Most sectors within manufacturing have seen serious downsizing and restructuring over the last four decades. Many have gone bankrupt. Much of this story was not pretty for the workers directly affected. Many lost the only good-paying jobs they ever held. Some also lost pensions and health care benefits.
Nonetheless, the conventional wisdom among economists was that this process was good. It was associated with growing efficiency in the manufacturing sector as the least productive firms went out of business, other firms became more productive in order to survive. The net effect was that we are able to buy a wide range of manufactured goods for much lower prices than would be the case if the manufacturing sector had not gone through this period of downsizing and transition.
With this as background, it was striking to see the Wall Street Journal bemoaning what appears to be a comparable period of adjustment in the banking industry. The central point is that the banking industry appears to be less profitable than it was before the crisis. Apparently tighter regulations are playing a major role in this decline in profitability.
This drop in profitability is presented as a bad thing, but it is hard to see why those of us outside of the banking industry should see it that way. If the sector had become badly bloated prior to the crisis then we should want to see it downsized. The workers who lose their jobs can be redeployed to sectors where they will be more productive. (The same argument that economists gave for manufacturing firms.) Declining profitability is a necessary part of this story.
Maybe the banks will also stop paying their CEOs tens of millions of dollars to issue phony accounts to customers. Lower pay for CEOs and other top executives will leave more money for shareholders.
There is a risk that the bankruptcy of a major bank could cause a serious disruption to the economy. Of course, that would imply that we still need to be concerned about “too big to fail” banks, in spite of the endless assurances to the contrary. If we have in fact fixed the too big to fail problem, then the rest of us should be celebrating the downsizing of the banking industry as the market working its magic. Too bad the WSJ doesn’t like the market.
Most sectors within manufacturing have seen serious downsizing and restructuring over the last four decades. Many have gone bankrupt. Much of this story was not pretty for the workers directly affected. Many lost the only good-paying jobs they ever held. Some also lost pensions and health care benefits.
Nonetheless, the conventional wisdom among economists was that this process was good. It was associated with growing efficiency in the manufacturing sector as the least productive firms went out of business, other firms became more productive in order to survive. The net effect was that we are able to buy a wide range of manufactured goods for much lower prices than would be the case if the manufacturing sector had not gone through this period of downsizing and transition.
With this as background, it was striking to see the Wall Street Journal bemoaning what appears to be a comparable period of adjustment in the banking industry. The central point is that the banking industry appears to be less profitable than it was before the crisis. Apparently tighter regulations are playing a major role in this decline in profitability.
This drop in profitability is presented as a bad thing, but it is hard to see why those of us outside of the banking industry should see it that way. If the sector had become badly bloated prior to the crisis then we should want to see it downsized. The workers who lose their jobs can be redeployed to sectors where they will be more productive. (The same argument that economists gave for manufacturing firms.) Declining profitability is a necessary part of this story.
Maybe the banks will also stop paying their CEOs tens of millions of dollars to issue phony accounts to customers. Lower pay for CEOs and other top executives will leave more money for shareholders.
There is a risk that the bankruptcy of a major bank could cause a serious disruption to the economy. Of course, that would imply that we still need to be concerned about “too big to fail” banks, in spite of the endless assurances to the contrary. If we have in fact fixed the too big to fail problem, then the rest of us should be celebrating the downsizing of the banking industry as the market working its magic. Too bad the WSJ doesn’t like the market.
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The NYT had its second major article in less than a month on the alleged mistreatment of a small public pension fund by the California Public Employee Retirement System (Calpers). The focus of this piece is the bill that the small California town of Loyalton faces from terminating its pension plan for four retirees and converting to a 401(k) system. According to the piece, the city council apparently did not understand the information Calpers gave it on termination costs when it voted in 2012 to end its pension with Calpers. This is unfortunate, but it is not clear that the council’s confusion is an appropriate topic for a major NYT piece.
The prior piece discussed problems involving pensions for six workers for Citrus Pest Control District No. 2. They discovered that there would be substantial costs associated with terminating their participation in Calpers and switching to a 401(k) pension. While that piece, like this one, implied that Calpers has been doing something improper; in fact, the system has provided all the appropriate information to its participants.
It is certainly plausible that these very small systems with no professional administrators may not understand the information given to them by Calpers. In this case, the problem is a lack of sophistication on the part of the people managing these small funds, not Calpers.
Of course, this is the argument as to why a defined benefit system like Calpers is better than a 401(k) type system where individuals have to make their own investment decisions. Most people are not financially sophisticated. As a result they often make bad choices in managing their money. This is especially likely when people pushing various funds are in a position to make large fees by promoting bad choices.
It is striking that the NYT has now devoted a large amount of space to the problems facing a total of ten workers in the California Public Employees Retirement System. It might be appropriate for it to shift its focus to the tens of millions of workers without adequate retirement plans.
The NYT had its second major article in less than a month on the alleged mistreatment of a small public pension fund by the California Public Employee Retirement System (Calpers). The focus of this piece is the bill that the small California town of Loyalton faces from terminating its pension plan for four retirees and converting to a 401(k) system. According to the piece, the city council apparently did not understand the information Calpers gave it on termination costs when it voted in 2012 to end its pension with Calpers. This is unfortunate, but it is not clear that the council’s confusion is an appropriate topic for a major NYT piece.
The prior piece discussed problems involving pensions for six workers for Citrus Pest Control District No. 2. They discovered that there would be substantial costs associated with terminating their participation in Calpers and switching to a 401(k) pension. While that piece, like this one, implied that Calpers has been doing something improper; in fact, the system has provided all the appropriate information to its participants.
It is certainly plausible that these very small systems with no professional administrators may not understand the information given to them by Calpers. In this case, the problem is a lack of sophistication on the part of the people managing these small funds, not Calpers.
Of course, this is the argument as to why a defined benefit system like Calpers is better than a 401(k) type system where individuals have to make their own investment decisions. Most people are not financially sophisticated. As a result they often make bad choices in managing their money. This is especially likely when people pushing various funds are in a position to make large fees by promoting bad choices.
It is striking that the NYT has now devoted a large amount of space to the problems facing a total of ten workers in the California Public Employees Retirement System. It might be appropriate for it to shift its focus to the tens of millions of workers without adequate retirement plans.
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The NYT printed a column by Arthur Brooks which beautifully displayed how political elites misunderstand the appeal of Donald Trump. The piece, which is titled “those who don’t understand Trump are doomed to repeat them,” complained that many people see Trump’s rise as meaning, “that mainstream positions on issues such as trade and immigration must be fundamentally rethought.”
Brooks goes on to assert:
“The real issue is weak, unevenly shared growth. If we addressed this issue, and if people felt their lives improving, the appetite for invective on secondary issues such as trade and immigration would dissipate. So walking away from free enterprise principles on trade and immigration is not the solution.”
While the real issue is in fact unevenly shared growth, the fact is that we have not been following “free enterprise” principles on trade and immigration. Longer and stronger patent and copyright protections, which are the equivalent of tariffs of several thousand percent, are not “free enterprise.” Nor is a licensing system which prevents foreign trained doctors from practicing in the United States unless they complete a residency program in the United States part of most definitions of “free enterprise.” (Dentists have to complete a dental school in the U.S., although recently graduates of Canadian schools were also allowed to practice here.)
As a result of patent and related protections for prescription drugs we will pay more than $440 billion for drugs that would likely sell for around 10 percent of this price in a free market. The difference of close to $400 billion a year is more than five times the amount that we spend on food stamps and twenty times the amount that we spend on TANF. The “doctor tax” that we pay as a result of protectionism is close $100 billion annually. This is the difference between what we pay for doctors in the U.S. and what we would spend if our doctors were paid the same as doctors in Germany, Canada, or other wealthy countries.
These and other forms of protectionism are responsible for “unevenly shared growth.” The Trumpites will thrive both as long as such protections persist and even more so as long as our elites pretend that they are just the free market. This is of course the point of my new book, Rigged: How Globalization and the Rules of the Market Economy Were Structured to Make the Rich Richer.
The NYT printed a column by Arthur Brooks which beautifully displayed how political elites misunderstand the appeal of Donald Trump. The piece, which is titled “those who don’t understand Trump are doomed to repeat them,” complained that many people see Trump’s rise as meaning, “that mainstream positions on issues such as trade and immigration must be fundamentally rethought.”
Brooks goes on to assert:
“The real issue is weak, unevenly shared growth. If we addressed this issue, and if people felt their lives improving, the appetite for invective on secondary issues such as trade and immigration would dissipate. So walking away from free enterprise principles on trade and immigration is not the solution.”
While the real issue is in fact unevenly shared growth, the fact is that we have not been following “free enterprise” principles on trade and immigration. Longer and stronger patent and copyright protections, which are the equivalent of tariffs of several thousand percent, are not “free enterprise.” Nor is a licensing system which prevents foreign trained doctors from practicing in the United States unless they complete a residency program in the United States part of most definitions of “free enterprise.” (Dentists have to complete a dental school in the U.S., although recently graduates of Canadian schools were also allowed to practice here.)
As a result of patent and related protections for prescription drugs we will pay more than $440 billion for drugs that would likely sell for around 10 percent of this price in a free market. The difference of close to $400 billion a year is more than five times the amount that we spend on food stamps and twenty times the amount that we spend on TANF. The “doctor tax” that we pay as a result of protectionism is close $100 billion annually. This is the difference between what we pay for doctors in the U.S. and what we would spend if our doctors were paid the same as doctors in Germany, Canada, or other wealthy countries.
These and other forms of protectionism are responsible for “unevenly shared growth.” The Trumpites will thrive both as long as such protections persist and even more so as long as our elites pretend that they are just the free market. This is of course the point of my new book, Rigged: How Globalization and the Rules of the Market Economy Were Structured to Make the Rich Richer.
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The Brexit vote was a case where the elites were clearly aligned against the U.K. leaving the European Union. While they had many good arguments on their side, and much of what the pro-Brexit crew was saying was nonsense, some of the elite gloating now also falls into the nonsense category.
In particular, the fall in the British pound is being taken as evidence that Brexit was a mistake. Actually, this is not really evidence of anything. The pound had become seriously over-valued in recent years causing the U.K. to run a current account deficit that is projected to be almost 6.0 percent of GDP for 2016. This is almost certainly not sustainable. The current account deficit also leads to a large gap in demand, which at the moment appears to be filled primarily by demand generated by a housing bubble.
Note that this is an economic quagmire created by the British elite: the establishment folks running the Bank of England and the Treasury Department. The Brexiters had nothing to do with it.
The correction for an excessive current account deficit is a fall in the value of the currency, which the U.K. is seeing now. Rather than being a negative for the economy, this is a positive development. It is the only plausible mechanism through which the U.K. can get closer to balanced trade. While the decline has undoubtedly been hastened by fears over Brexit, the bigger problem was letting the pound get so over-valued in the first place.
It is also worth noting that if the value of the pound is measured relative to the euro rather than the dollar, which is arguably the more appropriate yardstick, the pound has not fallen that sharply. It is still well above the lows it hit relative to the euro in 2008 and 2009.
As the U.K. loses part of its financial industry in the fallout from Brexit, it will need increased output in other areas to fill the gap created. A lower-valued pound would be an important part of this story. A lower-valued pound will make a wide range of U.K. produced goods and services more competitive internationally, reducing the size of the country’s trade deficit.
The long and short is that anyone who thinks the falling pound is the best evidence of the foolishness of Brexit doesn’t have a very good argument for their position.
The Brexit vote was a case where the elites were clearly aligned against the U.K. leaving the European Union. While they had many good arguments on their side, and much of what the pro-Brexit crew was saying was nonsense, some of the elite gloating now also falls into the nonsense category.
In particular, the fall in the British pound is being taken as evidence that Brexit was a mistake. Actually, this is not really evidence of anything. The pound had become seriously over-valued in recent years causing the U.K. to run a current account deficit that is projected to be almost 6.0 percent of GDP for 2016. This is almost certainly not sustainable. The current account deficit also leads to a large gap in demand, which at the moment appears to be filled primarily by demand generated by a housing bubble.
Note that this is an economic quagmire created by the British elite: the establishment folks running the Bank of England and the Treasury Department. The Brexiters had nothing to do with it.
The correction for an excessive current account deficit is a fall in the value of the currency, which the U.K. is seeing now. Rather than being a negative for the economy, this is a positive development. It is the only plausible mechanism through which the U.K. can get closer to balanced trade. While the decline has undoubtedly been hastened by fears over Brexit, the bigger problem was letting the pound get so over-valued in the first place.
It is also worth noting that if the value of the pound is measured relative to the euro rather than the dollar, which is arguably the more appropriate yardstick, the pound has not fallen that sharply. It is still well above the lows it hit relative to the euro in 2008 and 2009.
As the U.K. loses part of its financial industry in the fallout from Brexit, it will need increased output in other areas to fill the gap created. A lower-valued pound would be an important part of this story. A lower-valued pound will make a wide range of U.K. produced goods and services more competitive internationally, reducing the size of the country’s trade deficit.
The long and short is that anyone who thinks the falling pound is the best evidence of the foolishness of Brexit doesn’t have a very good argument for their position.
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Okay, that’s not exactly what this piece on trade as a way to promote world peace said, but it is a logical implication. The piece was presenting the argument that free trade is a way to promote world peace since countries that trade with each other don’t want war to get in the way of their prosperity.
Of course if we accept this argument, then it can’t possibly make sense to claim that protectionist measures that some groups like are okay. So the protectionist measure that prohibits foreign doctors from practicing in the United States unless they complete a U.S. residency program is an obstacle to world peace. The same applies to the ban on foreign dentists who have not completed a dental program in the U.S., or in recent years, Canada as well. In the same vein, patent and copyright protections, which can be equivalent to tariffs of many thousand percent, should also be seen as major barriers to world peace.
After all, no one has made the argument that a protectionist barrier does not threaten world peace if rich people like it, although a Nobel prize in economics probably awaits anyone who does make this case.
Okay, that’s not exactly what this piece on trade as a way to promote world peace said, but it is a logical implication. The piece was presenting the argument that free trade is a way to promote world peace since countries that trade with each other don’t want war to get in the way of their prosperity.
Of course if we accept this argument, then it can’t possibly make sense to claim that protectionist measures that some groups like are okay. So the protectionist measure that prohibits foreign doctors from practicing in the United States unless they complete a U.S. residency program is an obstacle to world peace. The same applies to the ban on foreign dentists who have not completed a dental program in the U.S., or in recent years, Canada as well. In the same vein, patent and copyright protections, which can be equivalent to tariffs of many thousand percent, should also be seen as major barriers to world peace.
After all, no one has made the argument that a protectionist barrier does not threaten world peace if rich people like it, although a Nobel prize in economics probably awaits anyone who does make this case.
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