aughts. I had a friend in 1999 who called his family in Brazil every day and talked for at least four or five hours over the internet, for free. That would have cost thousands of dollars a month in the 1980s or early 90s (a guy on my college dorm floor in 1994 was kicked out because he couldn't pay the bill for calling his girlfriend in another state for two hours a day). The carnage in the telco industry was just incredible; some companies lost over 99% of their value. Again, a huge gain in utility for consumers, a huge drop in output as measured in dollars.
People tend to forget that gov't seizes wealth as opposed to creating it.
Do they forget it? Or do they dismiss it because any thinking person can determine that it is false in about 30 seconds?
I'm not sure what thinking person would argue the government's primary source of monies spent is something other than taxes.
RW,
Japan followed Krugman's advice (devaluation, truly massive government stimulus), and does Krugman take credit for their "permarecession"? No, he doesn't. He claims they didn't do enough of it.
Sorry, s/b:
People tend to forget that gov't seizes wealth as opposed to creating it.
...
Do they forget it? Or do they dismiss it because any thinking person can determine that it is false in about 30 seconds?
I'm not sure what thinking person would argue the government's primary source of monies spent is something other than taxes.
It's true government projects (such as roads) may provide value, but they do so with seized money, not wealth they've created.
An ordinary armed robber (as opposed to the ones in uniforms) spends money too, but surely no "thinking person" argues they are creating wealth.
"Yeah, the IBM typewriter juggernaut sure crushed Microsoft and Google, huh?"
I don't really see where that is at all analogous to anything. After all, Microsoft and Google didn't make computers, and they weren't directly competing with IBM or any major players in te market for the most part (save Apple to a degree). And IBM *was* making computers, they were just lagging behind Apple. What Gates did was to write a simple, user friendly operating system and partner with IBM and other non-Apple computer manufacturers to surpass Apple. But you didn't have the largest corporations walling off the markets to computer start ups, especially once Apple struck gold. The scene vis-a-vis fossil fuels vs. new technology simply isn't like that in any regard.
Megan -- Have liberals suggested that spending is the correct response in every circumstance? (I haven't seen anyone make that suggestion, perhaps you can cite some examples.) The real issue is whether or not spending is the correct response to current conditions.
But perhaps, by asking "why don't we just do it indefinitely" you are (absurdly) suggesting that no policy prescription can be judged useful in any circumstance unless it can be shown to be useful in every circumstance? This is like suggesting one shouldn't take antibiotics to counter an infection because those antibiotics may not be useful for a different infection or once the infection is gone.
It seems too that any stimulus will also have a large amount of leakage, if done the way Krugman proposes. If we want to create demand for manufactured goods, some of that will stimulate demand for labor for US workers, but quite a bit of it will be stimulating the Chinese manufacturing sector, not ours. Also, if one were to stimulate demand for construction workers, and that leads to a lot of Mexican construction workers working in the US, well, you're stimulating Mexico.
It seems to me too that Krugman is barking up the wrong tree where he is going for his history as to what to do and what not to do. In 1930, the US was a huge exporter, compared to our consumption in 1929 we already had a lot of overcapcity, i.e. China is where the US was in 1930, not us, though in the Chinese case, they seem to recognize this as far as one can tell as far the news coming from there. Japan in 1990, same deal, though to a lesser extent. In each of these cases stimulating domestic demand would work, given who the supplier would be.
It would seem that the country that Krugman should be studying is what Britain did in 1930. Britain did not exactly sail through the Depression, but they did much better than we did, studying them might be profitable. Has Krugman cited that anywhere, or is looking for his keys under the lamp post?
"That's precisely what happened. Google and Craigslist offered advertising at much cheaper rates than the older media outlets; the total output ended up being lower (but consumer utility rose). Creative destruction does create reductions in total output in dollar terms."
That seems like a really bad example to me. After all, Google and Craig's List aren't providing the same service to consumers more efficiently than newspapers, they're not providing the same (primary) service at all, in fact. Rather the newspaper problem seems to be a problem that arises from having a primary revenue stream (advertising) that's different than your primary service provided (reporting the news).
"Megan -- Have liberals suggested that spending is the correct response in every circumstance? (I haven't seen anyone make that suggestion, perhaps you can cite some examples.) The real issue is whether or not spending is the correct response to current conditions.
But perhaps, by asking "why don't we just do it indefinitely" you are (absurdly) suggesting that no policy prescription can be judged useful in any circumstance unless it can be shown to be useful in every circumstance? This is like suggesting one shouldn't take antibiotics to counter an infection because those antibiotics may not be useful for a different infection or once the infection is gone."
The problem's pretty simple; Megan's addressing a straw man. No one has made the argument that any and all spending is good spending, and there's been plenty of argument over what exactly we should spend money on. But Megan isn't actually engaging with that, but rather a ridiculous caricature from wingnuttia.
But you didn't have the largest corporations walling off the markets to computer start ups, especially once Apple struck gold. The scene vis-a-vis fossil fuels vs. new technology simply isn't like that in any regard.
In what sense is Exxon walling off the market for this mythical new technology? And Apple certainly did wall off the market to anybody who wanted to use their OS; there are not and never have been meaningful numbers of Mac clones.
What Gates did was to write a simple, user friendly operating system
You must be raving-at-the-moon insane to describe MS-DOS 1.0 that way.
How will we get out of this hole? We'll dig our way out!
No, no, dig up, stupid.
Green energy fails on a profit/loss basis in comparison to fossil fuels- it is that simple. If fossil fuels are supply limited (and I think the evidence is pretty overwhelming that they are), then this will not always be true, but I will point out we don't know what will be considered "green" tomorrow.
Green energy investments made today have to provide a surplus greater than the equivalent alternatives over the lifetime of the installed capital to make us otherwise wealthier as a result. Right now, they don't.
Japan followed Krugman's advice (devaluation, truly massive government stimulus)
You are right about the government stimulus, but absolutely wrong about the currency.
When the Nikkei crashed in 1991, the yen-dollar exchange rate was about Y125-135:$1. During the 90's, the yen strengthened substantially, going as low as about Y83:$1 in 1995 before increasing briefly to the 140 level by 1998, then rebounding again to about the 115-125 range around the time that Krugman began commenting on it.
There was no systematic devaluation of the currency to the levels that he was talking about. His argument was that Japan should stimulate inflation in order to encourage domestic consumption, given that they had no opportunity for a stimulus through rate cuts and the long deflation suggested that they had nothing to lose. They never did heed his advice.
I don't know why (I do), but stimulus debates always make me think of the following two scenes from The Simpsons episode, Lard of the Dance.
Homer Simpson: Okay, boy. This is where all the hard work, sacrifice, and painful scaldings pay off.
Employee: Four pounds of grease... that comes to... sixty-three cents.
Homer Simpson: Woo-hoo!
Bart Simpson: Dad, all that bacon cost twenty-seven dollars.
Homer Simpson: Yeah, but your mom paid for that!
Bart Simpson: But doesn't she get her money from you?
Homer Simpson: And I get my money from grease! What's the problem?
--------------------------------------------------------------------------------
Marge: Homer! That side of bacon was for my bridge game tonight!
Homer: Marge, if you don't mind, I'm a little busy right now achieving financial independence.
Marge: With cans of grease?
Homer: [sarcastically] No! Through savings and wise investment. Of course with grease.
"Overall I bet that in the short run a cap and trade system will be a very slight drag on the economy. In the long run it will save humanity from certain destruction."
Cap and trade will do nothing to reduce CO2. It has not done so in Europe. Despite the arrogance of our politicians who believe they have a surperior plan, it will not do so here.
The theory of a man made, CO2 driven climate change has been all but completely discredited. The evidence increasing points to a naturally changing climate dependent on a vast number of influences. Certain destruction only exists in the output of the virtual climate machines, the fatally flawed global climate models.
Brien,
Craigslist provides more or less exactly the same service to consumers as a newspaper's classified section, but for free. Reduction in dollar output, deflationary benefit to consumers.
Google isn't quite the same as a newspaper, but it's generally accepted advertisers are leaving print media for cheaper rates on the Internet.
RW,
Japan has constantly intervened in the currency markets to keep the value of Yen down and to push it down, that they fail sometimes (and only sometimes as your own evidence shows) in comparison with the dollar is not the best measure since the dollar is produced and sent abroad on such a massive scale. Look at the Yen compared to a currency basket, and tell me what you see over the same time period.
However, did Japan get out of it's permarecession in any of the time frames where the yen was weakest? The answer is no. The country has slipped into recessionary states regularly over the last 19 years- high yen or low yen.
But I am curious- do you think the US should intentionally devalue the dollar to get us out?
"Craigslist provides more or less exactly the same service to consumers as a newspaper's classified section, but for free. Reduction in dollar output, deflationary benefit to consumers.
Google isn't quite the same as a newspaper, but it's generally accepted advertisers are leaving print media for cheaper rates on the Internet."
Right, but advertising isn't the primary service provided by newspapers. It's the primary revenue source obviously, but it's not what the vast majority of people buying the papers or browsing their websites are looking for.
Look at the Yen compared to a currency basket, and tell me what you see over the same time period.
The dollar is the reserve currency, and Japanese export GDP derives much of its growth from US consumption. The dollar is accordingly the most suitable benchmark for comparison.
The yen has strengthened consistently since the end of Bretton Woods. Having a export based economy with dollar reserves has supported its value.
The yen is an intrinsically strong currency because of these factors. Krugman advocated running the printing presses to stimulate inflation, but the Japanese never pursued that policy.
My point is not to agree or disagree with Krugman, but to object to your misrepresentations of the history. His advice was not heeded. You may argue that it was bad advice if you would prefer, but the Japanese did not follow it.
Hmmmm . . . that may be the hope, but that's certainly not attacking the root of the problem, namely well-paying jobs. I had thought that this was supposed to be part of the infrastructure upgrade's appeal, that they were not only to employee people, but they would do so at more than McJob wages.
Like it or not, that's the issue any administration - this incoming one or those thereafter - will ultimately have to deal with.
"The theory of a man made, CO2 driven climate change has been all but completely discredited."
Source please
that's certainly not attacking the root of the problem, namely well-paying jobs.
Increasingly I wonder whether this particular root is susceptible to improvement. Many skilled, value-added jobs have been replaced, and will continue to be replaced, by robots, computers, and other artificial productivity enhancers. This means lower prices for consumers, but it means less opportunity to earn good wages by doing something useful. It will never take as many robot repairmen to keep a factory going as it took line workers in the past (though of course the repairman himself may earn a premium wage for his skill). What will everyone do when people are largely unnecessary to get work done?
that's certainly not attacking the root of the problem, namely well-paying jobs.
That's a noble goal in theory, but in practice, we need to be realistic. We can't just create high wage jobs out of thin air. There has to be a genuine value-added opportunity to create them and to keep them here, otherwise the impetus will be to offshore them to lower wage markets. Aside from iPod design and structured finance, there isn't much that we can do that someone else can't do better or more cheaply.
The US consumer needs abundant credit and cheap exports to maintain prosperity. We need a new housing bubble for the same reason that we had the last one; because housing is the one asset available to the average American that increases his debt capacity.
There are sound reasons for alternative energy projects, but I am skeptical that the green movement will ever create many stable high wage jobs. Energy is supposed to be a commodity good, so if green energy production is going to be affordable, the labor costs associated with it will need to be reasonable.
Assuming that it works, the main benefit of green energy will be the ability to reduce the US trade deficit, and the balance of payments problem that accompanies it. I'm sure that there will be much stumbling and more than a few boondoggles in the process of finding it.
I don't know anyone who thinks that at all. What most 'liberals' think, the ones that I know anyway, is that this is all coming out of deficit financing. And unlike Republicans, most people agree that yes, deficits do matter. The only time to do this sort of thing is when there is a high probability that the benefits outweigh the costs.
Your question is easily answered - 1)capitalization, and 2) better (percieved) investment opportunities. Different groups will give you different answers about battery tech, for example, but practically all of them agree that the cost of batteries to power an automobile would drop dramatically if only they could be reliably manufactured in batch lots measured in the thousands or tens of thousands. The first car to roll off the assembly line costs $300,000,000 plus $25,000, the second, $300M plus 2 times $25K, etc. How many groups do you know that have $300M on hand to plunge into a battery manufacturing venture in the hopes that the product they're offering might might be picked up by automobile manufacturers? Very few, insofar as I know.
Correction to my point above: "The US consumer needs abundant credit and cheap imports to maintain prosperity." Multitasking is bad, bad, bad...
Ann @ 12:32pm
Thank you. I wish we can drill your point into the heads of some environmentalists.
RW,
You can look for yourself, if you like, but Japan increased it's monetary base by a factor of greater than three from 1991 to 2006. This was tremendous devaluation by any standard, but especially so for a country that grew as slowly as Japan did in that time frame. So, they did, indeed, inflate quite wildly since 1991. However, devaluation with respect to the dollar is a double-edged sword for a resource-poor country in a world of dollar-priced commodities.
And, sure, the US is a big customer for Japanese exports, but exports to the US don't even account for 5% of the Japanese economy, nor does it even account for a quarter of Japanese exports to the world, so, yes, you do need to look at a currency basket.
I misrepresented nothing about Krugman's advice and CYAing, nor actual Japanese policy. The simple fact is that these Keynesian policies have not saved Japan from "permarecession". Hell, even you are claiming they didn't devalue enough.
Ah, a classic sf question. If you've got any new ideas for this one, I'd certainly like to hear them. In slightly more detail, one could ask what people need high-paying jobs for, given that prices are being continually lowered by ever more sophisticated manufacturing techniques. The problem, of course, is that not all prices are falling - and it is those prices that need to be scrutinized. Off the top of my head, real estate, insurance, health, and education costs are the bit cost drivers, and have been as long as I've been alive it seems. So the question in greater detail then is how to ensure that these items and others like them(most people consider them necessities) are available for consumption.
Off the top of my head, real estate, insurance, health, and education costs are the bit cost drivers
Because those are areas where productivity increases have been the most limited, they have naturally risen in price relative to other areas where productivity has gone blasting through the roof. As for solutions, I have none. But I do think it important do think in terms of real output, and not money, which after all isn't worth the paper it's no longer printed on.
How many groups do you know that have $300M on hand to plunge into a battery manufacturing venture in the hopes that the product they're offering might might be picked up by automobile manufacturers?
Toyota? Exide?
Rob,
Those four areas have something else in common- a really elephant-sized commonality.
Is that really inevitable? I don't see why introducing trade barriers, tax incentives and suchlike couldn't be used to prevent offshoring. And I really don't see why there is really any problem with this idea. More in just a second.
Very true, at least in the purely economic sense. but this goes to a larger point. The twentieth century truly was the science fiction century. And for a lot of people, the way a decently middle-class person lives in the U.S. is science fiction. However, certain natural limits are being approached(absent some Wild Breakthrough.) All the easy tech stuff has been done. From here on out, there's going to be a lot of hard slogging, technology-wise, and the technical gains in the twenty-first century as opposed to the twentieth will be nothing like the gains of the twentieth as opposed to the nineteenth.
No, if the big story of the twentieth century was technical progress (I happen to think so, at any rate), the big story of the twentyfirst will be these gains spreading globally and into the third world. So by 2099 we haven't done anything like colonizing the Oort cloud. Otoh, by 2099, the citizens of Guatamela, Somalia, etc will have living standards that are up to Middle America in the 1950's, and with access to better medicine and toys to boot.
Though I would not describe healthcare as an area that has not seen vast improvements in true productivity. One of the reasons costs escalate in this field is that medicine actually can do quite a bit more than it could do 50 years ago. People often overlook this fact.
Isn't there a famous quote from a well-known 19th century scientist that mirrors this one:
Yancy, good point about improvements in medicine. But an individual doctor has not expanded his ability to see patients to the degree that his bookkeeper has expanded the ability to track patients' billing.
Hell, even you are claiming they didn't devalue enough.
With all due respect, do you actually read the comments that are written here?
I have not commented once on this thread as to what I thought what the Japanese should or shouldn't have done. I pointed out what Krugman wanted and noted that his advice was not followed, which it was not.
RW,
I didn't mean to imply you thought they should have followed Krugman's advice, but you did claim they didn't devalue when they clearly have. I took this to mean you thought they hadn't followed Krugman's advice because they hadn't devalued enough.
So, yes, I do read the comments. Do you?
"What will everyone do when people are largely unnecessary to get work done?"
Relax! Or, since people still aren't unnecessary in areas such as education, health care and childcare, more and more of us can work in those areas, and can buy our robot-produced goods at relatively low prices. This will be different from the past, but that doesn't mean it's bad.
I don't understand the idea that there won't be any jobs left, simply because certain types of jobs are gone. Robots replacing some jobs means that we can focus on other areas. Health care (things like nursing home care, not drugs) and education are expensive in part because they are two vital areas where we haven't had big productivity increases. But productivity increases elsewhere mean that we can devote more people to those less productive areas that still take a lot of people-hours.
It all means that there will be adjustments, but the economy can make those adjustments, unless the politicians step in and prevent the needed changes.
I don't understand the idea that there won't be any jobs left, simply because certain types of jobs are gone.
It's not that there won't be any jobs left, it's that there won't be any skilled, value-added jobs left. We'll still need cashiers and people to give sponge baths to nursing-home inmates, but the opportunity to actually create value will have been turned over to the robots.
Ann,
This discussion reminds me of one that took place on Kevin Drum's old blog. Someone asked what would happen when automation took over the production of every good and service. How would people pay for the goods and services from the owners of the robots? I must admit, it is difficult for me to conceive of a time in which humans have no marginal productive capacity.
"The theory of a man made, CO2 driven climate change has been all but completely discredited."
Source please
Posted by Kim | January 14, 2009 3:57 PM"
There is no single source. I've spent the past 10 years following the issue and have read much on both sides. Among those who have provided research that indicates CO2 is not driving the climate are John Christy, also a reviewer for the IPCC, Roy Spencer, Sven Svensmark, Richard Lindzen, Roger Pilke Sr. among others. The list keep growing. Contrary to what you read in the press, there is actually quite a bit of data out there. It's also not that hard to find.
Increasingly I wonder whether this particular root is susceptible to improvement. Many skilled, value-added jobs have been replaced, and will continue to be replaced, by robots, computers, and other artificial productivity enhancers. This means lower prices for consumers, but it means less opportunity to earn good wages by doing something useful.
What about jobs for people who design, build, test, sell, install, repair, maintain and operate robots? I don't think there's a shred of evidence in economic history that supports the thesis that productivity-enhancing technology results in a net loss of jobs.
What about jobs for people who design, build, test, sell, install, repair, maintain and operate robots?
If far fewer people were not required for all of those tasks than for the tasks the robots are doing, then nobody would use robots because they would be too expensive.
The issue is not a possible "net loss of jobs," it is making a middle-class lifestyle possible for the great majority of people by allowing them to meaningfully create value at work which can then be exchanged with others If the manufacturing sector goes the way of the farm sector (and it's well on its way already), what the hell will we do all day?
"Similarly, the trillionth stimulus dollar probably isn't nearly as effective as the first."
More to the point, when government spending gets to the level where it spooks the bond market, the resulting increase in interest rates at that point may outweigh any marginal benefits from further fiscal stimulus.
Hi. I hope this goes through.In answer to Yancy: I have seen much technological change in my field. Technology never works so well that it runs itself. So you still need as many workers. They don't do the same thing they used to do. They are more powerful and productive,but you don't have to pay them more. They do have to be more educated.So you do have to pay them more than uneducated people. When the product gets easier to make prices drop and more is consumed.Thus technology increases real wealth.It can also lead to decentralization. Little locals can now do what used to be done off site.I do not mean to suggest this is all painless and smooth,any more than any other type of change.
Total robotization will only be possible when everything becomes so perfect it will be static.Since there will then be no change, the pain caused by change will be eliminated. But then there will be no jobs.This will never happen.
Change is good.
"what the hell will we do all day?"
Jobs we can't even imagine yet I'd assume. You make the great mistake of beliving that everything that can be invented has been invented. We have so much further to go.
"If far fewer people were not required for all of those tasks than for the tasks the robots are doing, then nobody would use robots because they would be too expensive."
Rob Lyman,
One of the conceptual challenges here is that technological advancement often leads to kinds of jobs no one would have ever thought of before. For example, who would have thought, in the 1970s, that there would be people teaching Microsoft Office for a living? Or selling software? I remember watching the first ever episode of Late Night with David Letterman, when NBC replayed it (the day Letterman left for CBS), and David Letterman was bantering with the studio audience in the beginning. He asked one fellow what he did for a living, and the guy responded that he sold software. Letterman's response was something to the effect of, "what the heck is that?". That episode was recorded in 1982.
You do have a solid point about the need for high-paying blue collar jobs, and, as you allude to it, technology has helped reduce the percentage of Americans employed in manufacturing (technology has also drastically reduced the percentage of Americans employed in agriculture, of course). But technology also can lead to new high-paying blue collar jobs. Think, for example, of the sort of drilling technology that enables oil companies to drill for oil miles below the ocean floor. That has lead to more high-paying blue collar jobs for workers on deep water rigs.
Unfortunately, a lot of the people who lament the plight of blue collar workers also oppose the sorts of natural resources jobs that would provide them with middle class livelihoods, by blocking domestic drilling and mining.
Total robotization will only be possible when everything becomes so perfect it will be static
Robotization need not be total to make it hard to enter the middle class. We're talking about gainful employment for hundreds of millions of people.
You make the great mistake of beliving that everything that can be invented has been invented.
If I actually believed that, I wouldn't have anything to worry about, because the economy as of today's date has (broadly speaking) plenty of jobs. I presume that much more will be invented, and that it will follow the current trend of increased automation and decreased necessity for human involvement.
I have no doubt that there will always be jobs to do. But will there be jobs such that 2-300 million people will all be able to be middle class, especially considering that many of them are not terribly bright and don't have what it takes to do a CS PhD? I'm less certain of that.
Rob,
"especially considering that many of them are not terribly bright"
There is always the Flynn Effect.
To put it another way, there have always been people with weak minds but strong backs. More, indeed then people with powerful analytical skis and mathematical creativity (and of course this is a sliding scale with many axes; a brilliant machinist might make a poor lawyer, but that doesn't mean he's dumb). In the past, these people have been useful in repetitive, strenuous, or dangerous jobs, to which they could bring considerable value.
When the repetitive, strenuous, and dangerous jobs are all taken up by robots, what will we do with these people? Keep in mind they are more numerous and better-armed than Atlantic readers.
"When the repetitive, strenuous, and dangerous jobs are all taken up by robots, what will we do with these people?"
I doubt that all such jobs will ever be done by robots, but, for starters, we can stop importing more peasants with elementary school educations to compete with native unskilled workers, and transition to a immigration policy similar to that of Australia -- one skewed toward attracting immigrants with higher levels of human capital. We can also adopt the sort of education system common in Europe which puts more resources into vocational tracks.
"Keep in mind they are more numerous and better-armed than Atlantic readers."
But not as well armed and numerous as our robot drones - they would be quickly exterminated. If such an unlikely senario ever really came to pass.
Rob,
I can't for the life of me understand why someone as pessimistic as yourself would bother to have children.
I can't for the life of me understand why someone as pessimistic as yourself would bother to have children.
I figure they'll wind up members of the ruling class. Plus, they're cute.
Are you guys seriously imagining a world where robots can come over to my house, design my garden, plant the roses, dig some ditches, clean out my rain gutters, etc.?
Robots are good for repetitive work that is very, very standard, and done in mass quantity.
By the time they are that smart, there will be simple to use tools that allow even the dullest human to use crews of robots to improve their productivity. This will be like the move from Cray supercomputers to PCs....when supercomputers were the only game, I would agree that how could ordinary people ever use them productively! But then the PC comes along.
How would you know what has "gotten out of control"?
Really.
Isn't it true that you have hardly any idea of what you are talking about when economy is the subject? Isn't your field of expertise being a droll commentator - which means you are as ignorant as nearly all the members of Congress on the actual economy?
"Be brave. Be like Krugman. Take a stand."
I'll take that challenge.
Cut corporate tax rates in half. Eliminate capital gains taxes. Balance the federal budget by reducing spending to meet expected revenues.
That wasn't so hard.
I don't see why introducing trade barriers, tax incentives and suchlike couldn't be used to prevent offshoring.
This is where we are going to have to part company. Smoot-Hawley should make you reconsider that position.
If we are going to indulge in protectionism, then the end result should be a reduced consumption of those goods than we would otherwise have, because US labor costs will make them more expensive. If the goods have costly parts that dwarf the labor costs, such as cars, then it is possible to produce them profitably here. But if they turn out to be cheap commodities, it will be difficult to make here for a profit, unless the workers are low skilled or illegal.
you did claim they didn't devalue when they clearly have.
During the "lost decade", Japan's annual increases in M1 were largely consistent with the pre-recession period. So no, they did not follow his advice.
However, there was a substantial, unique boost in liquidity in 2002, when M1 increased by 27%. You might wish to note what year their recession ended.
Not that I would favor this for the US today, as the US has somewhat different issues. But it does help to diminish the claim that printing money inflationary by default.
Cut corporate tax rates in half. Eliminate capital gains taxes. Balance the federal budget by reducing spending to meet expected revenues.
That wasn't so hard.
The stimulus checks weren't so hard, either. The failure was easy, ignoring that failure is apparently even easier.
Cutting capital gains won't inspire investors to invest if they lack confidence in the markets and the likelihood of corporate performance. Businesses won't invest in equipment if there are no customers, no matter how low the tax rates may be.
Brien,
Sure, newspapers and the Internet aren't exactly the same product. I'm just making the point that a decline in overall economic output as measured in dollars aren't, in and of themselves, necesssarily bad for everyone; to some extent, they may be the result of goods/services becoming less expensive, which benefits consumers.
As people have pointed out above, labor is increasingly skilled because we build better and better machines to assist us. The better those machines get, the more quickly and cheaply we can do things (e.g., one backhoe (and the skilled labor to design and build it) versus 10 guys with shovels). We may soon reach a level where increasingly robotic labor mean that a lifestyle that costs $100K/year now can be had for soemthing closer to $10K.
It wasn't that long ago, historically speaking, that being able to eat meat three times a week was considered a luxury for most Americans.
Craig,
Under your plan the economy would implode. I'm certain it would be the ideal stategy long term - but it sure as hell isn't the right strategy now.
"When the repetitive, strenuous, and dangerous jobs are all taken up by robots, what will we do with these people?"
They will design, build, program, and maintain the robots, of course. Either that, or work in customer service.
"there have always been people with weak minds but strong backs"
Yes, but have these people traditionally made up the bulk of the middle class?
Look, no one knows what the relative income distribution will look like in the future, but if everyone is lower, rather than middle, class, then doesn't that become the 'middle' class? And given technological progress, do we have reason to believe that it will be so bad? They're pretty sure to have more than we had.
In terms of material wealth and comfort today vs. 200 or even 100 years ago, there are virtually no poor or even middle class in the US, only wealthy people. Think of central heating, electric lights, antibiotics, radio and television and phones!
We're in for some changes, but there are plenty of things to be done by average people - Aaron has listed some of them. And the fact that none of the rest of you has mentioned child care makes me wonder if I'm the only single working mother in this discussion - between child care, care for the elderly, food preparation and laundry and errands, it's very hard for me to feel that we're in imminent danger of having no simple physical tasks for people to do.
And if we ever truly get to the point where the robots can do everything, then we'll finally have more leisure time.
All the democratic economic policy mavens (like Krugman) emphasize to be a stiumulus, it must be temporary and short term. Which is why it is exactly the opposite of the Laffer Curve, which concerns long-term revenues.
The revenue arguments on the stiumulus are simply that it won't be that terrible of a deficit, since a portion of the spending (focused so heavily on domestic items) will come back into governemnt coffers as taxes as it is spent.
" Cutting capital gains won't inspire investors to invest if they lack confidence in the markets and the likelihood of corporate performance. Businesses won't invest in equipment if there are no customers, no matter how low the tax rates may be.
Posted by RW | January 14, 2009 10:02 PM"
Of course it will provided the cuts are permanent.
Investors know the difference between an expense and an investment. Unless the economy completely flatlines and unemployment is near 100%, there will always be investment opportunities even in a depression. Investors can take a longer view if they can profit from it.
there will always be investment opportunities even in a depression.
Obviously, there aren't nearly enough opportunities at this moment, because the markets are flailing and many of those who do have money have it parked on the sidelines or in zero-return taxable treasuries. For businesses that could use the money, there isn't enough credit available for them, either.
Tax cuts won't fix what's broken here. We're going to get tax cuts, anyway, and I don't particularly object to them, but I have no ideological inclination to see a miracle built on tax cuts where no such miracle exists. Even Arthur Laffer didn't suggest that 0% was always an optimal tax rate.
TallDave: it will self-evidently require fewer people to build robots than to do the work the robots do. Otherwise, there is no productivity gain and you've wasted your money on a bunch of hunks of metal.
Aaron, Ann: you have listed mostly low-paying, menial tasks as unlikely to be taken over by robots. Fine; you're right that robots won't do weeding or child care. But can we really be a nation of lawnmowers?
This is the point: our current society is so structured (or was) that a pretty decent living can be made without being a PhD or a capitalist robber baron. Technology has increased the productivity of GEDs to the point where they generate a substantial surplus, but not so much that such relatively unskilled/uneducated workers are outright obsolete. This is a bit of an aberration, historically. Is our current model sustainable over the long term, or are we in for re-stratification between the people who own the robots and the people who mow their lawns?
Rob -
Are you saying that the people that own the robots will be able to make massive amounts of money even though the rest of society has no money to pay? Yes, things will shift, but there will be a need for people to do many jobs, and there will be lots of cheap stuff that will work better because of technology. I don't see why it's likely that getting more for less will make us worse off, unless it's through sheer envy of those that are rich. If so, our unhappiness will be self-inflicted.
And by the way, I'm planning to get a robot (either a Lawnbott or a Robomower) to mow my lawn next year. From what I've read, they work great, just like my robot vacuum cleaner (Roomba) for inside.
Rob,
You've mentioned many times that you aren't very materialistic. I think you have trouble getting your head around the idea that human wants are unlimited. If wants are unlimited, any reduction in the cost of labor and materials will increase demand.
If the median for humanity was the Palace of Versailles then living in the White House would be considered grinding poverty. No matter how productive labor becomes, human wants will always be greater than what can be produced.
I don't see why it's likely that getting more for less will make us worse off, unless it's through sheer envy of those that are rich.
Actually, that envy is what concerns me somewhat; I don't care about income inequality by itself, but 1) I don't like it when people vote for socialists, and 2) I think the problem of living standards for the left half of the bell curve is a serious one. The world everyone else is describing is one where returns to specialized education and intelligence are huge; what do we do for the people who lack both?
You've mentioned many times that you aren't very materialistic. I think you have trouble getting your head around the idea that human wants are unlimited.
I think a better way to put it would be that my appetite for leisure and real estate are both greater than average, while my appetite for "stuff" is less than average. That is, my materialism takes an uncommon form.
That said, I don't doubt that wants are unlimited. But the question is, if those wants can only be satisfied by the application of specialized skill and high intelligence (designing computer games, building robots), how will all the dumb people earn a living?
"Similarly, the trillionth stimulus dollar probably isn't nearly as effective as the first."
It can be as effective if that trillionth dollar is the first dollar passed along to that particular person or program.
No stimulus spending is not the "Democratic version of the Laffer Curve." If it were, it would say that expenses for stimulus spending would completely pay for themselves in increased tax revenue. Nobody is saying that. It's a false analogy.
And Timjbd, is correct. The last dollar of spending would be as effective as the first until we get to full employment.
"I think the problem of living standards for the left half of the bell curve is a serious one."
This is the part of your concern that I don't understand, given that most US working poor people today live in the type of luxury that was unimaginable a century or two ago. Their houses aren't as nice as rich people's used to be, of course, but the homes are more comfortable (heating and air conditioning), better lit, etc. People today are less likely to spend much of their lives in pain (from infections that had to be fought off without antibiotics, from toothaches, from all sorts of things that can now be treated). They're better nourished and have access to an unprecedented supply of fruits, vegetables, etc. even in the winter. They have cars and color TVs! Women are much less likely to die in childbirth or to lose children to disease.
Are you worried about an actual decrease in living standards, or are you saying that they'll get better and better off but be so envious of others that they'll eventually rebel and blow it for everyone?
This is the part of your concern that I don't understand, given that most US working poor people today live in the type of luxury that was unimaginable a century or two ago.
A certain degree of poverty is inevitable. Society's challenge is to address whether there is an acceptable maximum level of poverty, and if so, what minimum living standard there should be.
That being, you grossly exaggerate the joys of poverty, and there is more than a bit of Marie Antoinette-inspired Pollyanna thinking in your comments.
The fact is that the majority of Americans, most likely including most, if not all, of the libertarians posting here, are a few paychecks away from poverty and have far more in common with the poor than with the wealthy. Somewhere along the way, this Horatio Alger optimism unfortunately morphed into a turf war between the middle class who benefited from a bit of New Deal good luck (even if they give it no credit) and the poor who never figured out how to play the paycheck game, even though neither one of them is exceptionally successful.
I expect the economy to rebound, but if it doesn't, it will become clear soon enough that most peoples' modest successes in this society are attributable to the benefits of the rising tide, rather than talent. It would be nice if people could learn this lesson without having to suffer from it, but some folks will need to hit bottom hard before they can be roused from their deep sleep.
Are you worried about an actual decrease in living standards, or are you saying that they'll get better and better off but be so envious of others that they'll eventually rebel and blow it for everyone?
The latter, mostly, although I wouldn't absolutely rule out the former.
it will become clear soon enough that most peoples' modest successes in this society are attributable to the benefits of the rising tide, rather than talent
Both are necessary, neither are sufficient. A rising tide doesn't lift boats with holes in them and a tsunami can swamp even the hardiest vessel.
"Be brave. Be like Krugman. Take a stand."
Sure. Stop trying to manipulate/prop up asset prices (apparently randomly) and thus create more uncertainty when the greatest bar to investment is uncertainty. Force price discovery. Audit all significant financial institutions, and shut down the insolvent ones. (Which will be most of them.)
Don't try and reflate the currency by pouring billions into financial companies with black-hole, cooked balance sheets. Recapitalize institutions that are shown to be sound; if there aren't enough of them, capitalize some new institutions. The First National Bank of Thomas will be happy to take $100 million of TARP funds. Unlike many present TARP recipients, I have no need to hoard capital against future balance-sheet distress, and thus could start funding loans the next day.
Finally, seize obviously distressed mortgage pools by eminent domain. Force the holders to abandon hope for bailout, or some other miraculous change. They're toast, and need to face the obvious. Since the market value of those loans is clearly far less than the face value, the underlying loans -- or the prices of the properties they secure -- can be written down to 2001 levels.
What we need, in short, is a do-over to 2001. Let's get cracking.
3) We are a nation of net dissavers, which contributed greatly to the bubble. Can we really prolong this?
Notice that the bubble was caused by something you disliked before the bubble started.
There is no evidence for the dissaving hypothesis. Japan was a nation of massive net savers and experienced exactly the same phenomenon but worse.
It is likely that savings vs. dissavings has no impact.
A rising tide doesn't lift boats with holes in them and a tsunami can swamp even the hardiest vessel.
Fair point. Still, your average American is not a true wealth creator, but an order taker in the employ of wealth creators. They couldn't produce on their own if forced to, the best that they can hope to do is to join an organization led by others who can.
I think Karl is 100% correct.
Wouldn't being a nation of net savers make this problem even worse. Say every American saved 20% of their income. Each month 150 billion would poor into banks and brokerage firms, mortgages bonds would be prepaid, credit card receivable would plunge along with interest rates. This vast sea of capital would lead to the financing of ever more dubious investments as people chased ever smaller investment returns.
It would seem the rescipe for a massive bubble.
Wouldn't being a nation of net savers make this problem even worse?
It probably would, because without customers to borrow the money, the money goes nowhere and creates no growth.
Money is like water. If it flows, you can end up with a river. If it doesn't move, then it stagnates and turns into useless muck. While you don't want a storm of water that destroys the shoreline, it's better if it moves somewhere in a manageable fashion.
During the lost decade, Japanese consumers didn't spend and Japanese businesses had to contend with no growth. Deflation caused consumers to stop spending while they wait for lower prices, and keeps businesses on the sidelines while they wait for new business.
Even monetarists favor a mild trace of inflation for these very same reasons. When prices tend to increase slowly over time, consumers are more motivated to turn their cash into assets before the asset prices become out of reach. The key is to have a balance that encourages asset purchases without completely destroying the motivation to save. Some of each are necessary.
"you grossly exaggerate the joys of poverty"
Look, I'm on the side of continued progress, so that poor people are made even better off, since there's still a long way to go. That's why I'm concerned about a focus on inequality - the only sure way to reduce the gap between rich and poor involves hurting everyone for the sake of hurting the rich most. I favor helping poor people, rather than putting our energies into holding back those that are more capable.
"your average American is not a true wealth creator, but an order taker in the employ of wealth creators"
Not true. Wealth is created simply by doing a job that needs to be done. Not much wealth is created from some jobs, of course, and it's possible to put out a lot of effort without creating value - filling out pointless bureaucratic red tape or doing a job incompetently in a way that causes damage, say. But there are many, many ways that unskilled people can add value and contribute to society.
That's why well-regulated capitalism is important, so that the market can send signals that lead us all to allocate our resources, including our human capital, in the best way possible.
Wealth is created simply by doing a job that needs to be done.
I didn't disagree with that. My point was about who was directing the creation, and the haughtiness of certain members of the middle-class who believe themselves to be self-made, when they are really cogs in the wheel who had some training and a bit of luck. They are not masters of the creation of wealth, and they lack the ability to initiate its production.
The average middle-class American who scorns the poor is dependent upon bimonthly handouts from others to provide them with their incomes. They can't survive on their own and aren't particularly resourceful, so much as they are obedient and able to provide some sort of narrow functional skill.
Such people grossly overvalue their own talents and the status of their positions, and fail to recognize that it wouldn't take much to knock them off of their pedestals. When that degrades into arrogance, it deserves to be ridiculed.
Of course liberals want to spend their way out of the recession...when you only have a hammer, every problem looks like a nail. Liberals are as hooked on big government as a drug addict is hooked on dope. Five trillion? Ten trillion? Someday we'll have a real Depression and our currency will have the approximate value of a used roll of paper towels.
The problem is that we constantly expect government to "do" something. Not only is that senseless in many cases, it's incompatible with maintaining a society that values any sort of personal economic liberty. How damaged we've become is illustrated by the fact that many Republicans have jumped on the never-ending bailout bandwagon. Sad.
Sure as night follows day, the economy will correct itself. We could save the next round of trillion dollar stimulus by simply being patient and waiting for things turn around. But that kind of patience requires a maturity and wisdom that our spoiled and shallow society has mostly lost. We have deluded ourselves that the government can solve all our problems...the government can now supposedly even alter Earth's climate, change the weather. All we have to do is unleash the full potential of the federal government, and we'll be living in a utopia!
You've got to be kidding.
RW - Thanks for explaining your point. I agree that the people that just show up and follow directions would produce dramatically less if they didn't have someone to direct them. I took some Marxism classes in college, and the part of the "labor theory of value" that made the least sense to me at the time was the argument that all value came from the laborers themselves, not from the person who organized everyone or figured out what to produce or how to do it.
Americans are very lucky to have been born into a system that functions so well and offers so many opportunities.
Well, if you've got any idea what those jobs may be, by all means, let's hear them. The patter about 'knowledge-based' jobs[1] replacing manufacturing jobs has been going on for thirty years.
[1]What, plumbing isn't 'knowledge-based'? Carpentry?
That's one part of the equation. The other part is that higher labor costs really just means that workers are taking home more pay, hence able to afford more products and services. The question is, which one dominates?
Another significant consideration is the level playing field. If U.S. companies were competing with companies based in regimes with democratic traditions, an impartial judicial system, etc, perhaps the (eventual)net gains for both countries
would be worth it. But what I see instead is a system in, say, China, where factory workers have little power to negotiate an increased wage share, hence little chance to achieve a middle-class lifestyle. This is, of course, a very common observation, and one that isn't really much disputed.
Finally, for all the fine talk of 'free trade', protectionism is loose in the world right now anyway, even amongst our trading partners. Indeed, they seem to think some variant of Mercantilism is what's called for.
Given the above, if the competitiveness of a given product is solely due to wage differentials on the floor and whacking big externalities that businesses in the U.S. don't get away with shucking off, I would say it makes good sense to erect tariffs and trade barriers that are based upon these differentials. Both as a trade tool and to promote better living standards abroad.
>sarcasm<Of course not. That's why people like the Walton clan are known for not having gobs of money, despite being the founders of such a large business>/sarcasm<
Yes, things will shift, but there will be a need for people to do many jobs, and there will be lots of cheap stuff that will work better because of technology. I don't see why it's likely that getting more for less will make us worse off, unless it's through sheer envy of those that are rich.
Didn't you claim to teach finance at one point? Somehow, being able to buy sugar-coated Easter peeps for $0.20 a pop instead of $0.45 doesn't seem to make up for the fact that on a $20K/yr salary - if that - one is supposed to buy a house going for $90K, a car for $15K, college for 40K, etc. And while most people have no problem doing without Easter peeps, housing, education, automobiles, etc, seem to be something of a necessity.
Now, if you have a plan to drop the price of housing back down to about $50K, autos to $8K, there might be something to your argument. So let's hear your plan.
The other part is that higher labor costs really just means that workers are taking home more pay, hence able to afford more products and services. The question is, which one dominates?
Obviously, for the business, cost management prevails. A business can't afford wages or any other input costs that ensure that it can't make a profit. At the micro level, a business can't pay wages with money that it doesn't have. It's better that there be a business that pays reasonable wages than an empty building with no business and no employees.
Another significant consideration is the level playing field. If U.S. companies were competing with companies based in regimes with democratic traditions, an impartial judicial system, etc, perhaps the (eventual)net gains for both countries
would be worth it. But what I see instead is a system in, say, China, where factory workers have little power to negotiate an increased wage share, hence little chance to achieve a middle-class lifestyle.
The problem you are missing is that we trade in order to raise the level of material prosperity for ourselves, by allowing American consumers to take advantage of those lower overseas labor costs. If televisions were built in Connecticut instead of China, they might cost $2,000 instead of $500. That means fewer TV's in American homes, and fewer people working for electronics stores, trucking companies, as longshoremen at the docks unloading them, etc.
Perhaps we should make TV's here, but that would provide a relatively small number of jobs in exchange for a lot of pissed off Americans who wouldn't be able to afford the TV's that they want, and at the expense of those Americans who benefit from the import business. There is always a tradeoff.
"The other part is that higher labor costs really just means that workers are taking home more pay, hence able to afford more products and services."
You asked me for my plan - well, based on your reasoning above, I propose that we just print more money and pay everyone an extra $100,000 a year. Then everyone has lots of money to afford things, and our problems are solved!
We need to look at efficiency and avoid money illusion - if things can be produced more cheaply in other countries, for whatever reason, then forcing them to be produced here at a higher cost generally doesn't lead to more prosperity. The solution is to allow (and in some cases to help) people here in the US to find things to do that actually contribute, rather than locking them up in make-work tasks which they only have through protectionism. The market is sending us signals about what is most efficient, and you're saying that you, personally, have better information and thus should be allowed to control a command economy. That hasn't worked well in the past.
[Granted, in some cases the signals of the market are excessively distorted by, say, bureaucratic red tape, overly restrictive work rules or environmental restrictions. If your argument is based on that, it would be worth listening to. But your argument seems to be more of a knee-jerk reaction that we need to cling to those "good" jobs that worked well a few decades ago. What's so romantic about factory jobs that we can't stand to lose them? I had more sympathy for those clinging to family farms, even though that, too, was unproductive.]
So Henry Ford was wrong then to increase the wages of his workers? That's just bad theorizing? It seems to me that businesses like, say, Zenith were doing okay before television manufacturing became largely an offshore affair. You seem to be saying that they weren't, which goes against historical fact.
That may be true. But why would this happen in the first place?
Blink. No. No I'm not missing that at all. I explicitly pointed out that there are costs as well as benefits, and you have to see which is the best way to jump - cheaper offshore products vs lowered wages at home. It's not at all obvious which one wins at.
In the case that you mentioned, it might well be that paying $2K for the homegrown version versus $500 is a no-brainer. But what if the numbers are $550 for the U.S. model versus $500 for the foreign one? And instead of making $18K/yr doing some sort of low-skill job, the factory worker now makes $40K?
If you don't run the numbers, you're just being glib. Or an ideologue. To illustrate, let's take it a little further, and say that it's $501 domestic versus $500 foreign, and it's $15K/yr vs. $90K/yr. You're going to say without any further analysis that it's still better on the macro level not to charge a one-dollar tariff on televisions?
I have a great deal of difficulty believing you teach 'finance' Ann, given the quality of your arguments here and elsewhere.
And you know, you really need to stop putting words into other people's mouths. If you want to be taken seriously, at least, taken seriously by me, you need to stop this sophomoric style. Or not. I really don't care.
SoV -
I'd respond to what you said to me in your last message, except that you really didn't say anything substantive. I don't care whether you believe that I teach finance, since I'm busy getting ready for my class tomorrow.
You're questioning one of the few areas in which there is a consensus, more or less, among economists - the value of free trade. Given that you're going against both accepted wisdom and a wealth of experience, the burden is really on you to defend your claims. A one dollar tariff might not hurt much because it's too small to do anything. But a tariff significant enough to stop trade, which presumably is your goal, would prevent an exchange that would otherwise have been mutually beneficial for both side (as evidenced by the fact that the trade otherwise wouldn't have occurred, absent some form of coercion). Do you have any evidence that your brand of coercion, preventing that trade, won't be as damaging as other similar coercion has been in the past?
And what do you have against Asians and other poor people around the world, that you want to block them from working their way out of poverty? I agree with you that the government of China is awful, but the people there still deserve a chance to work their way to better lives. Why are you so anxious to stop them? Again, what is so enchanting about factory jobs that you want to freeze us in time, keeping many of us trapped in factories, just to prevent poor dark-skinned foreigners from getting what for them is a good job?
I've been reading economic and political theory for over 30 years. There is always talk that extra government spending is a "stimulus" and it helps us and we must have it.
Someone show me proof of that.
The goverment spends huge amounts of borrowed/created money. Perhaps there is a short-term benefit of some sort. But in the meantime, we have a gigantic and ever-growing pile of debt to service, forever.
Forever is a hell of a long time.
I have never seen persuasive evidence that whatever good we get from the spending outweighs the deleterious long-term effects of the debt. It's just taken on faith, as some sort of self-evident fact.
Somebody help me out here.
But what if the numbers are $550 for the U.S. model versus $500 for the foreign one? And instead of making $18K/yr doing some sort of low-skill job, the factory worker now makes $40K?
The wage difference is much greater than that, which is why offshoring is commonplace for many goods. The labor costs would add substantial cost increases.
It's not about ideology, it's about money. You're trying to fight the tide by trying to force American businesses to compete against a foreign cost structure that is so much cheaper that what you suggest isn't possible to do in many instances.
To manufacture goods here, the American workers have to be (a) exceptionally or uniquely talented so that offshore labor can't be easily used in place of it (the guy who designs the iPod built in China belongs in this category, but the guy who snaps it together is not), (b) exceptionally cheap to hire (the exploited illegal worker who gets paid for piecework), or (c) producing goods for which labor is a relatively small component of the total production cost (cars and airplanes are two examples.)
It might also be possible if the markup on the goods is exceptionally high compared to the cost (the illegal in the fashion industry comes to mind), although it is obviously tempting to offshore this for the sake of profits.
The issue isn't with jobs, per se, so much as it is that Americans don't have much to offer that can't be done by someone else either better or for less. The jobs are a symptom of the other deficiency. We will need to get more creative and come up with things that can harness whatever talents we have, and that can be sold at a high enough margin to cover the expense.
Tariffs are not permitted under our free trade agreements and would provoke retaliation, so those are not a solution to anything. Again, Smoot Hawley was a disaster, so be careful what you wish for.
So you're saying that an extra $50 is too much to pay on a $500 television? Are you saying a $1 dollar tariff is too much to pay on a $500 television, even though it provides jobs salaried at $90K/yr rather than the alternative $18K/yr?
I think that if the difference in costs is 0.2% and that further, the difference fuels jobs paying five times what they would be otherwise, then it is indeed about ideology. You seem to say that no matter how small the cost differential, and how great the wage multiplier, it's just not 'economically feasible', that you're 'fighting the tide'.
I'd also note that when you talk about cost structure, you're also introducing additional non-economic factors (in the sense we are talking about), such as, for example, countries keeping their currencies artificially low. Note that this is a Mercantilist policy, pursued by such economic dunderheads like China. I maintain that it is hardly fair to describe American workers as 'uncompetitive' when foreign companies enjoy this advantage.
I'd also note that 'free trade' seems to be remarkably fragile, just like it's homier sib 'free markets'. If a nation like China pursuing the policies of export-oriented growth can so disrupt economies of other countries, countries whose consumers don't have corresponding increases in incomes, then I'd say that this is not a terribly good policy.
Or (d) not involved in the production of goods for which there are significant externalities which have to be paid for, unlike other countries whose businesses are free to offload those externalities with no penalties whatsoever. Businesses that can simply dump their effluvients into the nearest river, or let them escape up stacks with no scrubbers, or that can simply bury them in a deep hole out of sight, but free to leak into the water table.
Are you suggesting that in the name of 'competitiveness' we should scrap those 'burdensome regulations' dealing with pollution standards and worker safety? If not, why, and why doesn't this apply in the case of worker pay? And of course there are also factors (e), (f), etc, not necessarily pertinent to this conversation. Somehow, citing the freedom to pollute as a business advantage that shouldn't be taken into account in the domestic pricing of a product doesn't seem very fair to the American worker.
And yes, lower living standards is an externality.
Two points. In other countries, workers are not free to negotiate their wages and conditions in the way they can here, which is indeed nothing to do with the jobs per se. But this also has nothing to do with the competitiveness of the American worker. The second point is that due to technological innovations, the number of high-paying jobs that actually produce something seem to be shrinking. This mantra of 'work smarter, not harder' has been going on for nigh 30 years. You'd think that if there was anything to it, something would have come up by now. But, maybe you're right. So why don't you name a few of these new high-paying service jobs? Jobs that can employ, as Rob says, at least one third of the left half of the bell curve? It's not exactly sporting, you know, to depend on something in argument which simply does not exist.
That may or may not be true. But the reality is something different. In any case those 'free trade agreements' can be rewritten or superseded by new agreements, agreements which do take into account a wider array of externalities. (need I comment on the 'liberal' critics of various free trade agreements being right yet again?)
Oh, I do agree that Smoot-Hawley was a disaster, but I suspect that it was more because of when it was introduced, not because of what it was. Iow, while the stimulus package might work in the short term, if noting is done to address the trade imbalances, we'll be right back where we started from in short answer. Or not exactly - we'll be even more in the hole, financially speaking.
Again, if you have any ideas for high-paying jobs here that would correct those trade imbalances, or indeed, any ideas for low-paying jobs that would apply the correction, I'm all ears.
So you're saying that an extra $50 is too much to pay on a $500 television?
I'm saying that you are underestimating the cost difference, and that the American producers have to compete against others who don't have that cost disadvantage. You're talking about Americans earning $10-20/hr + benefits competing against wage earners who often make less than $1/hr, with few to no benefits and fewer protections in many cases.
For any product for which labor comprises much of its expense structure, this is going to be a problem. The product would need to be better to justify the cost difference.
This mantra of 'work smarter, not harder' has been going on for nigh 30 years.
That is the only way for a high wage country to possibly justify high wages. If it doesn't work, that's only because we aren't all that special, after all.
Again, if you have any ideas for high-paying jobs here that would correct those trade imbalances, or indeed, any ideas for low-paying jobs that would apply the correction, I'm all ears.
I don't, and neither do many other people. The US is too expensive and not uniquely talented to the degree that it would need to be to serve your objectives.
You want the US to deliver a low-skilled wage base that it cannot possibly provide on a wide-scale basis. This work gets offshored because this is the most logical way for the producer to produce it.
The tariffs argument doesn't go anywhere, as there is no way those are going to happen, and they would backfire if they did.
Sigh. You're perfectly free to quote where I said anything that would lead to your conclusion that I was underestimating the cost difference. You are not free to simply state it. And since I said no such thing, I suspect that's why you took the tack that you did.
RW, I am doing you the courtesy of taking you seriously and assuming that you are arguing in good faith. I would appreciate if you would extend the same courtesy and stop reciting bromides.
That may or may not be true, but first you have to establish that these products exist and have been outsourced to a significant degree. Ironically, it seems that a lot of the 'service industry' jobs like masseuse and dog-walker are precisely those sorts of jobs in which labor costs dominate. And which cannot be outsourced.
Further, you would have to show that this is predominant reason why high paying jobs are lost to downsizing. I notice that you don't answer any of my observations about deliberate currency valuations in particular or Mercantilism in general. Nor have you answered any questions about pollution externalities.
If you're going to be serious, please address the comments I actually make instead of ignoring them, and please don't attribute anything to me that I haven't actually said or could have been logically assumed to have implied.
You're perfectly free to quote where I said anything that would lead to your conclusion that I was underestimating the cost difference.
The fact that you would believe that a labor-intensive product would have only a 10% cost differential suggests that you are grossly underestimating what those costs would be. For a product with a substantial labor component, a wage differential of several multiples is going to raise total production cost dramatically.
You also need to keep in mind that prices need to be competitive. Even if your example was correct and a Korean $500 TV could be built in the US and sold for $550, not many people would buy the US set when they can buy an equally good Korean unit while easily saving fifty bucks. The company with the US-built $550 televisions won't be able to compete.
Ironically, it seems that a lot of the 'service industry' jobs like masseuse and dog-walker are precisely those sorts of jobs in which labor costs dominate.
Because these are low skilled jobs, providing services that aren't highly desired or essential must-haves.
An ambitious dog walker would aspire to create a strong brand that generates referrals and, er, fetches a price premium, but most won't be able to do that.
One reason that rising economies such as India and the PRC place such a premium on higher education is because jobs requiring education have more of a barrier to entry, which supports higher pay. Education and prosperity often correlate.
And just where did I say this? Quotes, please.
You're just repeating what you said earlier. If you recall, I was asking at what point would some sort of tariff become justifiable. Is a tariff of $50 on a $500 product worth it if it produces jobs that pay $40 K/yr instead $18 K/yr? How about a $1 tariff on a $500 product if it produces jobs that pay $90 K/yr instead $18 K/yr?. If you reply that even a penny tariff on $500 isn't worth it, even if it results in jobs paying $180 K/yr instead $18K/yr, well, I'm sorry, but that's just being ideological.
And you _still_ haven't said anything about price differentials resulting in the flight of jobs for reasons other than wage differentials. Please, I'm arguing in good faith here, is it too much to ask for you to do the same?
And just where did I say this?
Your hypothetical examples consistently distort the issue, by comparing an $18,000 foreign salary to a $40,000 US salary, leading to a 10% price differential in the good ($500 vs. $550.)
What your consistent use of this particular set of analogies misses is that wages in developed countries are not nearly that high, so the disparity between US wages and those in Asia, for example, are more akin to multiples of 10 or 20. A US worker making $2,000-3,000/mo just has nothing on his Chinese counterpart who might be earning perhaps $250-300/month, particularly when the Chinese worker has to tolerate longer hours and inferior conditions.
If you miss this degree in wage disparity by as much as you have, then you are sure to lowball the degree to which product prices would need to increase in order to pay those US wages.
Prices for labor-intensive goods are going to have to increase a lot more than just 10%, and American consumption patterns would fall to reflect the higher prices. That might be an acceptable outcome, but we can't pretend that the American consumer and those American workers who serve them wouldn't be negatively impacted by this.
I'm arguing in good faith here
I'm not sure how you can claim that when your numeric examples are intended to downplay the problem. Your fingerpointing is getting tedious; you should be able to make an argument was some basis in reality without trying to accuse anyone who disagrees with you of being evil or nasty, or so I would hope.
You seem to be under the impression that I'm saying that's what the figures are; I'm not, and I don't see how you can read it that way. I started by saying that to me that it was not at all obvious that tariffs and other trade restrictions always and everywhere result in a net loss. And to point this out I said if this were true, would this justify a tariff of x dollars? Well then, how about if this were true instead then?
Nowhere did I make a specific claim that these were the actual figures. I merely used them to point at that if these figures pertain, and you still object to them, even at these extreme values, then the objection is likely not monetary in origin, but ideological.
Now, as to what the situation actually is wrt to various jobs, well, I don't know. But then, you haven't convinced me that you know either. You seem to be simply asserting something with no proof that it is true. Do you have any specific examples of a specific product whose manufacturing base now lies in China solely because of these high labor costs? And are the laborers in those instances free to negotiate their wages in the way their American counterparts are (theoretically) free to negotiate?
As I've explained - more than once - my numeric examples are not intended to downplay the problem, but to give lie to the notion that tariffs and other restrictions on trade are always and everywhere a bad thing. Nothing more. So I think my argument meets the criteria for relevance. You, otoh, still have refused to answer any of my questions about Mercantilism, deliberate currency devaluation, etc. Would you please make an attempt to do so? Would you argue, for example, that to 'compete' with China we should get rid of pollution and worker safety regulations? That businesses should be free to take a pass on their externalities?
Look, if you have two countries, say the U.S. and Canada with similar democratic norms and traditions, and neither is unilaterally pursuing a mercantilist strategy agains the other, and neither enjoys advantages like a regulatory climate that does not force them to make good on their externalities, etc, etc, etc . . . then, yes, if company A in Canada can outcompete company B in the U.S. because the workers are paid a smaller wage, I'd say that tariffs would result in a net loss.
But if the situation is different from that, well, I'm not going to automatically assume that this would always be the case.
Now, where are your examples and where are your replies to these issues . . . which are very much a real-world affair?
SoV -
Yes, there are other factors driving outsourcing beyond just differences in wage costs. But they don't all go in the direction you're implying.
Companies that want to move their production to China have many additional costs beyond the obvious (transportation costs). For instance, there are much higher inspection/quality control costs. Those idiot pet food companies should have been testing the food constantly, knowing that Chinese factory owners take every chance to switch to cheaper materials. After all, before all those pets got sick because melamine was deliberately put in to make the food appear higher quality at a lower price, there were the cases where children in Haiti died because Chinese companies sold antifreeze as pure, medical-grade glycerin to be used in liquid acetaminophen, again just to save a bit of money.
If you fly back and forth to China a few times and make the effort to chat with some bored business travelers (it helps if you can get upgraded to business class), you will hear many stories about how hard it is to monitor those factories. I recall one story about a factory trying to produce kosher food products, and they had to inspect it at least once a week because they'd find the workers eating their lunch right there where the food was being processed, and eating pork around the supposedly kosher food.
I once met someone from Nike (on one of those long plane flights) who said that they needed to inspect their factories in China every single day, or else the factory owners would substitute cheap foam for the insoles, rather than the more expensive foam that Nike wanted for better performance in their shoes.
Another cost of doing business in China is bribes, which are more expensive for American than for European countries. French or German companies are allowed to pay bribes themselves, but the US has a law that our businesses can't pay bribes even in countries where they're standard practice, so US companies have to hire local partners to pay everyone off, and of course the middlemen take a cut, also.
And then there are intellectual property rights - if you try to produce anything requiring advanced technology that you don't want your competitors to get ahold of, your Chinese partner will figure out the secrets and begin competing against you directly in as short a time as they can manage.
So, on the one hand there are low wages, cheap reminbi and loose environmental and safety regulations. On the other hand, there are higher transportation costs, higher quality control costs, bribes and loose regulation of intellectual property. And there are surely many other factors.
To see which of these factors are most important, we can look at which types of jobs are being 'lost to China' - as RW has pointed out, it's the labor intensive work that has mainly moved over there. That's a pretty good indication that lower wage costs are a major factor.
As to the broader question - can we be 100% sure that any tariffs or other interference will always be bad? No, but we also have no way to be sure how much interference will help and how quickly we'll start to mess things up. The real question is whether micro-managing these things is generally good.
You made up an extreme example where you assumed that we actually knew all of the parameters, and where an incredibly small tariff was guaranteed to have enormous effects. But in practice we don't know all of the parameters or even all of the relevant factors, plus we don't know how things will change over time. We only know that protectionism hasn't worked in the past, that any interference will be inflexible and heavily driven by politics and will probably lock us in far longer than anyone really thinks the interference should last, and that there are strong, logical reasons to expect bad results. Plus, as RW pointed out, it's a political non-starter anyway.