Is a new paradigm percolating among the United States' academic elite?
There are tentative signs that economists may finally be re-evaluating the benefits of free trade. The intellectual arguments in favor of free trade have always been extremely weak, and the "consensus" has largely been sustained by a complex interplay of group think, incentives generated by narrow interest groups, the failure of contemporary economists to study economic history, and relatedly, the mathematization of the discipline, that has pushed it into more abstract, and frequently obtuse theoretical formulations.
In the August 29, 2012 edition of the New York Times, Edward Alden, a fellow at the prestigious Council on Foreign Relations points to growing economic research that suggests "globalization" has been a major factor driving real income decline in the United States. I put "globalization" in quotations, because it is commonly used as a lazy stand-in for two concrete policy choices that have gone largely unexamined: (1) maintaining a "strong" overvalued US dollar; and (2) maintaining a federal tax system that relies overwhelmingly on income and pay roll taxes (+90% of federal government revenue) rather than adopting a mixed Chinese-style system of taxation that shifts a considerable share of the tax burden onto imports (more than 20% of Chinese central government revenue comes from a variety of import taxes).
Countries that heavily tax imports and maintain undervalued currencies (making their manufacturing exports artificially hyper-competitive) have enjoyed steadily rising median incomes and full employment.
While the hegemony of "free trade" remains in place, there are hopeful signs that the intellectual grounds may be shifting. It is not clear if this shift will happen in time to save what is left of the US industrial base, and the middle and working classes who depend on it.
Friday, August 31, 2012
Wednesday, August 29, 2012
Fatal Attraction: Defeatism among Neoclassicals
Robert Gordon, an economist at Northwest University, recently published a working paper with the National Bureau of Economics Research, titled "Is US economic growth over? Faltering Innovation Confronts the Six Headwinds." His basic claim is that the innovation of the last few decades (largely in electronics) has contributed less to productivity growth than technological innovation in the 19th and early 20th centuries (the innovation he highlights is indoor plumbing). This faltering innovation, in turn confronts six headwinds: (1) Demography (population aging) (2) Education (stabilizing in the number of Americans with higher degrees) (3) Rising inequality (4) Globalization (5) Energy limits (6) Debt reversal.
By using the "headwinds" metaphor, Gordon subtly suggests that these 6 factors are all beyond US policymakers' control. They represent natural phenomena and are not primarily the consequences of specific, identifiable policy choices.
Gordon suggests that "Globalization" in particular is both exogenous and unavoidable:
"Some of the headwinds contain a sense of inevitability. The most daunting is headwind (4), the interplay between globalization and modern technology, which accelerates the process of catching up of the emerging markets and the downward pressure on wages and real incomes in the advanced nations." (p. 20).
Is this assumption correct? One would like to see evidence, particularly from other high income societies. If it's true that "Globalization" is an exogenous "head wind" then all societies with per capita incomes substantially higher than India and China should be seeing income declines. This is obviously not the case. Incomes in socieites as diverse as Singapore, South Korea, Israel and Switzerland are substantially higher today, in real terms, than ten years ago. Moreover, all of these countries have attained full employment. Middle-income societies that are much wealthier than China/India have seen dramatic economic growth over the last decade, with Argentina growing by 7-8% a year, every year from 2001-2009 and Brazil and Mexico also showing impressive growth.
Gordon is trying to convince Americans to fatalistically accept a diminished future. They shouldn't. Instead they should demand that their policymakers adopt the same mix of policies successfully employed in Israel, South Korea and Singapore: massive currency intervention to depreciate the national currency and make domestic manufacturing competitive, combined with an expanded social safety net to enhance workers' buying power.
By using the "headwinds" metaphor, Gordon subtly suggests that these 6 factors are all beyond US policymakers' control. They represent natural phenomena and are not primarily the consequences of specific, identifiable policy choices.
Gordon suggests that "Globalization" in particular is both exogenous and unavoidable:
"Some of the headwinds contain a sense of inevitability. The most daunting is headwind (4), the interplay between globalization and modern technology, which accelerates the process of catching up of the emerging markets and the downward pressure on wages and real incomes in the advanced nations." (p. 20).
Is this assumption correct? One would like to see evidence, particularly from other high income societies. If it's true that "Globalization" is an exogenous "head wind" then all societies with per capita incomes substantially higher than India and China should be seeing income declines. This is obviously not the case. Incomes in socieites as diverse as Singapore, South Korea, Israel and Switzerland are substantially higher today, in real terms, than ten years ago. Moreover, all of these countries have attained full employment. Middle-income societies that are much wealthier than China/India have seen dramatic economic growth over the last decade, with Argentina growing by 7-8% a year, every year from 2001-2009 and Brazil and Mexico also showing impressive growth.
Gordon is trying to convince Americans to fatalistically accept a diminished future. They shouldn't. Instead they should demand that their policymakers adopt the same mix of policies successfully employed in Israel, South Korea and Singapore: massive currency intervention to depreciate the national currency and make domestic manufacturing competitive, combined with an expanded social safety net to enhance workers' buying power.
Monday, August 27, 2012
Harvard's Willy Shih on Manufacturing Decline
One of the theme's of this blog is that the cause of general economic decline in the US has been driven by the decline in American manufacturing.
I came across an interview in the Sept/Oct 2012 issue of Harvard Magazine, with Harvard Business School's Willy Shih, whose perspective resonates with mine. Shih recounts his experiences working with Kodak, a once successful US camera manufacturer and film developer that outsourced its camera manufacturing business to East Asia in the 1970's, and as a result was unable to take advantage of surging demand for digital cameras later on. Shih likens manufacturing to an eco-system, or a commons, that features a workforce and an ecology of innovative know-how that must be replenished, and can be lost -- irretrievably -- if business leaders only think in terms of short term profitability (which over the last few decades has meant outsourcing much of the innovative intense manufacturing).
Shih is pessimistic that outsourced industries such as electronics can come back to the United States. Is his pessimism warranted? I don't think so. In theory, the policies of Japan, Korea, China and others that drove this and other industries out of the United States could be replicated by the United States, and one would expect, would have similar results.
I came across an interview in the Sept/Oct 2012 issue of Harvard Magazine, with Harvard Business School's Willy Shih, whose perspective resonates with mine. Shih recounts his experiences working with Kodak, a once successful US camera manufacturer and film developer that outsourced its camera manufacturing business to East Asia in the 1970's, and as a result was unable to take advantage of surging demand for digital cameras later on. Shih likens manufacturing to an eco-system, or a commons, that features a workforce and an ecology of innovative know-how that must be replenished, and can be lost -- irretrievably -- if business leaders only think in terms of short term profitability (which over the last few decades has meant outsourcing much of the innovative intense manufacturing).
Shih is pessimistic that outsourced industries such as electronics can come back to the United States. Is his pessimism warranted? I don't think so. In theory, the policies of Japan, Korea, China and others that drove this and other industries out of the United States could be replicated by the United States, and one would expect, would have similar results.
Saturday, August 25, 2012
Why are American incomes declining?
Why are American incomes declining? In beginning to identify the answer to this important question, it is important to identify the timing of the decline. If the decline in real incomes began decades after a certain kind of policy change, it is difficult to blame this decline on the policy change in question. For example, the Wagner act, which made it easier for US workers to form unions and was passed in 1935 could hardly be blamed for declining wages if the decline in incomes begins in the 1980's or 1990's, fifty or more years after the Wagner act was passed.
One difficulty in identifying the start of the decline in US real incomes, is that the decline begins for different subsets of the population in different years. For the average American male the decline began quite early, around 1970. The average American male has a lower income -- in real terms, adjusted for inflation -- than their counterparts forty two years ago, when Richard Nixon was President and Neil Armstrong's moon walk was a recent event. As economists Michael Greenstone and Adam Looney with the Brookings Institute have documented, for American males without a high school diploma, real median earnings are a whopping 66% lower than in 1969. For better educated American men, the decline has been less steep, with those with a college degree earning 12% less than males with a B.A. in 1969.
For some readers these declines might strike them as odd, perhaps especially from the perspective of their own life experience. A reader might question the evidence of general income decline, because they themselves have a higher standard of living than they did twenty or thirty years ago. In this case they are comparing apples with oranges, however, and not giving themselves enough credit for their skills and experience. As workers become more experienced they should earn more.
This point can be clarified by considering the effects of mass famine on human height. It is well known that the people of North Korea have suffered recurring famines over the last few decades and are generally much shorter than well-nourished South Koreans. Nevertheless, within North Korea the average 20 year old is taller than the average 10 year old who is taller than the average 5 year old. The increasing height of the individual North Korean from birth to maturity does not undermine the claim that mass famine is reducing the average height of North Korean birth cohorts.
The evidence that Looney and Greenstone have put together strongly suggests that the declines in US incomes began around the year 1970. Some important factor must have changed in the early 1970's that sent the US on a path of stagnation and real economic decline. Greenstone and Looney think they have an answer to this question, and it has to do with educational attainment. They argue that in the decades before 1970, American males continued to increase their educational attainment, and earned higher wages as a result. Since 1970, however, the share of American males earning a college degree has held roughly constant, which they suggest is the key reason for declining median incomes among US men. As additional evidence, they point to the fact that American women have enjoyed rising median incomes, improvement that has coincided with a rising share of women earning college degrees.
As it turns out, Looney and Greenstone's analysis is a good example of the ecological fallacy: women are earning more today than they did in the early 1970's for reasons that are only tangentially related to the fact that more women today have college degrees. The primary reason they are earning more today is because better kinds of economic activities are available to them than in the bad old days. As we will see later, what economists call the division of labor, is not only present at the level of individuals operating in a national economy, but also exists at the level of countries operating in a global economy. For the country as a whole, its position in the global division of labor is deteriorating. As we shall see, the US is taking on (or more accurately, being forced into) the role of hewer of wood and drawer of water. [Joshua 9:23]
One difficulty in identifying the start of the decline in US real incomes, is that the decline begins for different subsets of the population in different years. For the average American male the decline began quite early, around 1970. The average American male has a lower income -- in real terms, adjusted for inflation -- than their counterparts forty two years ago, when Richard Nixon was President and Neil Armstrong's moon walk was a recent event. As economists Michael Greenstone and Adam Looney with the Brookings Institute have documented, for American males without a high school diploma, real median earnings are a whopping 66% lower than in 1969. For better educated American men, the decline has been less steep, with those with a college degree earning 12% less than males with a B.A. in 1969.
For some readers these declines might strike them as odd, perhaps especially from the perspective of their own life experience. A reader might question the evidence of general income decline, because they themselves have a higher standard of living than they did twenty or thirty years ago. In this case they are comparing apples with oranges, however, and not giving themselves enough credit for their skills and experience. As workers become more experienced they should earn more.
This point can be clarified by considering the effects of mass famine on human height. It is well known that the people of North Korea have suffered recurring famines over the last few decades and are generally much shorter than well-nourished South Koreans. Nevertheless, within North Korea the average 20 year old is taller than the average 10 year old who is taller than the average 5 year old. The increasing height of the individual North Korean from birth to maturity does not undermine the claim that mass famine is reducing the average height of North Korean birth cohorts.
The evidence that Looney and Greenstone have put together strongly suggests that the declines in US incomes began around the year 1970. Some important factor must have changed in the early 1970's that sent the US on a path of stagnation and real economic decline. Greenstone and Looney think they have an answer to this question, and it has to do with educational attainment. They argue that in the decades before 1970, American males continued to increase their educational attainment, and earned higher wages as a result. Since 1970, however, the share of American males earning a college degree has held roughly constant, which they suggest is the key reason for declining median incomes among US men. As additional evidence, they point to the fact that American women have enjoyed rising median incomes, improvement that has coincided with a rising share of women earning college degrees.
As it turns out, Looney and Greenstone's analysis is a good example of the ecological fallacy: women are earning more today than they did in the early 1970's for reasons that are only tangentially related to the fact that more women today have college degrees. The primary reason they are earning more today is because better kinds of economic activities are available to them than in the bad old days. As we will see later, what economists call the division of labor, is not only present at the level of individuals operating in a national economy, but also exists at the level of countries operating in a global economy. For the country as a whole, its position in the global division of labor is deteriorating. As we shall see, the US is taking on (or more accurately, being forced into) the role of hewer of wood and drawer of water. [Joshua 9:23]
Friday, August 24, 2012
Welcome to Heterodox Political Economy!
The purpose of this blog is to provide a space for considering contemporary economics research that reaches beyond the framework of neo-classical economics. Although neo-classical approaches to economics have been ascendant since the 1970's, the real world consequences of this ascendance, including declining real incomes and rising inequality, suggest that it may be time for a reevaluation.
There are alternatives to neo-classical economics. What Erik Reinert calls the "other cannon" has a venerable tradition that goes back many centuries. Along similar lines, Ha Joon Chang has shown that durring their phenomenal rise, the United Kingdom and United States, as well as virtually all other Western societies deployed policies that are the antithesis of the free market, laissez faire approach that dominates today.
Unfortunately, much of the debate over economic policy in the English speaking world has been commandeered by narrow interest groups that benefit from the status quo. This has made it very difficult for many American and European policymakers to learn from the experiences of successful countries. The wealth and abundance of societies as diverse as Israel, Switzerland, Singapore and South Korea owes much to policies that bear a strong family resemblance to those carried out by the United Kingdom from the 1690's to the 1840's and the United States from the 1790's to the 1970's. The true history of Anglo-American development as well as the sources of success in Israel, Switzerland and elsewhere have unfortunately been obscured by the efforts of influential economic interest groups in the US and UK.
As the North Atlantic world continues to struggle with economic stagnation, high unemployment, and savage austerity, it is time to question the validity of the "mathematized ideology" that has become mainstream Anglophone economics. There are alternatives!
There are alternatives to neo-classical economics. What Erik Reinert calls the "other cannon" has a venerable tradition that goes back many centuries. Along similar lines, Ha Joon Chang has shown that durring their phenomenal rise, the United Kingdom and United States, as well as virtually all other Western societies deployed policies that are the antithesis of the free market, laissez faire approach that dominates today.
Unfortunately, much of the debate over economic policy in the English speaking world has been commandeered by narrow interest groups that benefit from the status quo. This has made it very difficult for many American and European policymakers to learn from the experiences of successful countries. The wealth and abundance of societies as diverse as Israel, Switzerland, Singapore and South Korea owes much to policies that bear a strong family resemblance to those carried out by the United Kingdom from the 1690's to the 1840's and the United States from the 1790's to the 1970's. The true history of Anglo-American development as well as the sources of success in Israel, Switzerland and elsewhere have unfortunately been obscured by the efforts of influential economic interest groups in the US and UK.
As the North Atlantic world continues to struggle with economic stagnation, high unemployment, and savage austerity, it is time to question the validity of the "mathematized ideology" that has become mainstream Anglophone economics. There are alternatives!
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