Tag: economics

This is what happens when you mindlessly assume that free trade is intrinsically beneficial in all circumstances:

Since 1974, Trade Adjustment Assistance (TAA) has provided 104, and then 156, weeks of myriad financial aid, partly concurrent with the 99 weeks of unemployment compensation, to people, including farmers and government workers, and firms, even whole communities, that can more or less plausibly claim to have lost their jobs or been otherwise injured because of foreign competition. Even if the injury is just the loss of unfair advantages conferred, at the expense of other Americans, by government protectionism. And even if the injury results not from imports but from outsourcing jobs. TAA benefited 50,000 people at a cost of $500 million in 2002. In 2010, it cost $975 million for 234,000 people. Its purpose is to purchase support for free-trade policies that allow Americans to benefit from foreign goods and services, and from domestic goods and services with lower prices because of competition from imports…. It is unjust to treat some workers as more entitled than others to protection from the vicissitudes of economic dynamism.

Consider a hypothetical Ralph, who operated Ralph’s Diner until Applebee’s and Olive Garden opened competitors in the neighborhood. With economies of scale and national advertising budgets, those two franchises could offer more choices at better prices, so Ralph’s Diner went out of business. Should he and his employees be entitled to extra taxpayer subventions because they are casualties of competition?

Why should someone be entitled to such welfare just because he or she is affected negatively by competition that comes from abroad rather than down the street? Because national trade policy permits foreign competition? But national economic policy permits — indeed encourages, even enforces — domestic competition.

In 2001, when approximately 80,000 people worked in 7,500 music stores, the iPod was invented. Largely because of that and other technological changes, today only about 20,000 people work in 2,500 music stores. Should those 60,000 people be entitled to extra welfare because they are “victims” of technology? Does it matter if the 60,000 have found work in new jobs — perhaps making or selling electronic devices?

In 2008, Americans bought 1.4 billion books made of paper and 200 million e-books. Soon they will buy more e-books than paper books, and half the nation’s bookstores will be gone. Should the stores’ former employees be entitled to special assistance beyond unemployment compensation?

Will has omitted to take three salient facts into account. First, he fails to note that 234,000 people receiving benefits from the program – up from only 50,000 – do not have any jobs. Therefore, it makes no sense to ask if the 60,000 people who no longer work in music stores have now found work in making or selling electronic devices, especially when none of those electronic devices are made in the USA. It’s a bizarre and uncharacteristically inept attempt at a rhetorical point.

Second, the reason that one could make a case for compensating those who lose their jobs to foreign competition rather than to domestic competition is because a) the former is a direct result of federal trade policy whereas the latter is not, and, b) whereas the worker who loses a job to a domestic competitor can reasonably move elsewhere domestically to find another job, potentially with that very competitor, the worker who loses a job to an overseas competitor cannot.

Third, the advance of technology tends to create new jobs even as it destroys old ones. (This is not always true, an assumption that needs to be examined at some other time.) So the loss of a job in one sector is counterbalanced by the addition of a job in another. However, the loss of a job to overseas competition is a net loss for the national economy and it is not counterbalanced by the addition of a job.

The oxymoronic aspect of free trade in a modern economic system is this. It makes no sense to even attempt managing any aspect of a national economy if national employment is to be left to the vagaries of international competition. This is why “free trade” is not, as many on the right believe it to be, a step towards freedom, it is rather an significant step towards global tyranny and the destruction of the United States Constitution.

Now, I am not defending the Trade Adjustment Assistance program or any other form of welfare or government income redistribution plan. I am simply pointing out that it is totally absurd for George Will and other free traders to complain about the cost of free trade-related welfare to a nation rendered bankrupt, at least in part, by the government’s international free trade policies.

Given that the federal government used to fund itself through the use of tariffs on international trade, it is most strange to argue that direct income taxes and payroll taxes on its citizens are either more liberating or more to the material benefit of those very citizens.

Susan Walsh notices that median male income hasn’t kept pace with GDP growth:

WHY? Economists can’t explain it, it’s still a matter of conjecture. Alex Tabarrok’s thoughts:

The big difference between female and males as far as jobs, of course, has been labor force participation rates, increasing strongly for the former and decreasing somewhat for the latter. Most of the female change, however, was over by the mid to late 1980s, and the (structural) male change has been gradual.

Female education levels have increased dramatically and male levels have been relatively flat.

Females are also more predominant in services and males in manufacturing: plumbers, car mechanics, carpenters, construction workers, electricians, and firefighters, for example are still 95%+ male.

The primary factor is no mystery and is connected to the labor participation rates, but not for the reason suggested. Both male and female participation rates did most of their changing prior to 1973. That was the year that the number of older men leaving the labor force finally stopped compensating for the number of young women entering it. So, that is the point when wages finally began feeling the effects of the oversupply of labor from the increase in women entering the work force from the 33.9 percent who had always worked.

The secondary factor is the mass transfer of income that takes place from productive private sector men to unproductive public sector women that has been made possible by the mass borrowing in the public sector. More details on this later.

One thing that most people probably don’t realize is that in the pre-Samuelsonian era, depressions were generally viewed in terms of the supply and demand for labor rather than a via a money metric of consumption. One of the more remarkable things for a young economics student reading Keynes’s General Theory today is discovering how it reads more like an Austrian logic-based text than a modern macroeconomics statistical digest. Today, the employment level doesn’t even factor into the modern determination of whether the economy is growing or not. Hence the new economic oxymoron of “a jobless recovery”.

But by the older perspective, it is obvious that the USA is still in the same depression that it was in 2008. Consider the following labor report:

About 6.2 million Americans, 45.1 percent of all unemployed workers in this country, have been jobless for more than six months – a higher percentage than during the Great Depression.

Moreover, another little known fact is that the unemployment numbers provided for the Great Depression on an ex post facto basis by post-WWII economists were overstated because the BLS economist responsible, one Stanley Lebergott, counted many government workers as being unemployed. Michael Darby corrected for this and came up with the following numbers:

Year L D
1929 3.2% 3.2%
1930 8.7% 8.7%
1931 15.9% 15.3%
1932 23.6% 22.9%
1933 24.9% 20.6%
1934 21.7% 16.0%
1935 20.1% 14.2%
1936 16.9% 9.9%
1937 14.3% 9.1%
1938 19.0% 12.5%
1939 17.2% 11.3%
1940 14.6% 9.5%

Note that by this corrected measure, even the woefully misleading U3 unemployment measure is presently at the same level as 1937, and worse than 1930. At 15.8, the more relevant U6 measure is worse than 1931 and every year except 1932 and 1933, the absolute nadir of the Great Depression. It may be worth noting that adding the current 20.3 million government workers to the ranks of the unemployed, as per Lebergott, would increase the current U3 rate to 22.3 percent and the U6 rate to 29 percent, which exceeds even Lebergott’s calculation for 1933.

Given the slide in housing prices, the unemployment rates, and the length of joblessness, two things should be readily apparent. First, the economic contraction has not ended. Second, the GDP figures notwithstanding, it is a larger scale event than the Great Depression.

Mark Perry omits a key factor in attempting to defend international free trade:

Bottom Line: To argue against free trade among countries, one would also have to object to free trade among American states, counties, cities and individuals, see my edits below of Fletcher’s article that hopefully make this point.

That simply is not the case. In fact, Perry misses a vital point, which is that in order to argue FOR free trade among countries, one has to accept a similar free flow of labor between countries as presently exists between American states, counties, and cities. And how sizeable is that free flow?

In 2009, 4.7 million Americans moved from one state to another. Keep in mind that the entire American employed labor force is only 140 million. If we conservatively divide the number of domestic migrants by the average household size of 2.6, we’re looking at 1.8 million workers, 1.3 percent of all American workers, who moved intrastate.

This suggests that if the world were to adopt international free trade, more than a million Americans would need to move to China, Mexico, Japan, Germany, and Canada in order to find employment on an annual basis. It would be necessary to know the amount of intrastate trade vesus international trade to provide a precise estimate of how many Americans would need to emigrate every year, (53% of them to China), under a free trade regime, but I find it unlikely that many Americans are likely to prove supportive of a trade system that would require them to move to places like India and Bangladesh as freely as it now forces residents of Detroit and Minneapolis to move to Scottsdale and Naples.

Being an American expatriate myself, I know much better than most that it is possible to change one’s international residence. And due to my extensive, long-term international experience, I can say that I find this particular aspect of the free trade argument to be naive to the point of absurdity. Most American expats to even first-world European countries don’t last two years due to the significant language and cultural differences. The concept is a complete non-starter and therefore the equivalence is false.

Given the following factors:

1. Gross Domestic Product (GDP) is the statistical measure for the size of the national economy.
2. The formula for calculating GDP is C+I+G+(x-m).
3. In the most recent BEA report, current dollar GDP was 15,010 billion. Exports (x) were 2,020 billion and imports (m) were 2,591 billion.
4. In Q1-11, international trade reduced the size of the US economy by $571 billion. Without any international trade at all, GDP in Q1-11 would have been 15,581 billion, representing a healthy rate of 4.8 percent annual growth from the 14,871 billion of the previous quarter instead of the 0.9 percent reported.

This is the challenge: justify the continuation of international free trade utilizing reason, logic, and conventional macroeconomic theory in light of these figures. This means no resorting to Austrian-based skepticism concerning the validity of economic statistics or ideological objections to government intervention. For the purposes of this exercise, we are assuming that the Samuelsonian metrics are valid, relevant, and a legitimate foundation for national policy.

You may recall that my prediction that the U3 unemployment would exceed 11 percent in 2010 was “incorrect”. The BLS reported U3 at only 9.8 percent even though fewer people were working due to a concomitant increase in the number of people who had mysteriously decided to exit the labor force in the midst of the “recovery” That’s why I revised my 2011 prediction as follows: “U-3 unemployment will climb above 10 percent. The real unemployment rate will be much higher, but it will be masked by a decline in the Labor Force Participation rate below 64 percent. The employment-population ratio will fall below 58 percent for the first time since 1984.

Needless to say, I didn’t find it quite as inexplicable as some economists have to see that the current employment trend is defying “the rules of a normal economic recovery.”:

The labor force — those who have a job or are looking for one — is getting smaller, even though the economy is growing and steadily adding jobs. That trend defies the rules of a normal economic recovery…. The percentage of adults in the labor force is a figure that economists call the participation rate. It is 64.2 percent, the smallest since 1984. And that’s become a mystery to economists. Normally after a recession, an improving economy lures job seekers back into the labor market. This time, many are staying on the sidelines.

Their decision not to seek work means the drop in unemployment from 9.8 percent in November to 9 percent in April isn’t as good as it looks. If the 529,000 missing workers had been out scavenging for a job without success, the unemployment rate would have been 9.3 percent in April, not the reported rate of 9 percent. And if the participation rate were as high as it was when the recession began, 66 percent, in December 2007, the unemployment rate could have been as high as 11.5 percent.

Translation: the real U3 unemployment rate has been over 11 percent since 2010, as I originally predicted. However, the BLS has concealed this very high rate of unemployment by the simple tactic of reducing the size of the labor force despite the growing population of the country. This is only one of the many reasons that Mises was correct to condemn the use of statistical empiricism in economics; the statistics are neither reliable nor represent a consistent metric.

There is no mystery and it is not true that “nobody is sure why it’s happening.” The reason it is happening is completely obvious: there is no economic recovery. The Bureau of Labor Statistics is playing games, just like the Federal Reserve and most of the other Federal agencies, to conceal the observable fact that the Great Depression 2.0 has been underway for 30 months already. And their ability to hide it is gradually crumbling.

UPDATE: BLS report today: U3=9.1%, LFP=64.2%, E/PR=58.4%.

Murray Rothbard expands his logical case against empiricism in economics, specifically, explaining how the systematic gathering of statistics tends to lead inevitably to bureaucracy and increased government intervention in the economy:

[S]tatistics are desperately needed for any sort of government planning of the economic system. In a free-market economy, the individual business firm has little or no need of statistics. It need only know its prices and costs. Costs are largely discovered internally within the firm and are not the general data of the economy which we usually refer to as “statistics.”

The “automatic” market, then, requires virtually no gathering of statistics; government intervention, on the other hand, whether piecemeal or fully socialist, could do literally nothing without extensive ingathering of masses of statistics. Statistics are the bureaucrat’s only form of economic knowledge, replacing the intuitive, “qualitative” knowledge of the entrepreneur, guided only by the quantitative profit-and-loss test. Accordingly, the drive for government intervention, and the drive for more statistics, have gone hand-in-hand….

Suffice it then to say that a leading cause of the proliferation of governmental statistics is the need for statistical data in government economic planning. But the relationship works also in reverse: the growth of statistics, often developed originally for its own sake, ends by multiplying the avenues of government intervention and planning. In short, statistics do not have to be developed originally for politicoeconomic ends; their own autonomous development, directly or indirectly, opens up new fields for interventionists to exploit.

Each new statistical technique, whether it be flow of funds, interindustry economics, or activity analysis, soon acquires its own subdivision and application in government.

In the RGD chapter entitled “No One Knows Anything”, I demonstrated how wildly inaccurate, mutable, and untrustworthy the economic statistics on which so much government policy is predicated are. But the problem is that regardless of how inaccurate or even irrelevant they are, they will be used to justify government action in various areas of the economy and inspire public malinvestment while simultaneously exacerbating private malinvestment. If statistics are the eyes of the state, the central flaw with them that they will always be short-sighted, astigmatic, subject to optical illusions, and prone to aggressive intraocular lymphomas.