Thomas Friedman has a great sense of irony. In a column titled “Average Is Over” he shows readers that average is clearly not over.
The column is a tidal wave of confusion about basic economics. The gist of the piece is that technology and globalization will displace all the average workers in the United States. Workers will have to be extraordinary to get decent paying jobs.
Both parts of this story are very poorly argued. Technology does replace many less-skilled jobs. Perhaps we should let Mr. Friedman in on a little secret here. This has always been true. The question is the rate at which technology displaces workers. Productivity growth has certainly be respectable since the pick-up in 1995 (@2.5 percent annually), but it is still below the 3.0 percent rate during the quarter century following World War II, when average was in. (Properly measured, productivity has been growing at closer to a 2.0 percent rate since the 1995 speed-up.)
Friedman apparently doesn’t know that technology doesn’t just eliminate jobs for less educated workers. The NYT had a piece a few months back on how new search technologies have drastically reduced the need for lawyers to do legal research. New screening devices can allow many medical diagnoses that formerly might have required doctors to be made by less highly trained technicians. Of course since doctors are a powerful interest group they may be able to ignore the development of technology and have rules that require that they still do diagnoses that could be performed instead by people earning one-fifth as much.
The real issues with technology are the rate at which it allows productivity to grow (in general, the faster the better, if the economy is not run by buffoons) and the extent to which it replaces low-skilled workers relative to the pace at which it replaces higher skilled workers. The same story applies to globalization.
We can get our manufactured products more cheaply from China. This is because it is a relatively poor country where people are willing to work hard for lower wages than workers in the United States. However China would also provide us with doctors, lawyers, architects and economists, all for much lower pay than their U.S. counterparts receive. This would drastically reduce the cost of health care, legal services, college education and other services provided by highly paid professionals. That would mean more economic growth and a big increase in living standards for the vast majority of people in the United States.
However, we don’t see huge numbers of Chinese taking professional jobs in the United States leaving U.S. born doctors, lawyers, etc. out of work. The reason is that U.S. professionals have much more power than manufacturing workers. They use the government to erect barriers to limit the number of foreign professionals who can work in the United States. This ensures that average can survive and flourish in the highly paid professions.
If anyone doubts this fact, they should take a look at the transcripts from Federal Reserve Board’s Open Market Committee Meetings for 2006. (Some of the highlights can be found here.) The transcripts show the people in top economic policy positions completely clueless as the housing bubble is in the process of deflating and the inevitable recession is coming into view. It is worth noting that none of these people have suffered serious career consequences from this failure showing that average (or below) still flourishes in these circles. But Thomas Friedman does a good enough job of demonstrating this directly twice a week in the NYT.
Thomas Friedman has a great sense of irony. In a column titled “Average Is Over” he shows readers that average is clearly not over.
The column is a tidal wave of confusion about basic economics. The gist of the piece is that technology and globalization will displace all the average workers in the United States. Workers will have to be extraordinary to get decent paying jobs.
Both parts of this story are very poorly argued. Technology does replace many less-skilled jobs. Perhaps we should let Mr. Friedman in on a little secret here. This has always been true. The question is the rate at which technology displaces workers. Productivity growth has certainly be respectable since the pick-up in 1995 (@2.5 percent annually), but it is still below the 3.0 percent rate during the quarter century following World War II, when average was in. (Properly measured, productivity has been growing at closer to a 2.0 percent rate since the 1995 speed-up.)
Friedman apparently doesn’t know that technology doesn’t just eliminate jobs for less educated workers. The NYT had a piece a few months back on how new search technologies have drastically reduced the need for lawyers to do legal research. New screening devices can allow many medical diagnoses that formerly might have required doctors to be made by less highly trained technicians. Of course since doctors are a powerful interest group they may be able to ignore the development of technology and have rules that require that they still do diagnoses that could be performed instead by people earning one-fifth as much.
The real issues with technology are the rate at which it allows productivity to grow (in general, the faster the better, if the economy is not run by buffoons) and the extent to which it replaces low-skilled workers relative to the pace at which it replaces higher skilled workers. The same story applies to globalization.
We can get our manufactured products more cheaply from China. This is because it is a relatively poor country where people are willing to work hard for lower wages than workers in the United States. However China would also provide us with doctors, lawyers, architects and economists, all for much lower pay than their U.S. counterparts receive. This would drastically reduce the cost of health care, legal services, college education and other services provided by highly paid professionals. That would mean more economic growth and a big increase in living standards for the vast majority of people in the United States.
However, we don’t see huge numbers of Chinese taking professional jobs in the United States leaving U.S. born doctors, lawyers, etc. out of work. The reason is that U.S. professionals have much more power than manufacturing workers. They use the government to erect barriers to limit the number of foreign professionals who can work in the United States. This ensures that average can survive and flourish in the highly paid professions.
If anyone doubts this fact, they should take a look at the transcripts from Federal Reserve Board’s Open Market Committee Meetings for 2006. (Some of the highlights can be found here.) The transcripts show the people in top economic policy positions completely clueless as the housing bubble is in the process of deflating and the inevitable recession is coming into view. It is worth noting that none of these people have suffered serious career consequences from this failure showing that average (or below) still flourishes in these circles. But Thomas Friedman does a good enough job of demonstrating this directly twice a week in the NYT.
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If Ross Douthat had access to the Congressional Budget Office’s (CBO) projections that show Social Security will be fully solvent for almost three decades, with no changes whatsoever, and that it could pay more than 80 percent of scheduled benefits after that date for the rest of the century (which is more than current retirees receive), then he would not have attacked President Obama for not having a plan to overhaul Social Security. Therefore, we can conclude that he doesn’t have access to CBO’s projections.
If Ross Douthat had access to the Congressional Budget Office’s (CBO) projections that show Social Security will be fully solvent for almost three decades, with no changes whatsoever, and that it could pay more than 80 percent of scheduled benefits after that date for the rest of the century (which is more than current retirees receive), then he would not have attacked President Obama for not having a plan to overhaul Social Security. Therefore, we can conclude that he doesn’t have access to CBO’s projections.
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That is a point that would have been worth making in an analysis of President Obama’s proposals to encourage job creation in the United States. The value of the dollar is by far the most important determinant of trade balance. If the dollar is over-valued by 20 percent this is equivalent to putting a 20 percent tariff on U.S. exports and giving out a 20 percent subsidy for imports.
If President Obama were serious about increasing U.S. employment in manufactured then it would be expected that he would say something about the over-valued dollar and his plans to bring it down. The fact that he didn’t say anything about the dollar’s value should have been noted in this piece.
That is a point that would have been worth making in an analysis of President Obama’s proposals to encourage job creation in the United States. The value of the dollar is by far the most important determinant of trade balance. If the dollar is over-valued by 20 percent this is equivalent to putting a 20 percent tariff on U.S. exports and giving out a 20 percent subsidy for imports.
If President Obama were serious about increasing U.S. employment in manufactured then it would be expected that he would say something about the over-valued dollar and his plans to bring it down. The fact that he didn’t say anything about the dollar’s value should have been noted in this piece.
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Larry Summers told Post readers that lack of confidence by businesses and consumers are major factors holding back the recovery. There is little evidence for this position.
Investment in equipment and software is almost back to its pre-recession share of GDP. The savings rate is still much lower than its post-war average, meaning that consumption is unusually high relative to income. This is especially striking since the huge baby boom cohort is at the edge of retirement and most have very little savings. This would be an argument for expecting a higher than normal saving rate rather than the opposite.
In short, there is no evidence in the data that lack of confidence is a major factor impeding recovery. The more obvious problem is that we simply lack a source of demand to replace the demand that had been generated by the housing bubble.
Larry Summers told Post readers that lack of confidence by businesses and consumers are major factors holding back the recovery. There is little evidence for this position.
Investment in equipment and software is almost back to its pre-recession share of GDP. The savings rate is still much lower than its post-war average, meaning that consumption is unusually high relative to income. This is especially striking since the huge baby boom cohort is at the edge of retirement and most have very little savings. This would be an argument for expecting a higher than normal saving rate rather than the opposite.
In short, there is no evidence in the data that lack of confidence is a major factor impeding recovery. The more obvious problem is that we simply lack a source of demand to replace the demand that had been generated by the housing bubble.
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In his column today David Brooks provided a brief discussion that purports to show that the growing inequality is attributable to a mix of globalization and technology and the moral failings of the working class. A little reflection would lead people to reject both parts of this explanation.
The first claim ignores the way in which deliberate policy shaped globalization. The reason that wages are much lower and the skills expected are much higher for manufacturing workers than in the past is because it has been government policy to place U.S. manufacturing workers in direct competition with their much lower paid counterparts in Mexico, China and elsewhere. The predicted and actual result of this policy is to reduce the pay of manufacturing workers.
The government could have adopted the same approach to doctors, lawyers, economists and other highly paid professionals. There are many millions of smart hard-working people in the developing world who would be delighted to fill these jobs at much lower wages than their counterparts in the U.S. receive. However, the barriers that make it difficult for these people to work in the United States have not been lowered by recent “free trade” agreements and some have even been increased.
In other words, it was not globalization and technology that led to the upward redistribution of income, it was conscious policy. The vast majority of people in the United States who hold high-paying jobs are able to maintain their income because they enjoy far more protection than manufacturing workers.
Moral turpitude side of this story also has an important economic policy aspect. Parents who work long and erratic hours are likely to find it much more difficult to watch over their children than parents with decent paying jobs with predictable hours. Given the large number of workers, especially younger workers who are likely to be parents of young children, who have irregular employment and irregular hours, it would be surprising if many children were not having serious problems staying focused on their education.
In his column today David Brooks provided a brief discussion that purports to show that the growing inequality is attributable to a mix of globalization and technology and the moral failings of the working class. A little reflection would lead people to reject both parts of this explanation.
The first claim ignores the way in which deliberate policy shaped globalization. The reason that wages are much lower and the skills expected are much higher for manufacturing workers than in the past is because it has been government policy to place U.S. manufacturing workers in direct competition with their much lower paid counterparts in Mexico, China and elsewhere. The predicted and actual result of this policy is to reduce the pay of manufacturing workers.
The government could have adopted the same approach to doctors, lawyers, economists and other highly paid professionals. There are many millions of smart hard-working people in the developing world who would be delighted to fill these jobs at much lower wages than their counterparts in the U.S. receive. However, the barriers that make it difficult for these people to work in the United States have not been lowered by recent “free trade” agreements and some have even been increased.
In other words, it was not globalization and technology that led to the upward redistribution of income, it was conscious policy. The vast majority of people in the United States who hold high-paying jobs are able to maintain their income because they enjoy far more protection than manufacturing workers.
Moral turpitude side of this story also has an important economic policy aspect. Parents who work long and erratic hours are likely to find it much more difficult to watch over their children than parents with decent paying jobs with predictable hours. Given the large number of workers, especially younger workers who are likely to be parents of young children, who have irregular employment and irregular hours, it would be surprising if many children were not having serious problems staying focused on their education.
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While it didn’t quite put it this way, the NYT told readers that President Obama plans to really lower the bar big-time on his economic record. It told readers:
“The president and his advisers are confident their course will lead to a full recovery, though not this year. That long-term prospect has stoked Mr. Obama’s competitive juices, lest a Republican take the White House and with it the eventual credit for economic gains.”
Economies generally recover over the long-term unless you do some really really awful economic policies. The real question is how long the recovery takes. If President Obama’s track record is so bad that all he can do is say that the economy will eventually recover, then he is in serious trouble.
While it didn’t quite put it this way, the NYT told readers that President Obama plans to really lower the bar big-time on his economic record. It told readers:
“The president and his advisers are confident their course will lead to a full recovery, though not this year. That long-term prospect has stoked Mr. Obama’s competitive juices, lest a Republican take the White House and with it the eventual credit for economic gains.”
Economies generally recover over the long-term unless you do some really really awful economic policies. The real question is how long the recovery takes. If President Obama’s track record is so bad that all he can do is say that the economy will eventually recover, then he is in serious trouble.
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The NYT noted that factory orders across the European Union fell sharply in November. It told readers:
“businesses are cutting back as they wait for political leaders to resolve the debt crisis.”
Actually, businesses are cutting back precisely because political leaders are making cuts in spending and raising taxes in order to resolve the debt crisis. The steps being taken by Europe’s governments have the effect of reducing demand in the economy. The reduction in factory orders is the predictable result of the austerity being pursued by governments across the continent.
The NYT noted that factory orders across the European Union fell sharply in November. It told readers:
“businesses are cutting back as they wait for political leaders to resolve the debt crisis.”
Actually, businesses are cutting back precisely because political leaders are making cuts in spending and raising taxes in order to resolve the debt crisis. The steps being taken by Europe’s governments have the effect of reducing demand in the economy. The reduction in factory orders is the predictable result of the austerity being pursued by governments across the continent.
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The NYT mentioned the drop in the unemployment rate to 8.5 percent from a peak of 10.0 percent in 2009 as evidence of the economy’s recovery. Most of this decline is the result of people leaving the labor force. (Workers are only counted as being unemployed if they are still looking for work.) The employment to population ratio, the percentage of people with jobs, is only 0.3 percentage points above its low-point for the downturn.
The NYT mentioned the drop in the unemployment rate to 8.5 percent from a peak of 10.0 percent in 2009 as evidence of the economy’s recovery. Most of this decline is the result of people leaving the labor force. (Workers are only counted as being unemployed if they are still looking for work.) The employment to population ratio, the percentage of people with jobs, is only 0.3 percentage points above its low-point for the downturn.
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Robert Samuelson tried to explain the Fed’s failure to recognize that the collapse of the housing bubble, which had been driving the economy in the last cycle, would lead to a serious downturn. He blamed it on complacency that resulted from the relatively stable growth of the prior quarter century. He compared this to the complacency following the 60s boom that led to the 70s inflation.
The comparison is more than a bit off. In the four years since this downturn began, GDP growth has averaged less than 0.2 percent. (This assumes 3.0 percent growth for the fourth quarter of 2011.) By contrast, growth averaged 3.5 percent from the business cycle peak in 1970 to the peak in 1980. Even if the timing is adjusted to have the 70s end with the trough of the 1982 recession, average growth over this period would still average 2.6 percent. Growth would have to far exceed projections in order to produce a comparable record following the 2008 crash.
It is also important to note that the financial crisis has little direct relevance to the current weakness of the economy. The problem is simply that there is nothing to replace the demand generated by the housing bubble. Consumption is actually unusually high relative to income and investment in equipment and software is back to its pre-recession share of GDP.
Robert Samuelson tried to explain the Fed’s failure to recognize that the collapse of the housing bubble, which had been driving the economy in the last cycle, would lead to a serious downturn. He blamed it on complacency that resulted from the relatively stable growth of the prior quarter century. He compared this to the complacency following the 60s boom that led to the 70s inflation.
The comparison is more than a bit off. In the four years since this downturn began, GDP growth has averaged less than 0.2 percent. (This assumes 3.0 percent growth for the fourth quarter of 2011.) By contrast, growth averaged 3.5 percent from the business cycle peak in 1970 to the peak in 1980. Even if the timing is adjusted to have the 70s end with the trough of the 1982 recession, average growth over this period would still average 2.6 percent. Growth would have to far exceed projections in order to produce a comparable record following the 2008 crash.
It is also important to note that the financial crisis has little direct relevance to the current weakness of the economy. The problem is simply that there is nothing to replace the demand generated by the housing bubble. Consumption is actually unusually high relative to income and investment in equipment and software is back to its pre-recession share of GDP.
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Folks in Washington policy circles are go really wild for silly fads: hula hoops, streaking, lava lamps, etc. Okay, I don’t know if the policy wonks really got into any of these, but they do fall for silly intellectual fads.
The Washington Post showed this sort of infatuation by printing a column from Steve Case telling us that new businesses were responsible for all the new jobs created in the last three decades. Case concludes from this that we should have policies that foster the growth of new businesses.
This is classic silly logic. New businesses both gain and lose jobs, just as do existing businesses. There is no obvious reason to prefer jobs in new businesses than existing businesses. If we adjust the balance so that we favor new businesses to the detriment of existing businesses, there is no reason to assume that the additional job growth in new businesses will exceed the additional job loss in existing businesses. The fact the new job growth happened to all be in new businesses is irrelevant.
To see this, imagine that all the job growth in the United States over the last three decades had occurred in the South, with the rest of the country just holding its own. It does not follow that if we had tax incentives for businesses to locate in the South, which were paid for with tax increases on the rest of the country, that we would see more overall job growth.
This is the essence of the argument put forward by Case. It makes no sense on its face. Policies toward new business should not be affected by the fact that they are net job creators just as it doesn’t make sense to favor a specific region because it is a net job creator.
Folks in Washington policy circles are go really wild for silly fads: hula hoops, streaking, lava lamps, etc. Okay, I don’t know if the policy wonks really got into any of these, but they do fall for silly intellectual fads.
The Washington Post showed this sort of infatuation by printing a column from Steve Case telling us that new businesses were responsible for all the new jobs created in the last three decades. Case concludes from this that we should have policies that foster the growth of new businesses.
This is classic silly logic. New businesses both gain and lose jobs, just as do existing businesses. There is no obvious reason to prefer jobs in new businesses than existing businesses. If we adjust the balance so that we favor new businesses to the detriment of existing businesses, there is no reason to assume that the additional job growth in new businesses will exceed the additional job loss in existing businesses. The fact the new job growth happened to all be in new businesses is irrelevant.
To see this, imagine that all the job growth in the United States over the last three decades had occurred in the South, with the rest of the country just holding its own. It does not follow that if we had tax incentives for businesses to locate in the South, which were paid for with tax increases on the rest of the country, that we would see more overall job growth.
This is the essence of the argument put forward by Case. It makes no sense on its face. Policies toward new business should not be affected by the fact that they are net job creators just as it doesn’t make sense to favor a specific region because it is a net job creator.
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