How President Obama lost the American public

Of all the punditry I've seen about Obama's failings and declining popularity, this LAT op ed by Marshall Ganz is among the most perceptive. An excerpt:

Abandoning the "transformational" model of his presidential campaign, Obama has tried to govern as a "transactional" leader. These terms were coined by political scientist James MacGregor Burns 30 years ago. "Transformational" leadership engages followers in the risky and often exhilarating work of changing the world, work that often changes the activists themselves. Its sources are shared values that become wellsprings of the courage, creativity and hope needed to open new pathways to success. "Transactional" leadership, on the other hand, is about horse-trading, operating within the routine, and it is practiced to maintain, rather than change, the status quo.

The nation was ready for transformation, but the president gave us transaction. And, as is the case with leadership failures, much of the public's anger, disappointment and frustration has been turned on a leader who failed to lead.

Obama and his team made three crucial choices that undermined the president's transformational mission. First, he abandoned the bully pulpit of moral argument and public education. Next, he chose to lead with a politics of compromise rather than advocacy. And finally, he chose to demobilize the movement that elected him president. By shifting focus from a public ready to drive change — as in "yes we can" — he shifted the focus to himself and attempted to negotiate change from the inside, as in "yes I can." 

The compromise versus advocacy point stands out in all of Obama's major initiatives. His February 2009 stimulus package was too small to do the trick according to his economic advisors but as big as Congress could pass according to his political advisors.  Instead of arguing for a sufficient plan and making conservatives take hard votes, he suffered politically by declaring the insufficient to be sufficient. His approach to the global financial meltdown was not to give voice to the bipartisan populist rage to adopt really effective controls over the banksters' dangerous practices but to meet with them on March 29, 2009 and assure them, "My administration is the only thing standing between you and the pitchforks."  Similarly, he preemptively gave away the public option in the healthcare reform legislation instead of advocating for it and (probably) losing. It turned out to be a bad political deal for him because as soon as the insurance companies got what they wanted--the unpopular mandate to buy insurance--they turned on him to get Democrats out of office and to gut just about everything else in the legislation.  A consequence of this seemingly unprincipled wheeling and dealing is that, as the bipartisan populist rage has swelled even more since his election, Obama is seen as just another one of the Washington/Big Money elites who don't understand and don't care about ordinary people and keep making things worse. 

It's less about policy differences than about feelings of alienation versus connection and trust.  In the previous post, I criticized Robert Rubin's policy recommendations, but would not have thought to criticize him as tall, lean, articulate, deeply intellectual, scary smart, professorial, patrician, globally connected with money and policy elites, unemotional, and aloof from the hoi polloi; he's all that, but it didn't occur to me that it's a problem.  My epiphany this morning is that that also describes President Obama and for him it's a big problem.

Update on Thursday, November 4, 2010 at 08:42AM by Skeptic

Nicholas Kristof starts his op ed today with a similar observation:

On my blog, a Times reader named Eddie asked about President Obama: “Where is the man I voted for?”

“Does he ever sweat?” Eddie continued. “We’re in desperate times and I don’t see a man who is really affected by it.” He concluded: “We need a committed, passionate person to lead a country ... not a Sunday school teacher taking cautious, baby steps.”

. . . .

To a disconcerting number of people I talk to, Mr. Obama comes across as remote, detached, inauthentic and arrogant.

Update on Friday, November 5, 2010 at 07:08AM by Skeptic

"Obama" disagrees. http://www.youtube.com/watch?v=y54FRMedT_s 

Update on Friday, November 5, 2010 at 10:25AM by Skeptic

David Brooks says voters agree with him that the Democrats' policies were bad, but he concludes (as he should) that the overwhelmingly important factor was not policy but failure to create jobs and prosperity.

Democrats have, at least temporarily, blown the opportunity they were given to connect with the industrial Midwest. Voters in this region face structural problems, not cyclical ones. Intensely suspicious of government, they are nonetheless casting about for somebody, anybody, who can revive their towns and neighborhoods. Disillusioned with big spending and big debt, they at least want to see their government reflect their values of discipline, order and responsibility. Not only in America, but also in Germany, Sweden, France, Britain and across Europe, working-class voters these days are putting center-right governments in power.

American politics are volatile because nobody has an answer for these people. They will remain volatile until somebody finds one.

Update on Saturday, November 6, 2010 at 08:53AM by Skeptic

Bob Herbert's column today makes it clearer than I did (and should have) that it isn't just Obama who has lost the confidence of ordinary Americans.

Neither the Democrats nor the Republicans are offering voters the kind of change that they seem so desperately to want. We’re getting mind-numbing chatter about balanced budgets and smaller government and whether Mitch McConnell and his gang can chase President Obama out of the White House in 2012.

What voters want is leadership that will help them through an economic nightmare and fix a country that has been pitched into a state of sharp decline. They long for leaders with a clear and compelling vision of a better America and a road map for getting there. That leadership has long been AWOL. The hope in the tumultuous elections of 2008 was that it would come from Mr. Obama and the Democrats, but that hope, after just two years, is on life support.

Tuesday’s outcome was the result of voters, still hungry for change, who either switched in anger from the Democrats to the Republicans or, out of a deep sense of disappointment, stayed home.

. . . .

What neither party is doing is offering a bold, coherent plan to get the nation’s economy in good shape and create jobs, to bring our young men and women home from the wars in Afghanistan and Iraq, to rebuild the education system in a way that will prepare the next generation for the great challenges of the 21st century, and to reinvigorate the can-do spirit of America in a way that makes people believe that they are working together toward grand and constructive goals.

. . . .

Americans right now are riddled with fears and anxieties of many kinds. They are worried about the economic well-being of their families, the cost of securing a decent education for their children, their prospects for a comfortable retirement, the continuing threat of terrorism, and the debilitating effects of endless warfare. They worry that America’s best days may be in the past.

. . . .

Our leaders in Washington seem entirely out of touch with the needs, the hopes, the fears and the anxieties of the millions of Americans who are out of work, who are struggling with their mortgages or home foreclosures, who are skimping on needed medication in order to keep food on the table, and who lie awake at night worrying about what the morning will bring. No one even dares mention the poor.

Update on Sunday, November 7, 2010 at 05:57AM by Skeptic

Karen Tumulty and Dan Balz report in WaPo that "Democrats ask whether Obama's White House fully grasped voters' fears." Of course, not all they interviewed supported the alienation narrative (nor apparently does Obama), but many did, including these: 

"There doesn't seem to be anybody in the White House who's got any idea what it's like to lie awake at night worried about money and worried about things slipping away," said retiring Tennessee Gov. Phil Bredesen (D). "They're all intellectually smart. They've got their numbers. But they don't feel any of it, and I think people sense that."

William A. Galston, a Clinton White House policy adviser who is now a senior fellow at the Brookings Institution, said the midterm election revealed what had always been a "missing middle" to the Obama campaign message.

"Hope is a sentiment, not a strategy, and quickly loses credibility without a road map," Galston wrote in a paper released two days after the election. "Throughout his first two years in office, President Obama often struggled to connect individual initiatives to larger purposes."

Inside the Beltway, these questions are being asked and answered in the context of Democrats trying to devise a strategy for resurgence. There are arguments being made to tack to the right--become more like Republicans--or to play "small ball" as Clinton did after 1994, but neither would work if Senator Schumer is right.

"Our road back is to be focusing on the average middle income family," says Sen. Charles E. Schumer (D-N.Y.). "The voter will choose no government over a government that works for someone else. But they will choose a government that helps them over no government every time."

In the White House, Washington veterans such as chief of staff Pete Rouse, Vice President Biden's chief of staff Ron Klain and legislative affairs head Phil Schiliro have been looking at parallels with earlier political upheavals. They have cautioned their colleagues that the differences between those times and today are at least as important as the similarities.

For instance, White House aides say, trying to imitate Clinton's small-bore initiatives such as promoting school uniforms and television V-chips would look inadequate when unemployment is still hovering close to 10 percent.

Update on Friday, November 12, 2010 at 08:15AM by Skeptic

Maybe Obama should reread parts of his own book, The Audacity of Hope, this passage for example:

Increasingly, I found myself spending time with people of means - law firm partners and investment bankers, hedge fund managers and venture capitalists. As a rule, they were smart, interesting people, knowledgeable about public policy, liberal in their politics, expecting nothing more than a hearing of their opinions in exchange for checks. But they reflected, almost uniformly, the perspectives of their class; the top 1 percent or so of the income scale that can afford to write a $2,000 check to a political candidate. They believed in the free market and an educational meritocracy; they found it hard to imagine that there might be any social ill that could not be cured with a high SAT score. They had no patience with protectionism, found unions troublesome, and were not particularly sympathetic to those whose lives were upended by movements of global capital. Most were adamantly prochoice and were vaguely suspicious of deep religious sentiment....

I know that as a consequence of my fund-raising I became more like the wealthy donors I met, in the very particular sense that I spent more and more of my time above the fray, outside the world of immediate hunger, disappointment, fear, irrationality, and frequent hardship of the other 99 percent of the population - that is, the people I'd entered public life to serve.

Hat tip to Ezra Klein.

Robert Rubin says we're in terrible shape but shouldn't change any policies.

Robert Rubin acknowledges the worst economic downturn in 80 years and says "the prospects for the US economy are the most complex and uncertain in my adult lifetime" in this FT piece. He also acknowledges lagging middle income wages over the last 30 years, but his policy recommendations include not one thing that is different from what we've been doing more and more of during those 30 years. 

For the longer term, the US has a dynamic and entrepreneurial culture, flexible labour and capital markets, the rule of law, relatively favourable demographics and other great strengths. But, in a global economy undergoing historic transformation, we must meet hugely consequential challenges to realise our potential for competitiveness and growth, and to achieve widespread income gains rather than the lagging middle income wages experienced over most of the last 30 years.

Meeting our challenges means moving from our current risk-laden fiscal trajectory to a sound fiscal regime and public investment and reform in economically critical areas, such as education, healthcare costs, infrastructure, immigration and others. Effective government to undergird a market-based economic system is not a liberal idea, but a practical imperative to meet the needs for a successful economy that markets won’t fulfil.

BTW, his reference to "flexible labour and capital markets" means US workers' wages sinking even more to a global equilibrium and big banks having freedom to keep "innovating." It's also clear he believes globalization in its present form and pace must be taken as fixed and cannot be tinkered with by government (except to adopt more free trade agreements).  Nothing in Rubinomics has any potential at all to increase middle income wages, but it will continue to be good for MNCs, Wall Street, and the Davos set. 

Update on Wednesday, November 3, 2010 at 06:36AM by Skeptic

Felix Salmon's criticism is that Rubin doesn't really say anything at all: 

The op-ed, which is written in borderline-unreadable technocratese, has a simple structure: there are headwinds in the economy. What should we do about them? Spending more might be problematic. Expansionary monetary policy likewise. So what should be done? The administration should be more business-friendly. And it should put together a “serious fiscal plan”.

. . . .

Well yes, Bob. But how do you expect the government to make tough decisions if you, a semi-retired technocrat with no public office at all, can’t even bring yourself to name them? It’s all well and good to talk about fiscal prudence in the abstract: the difficult thing is enacting it in reality. And you’re not being remotely constructive on that front.

Update on Wednesday, November 3, 2010 at 10:39AM by Skeptic

Paul Krugman says Mohamed El-Arian's WaPo op ed has the same deficiency that Salmon sees in the Rubin piece--he can describe the problem but is all mealy-mouthed and useless about solutions.

Yeah! We’re Number 40, 11, 16, 22, 24, 27, 48, and 29!

A big reason why America keeps drifting ever deeper into mediocrity is a misperception about how far we have already declined, how determined and effective our foreign competition is, and how ineffective minor tweaks to current policies are likely to be. It's gotten so bad that even Tom Friedman is chastened:

"Here is a little dose of reality about where we actually rank today," says Vest: sixth in global innovation-based competitiveness, but 40th in rate of change over the last decade; 11th among industrialized nations in the fraction of 25- to 34-year-olds who have graduated from high school; 16th in college completion rate; 22nd in broadband Internet access; 24th in life expectancy at birth; 27th among developed nations in the proportion of college students receiving degrees in science or engineering; 48th in quality of K-12 math and science education; and 29th in the number of mobile phones per 100 people.

Friedman may still think the way up is doubling down on globalization. To the contrary, we can't afford to fix these problems if Americans' real personal incomes continue to be hammered by the ways in which the US has designed and implemented globalization and free trade.

Update on Saturday, February 19, 2011 at 12:20PM by Skeptic

Charles Blow's column today presents more evidence that America is mediocre or worse among the IMF's "advanced economy" countries.  See his chart below.  The US ranks 30 out of 32 advanced nations in income inequality measured by the Gini Index. Sixteen percent of Americans reported food insecurity, putting us in a tie for last place (with South Korea) among the 20 nations reporting.  (The poll question was, "Have there been times in the past 12 months when you did not have enough money to buy food that you or your family needed?")

Only 5 nations in the group of 33 have a lower life expectancy at birth. The US has the largest percentage of its population in prison of any of the 33 countries (0.743%); second place France has less than half that incarceration rate (0.365%). The US unemployment rate ranks 26th highest out of 33; only Spain, Slovakia, Greece, Portugal, Slovenia, France, and the Czech Republic have higher unemployment rates.

Our least bad rankings here are in student test scores. We're number 16 out of 30 in science and 24 out of 30 in math.

Update on Saturday, August 20, 2011 at 03:22PM by Skeptic

In Unicef's Comprehensive Assessment of Children and Adolescents in the Economically Advanced Nations the US ranked 20 out of 21, just ahead of the UK. Rankings were derived by giving equal weight to six assessments:  Material well-being, health and safety, educational well-being, family and peer relationships, behaviours and risks, and subjective well-being. The US had it's highest ranking, 12, in educational well-being and was dead last in health and safety. 

Update on Saturday, October 29, 2011 at 08:54AM by Skeptic

Charles Blow writing in NYT today reproduces a chart from the Bertelsmann Stiftung Foundation similar to the one above but covering different metrics. The US ranks 27 out of 31.

Update on Tuesday, July 3, 2012 at 04:23PM by Skeptic

A brilliant clip from The Network via MoveOn.org.  

Update on Monday, July 9, 2012 at 06:41PM by Skeptic

More stats and links along these lines are in this new post, American Exceptionalism, shake hands with Inconvenient Facts. 

Update on Saturday, July 6, 2013 at 09:01AM by Skeptic

Christine sent a link to 7 graphs that prove America is overrated in Global Post. It shows the USA is second worst (behind only the UK) in privacy protection, is the only OECD member with zero paid maternity leave, has several times as many violent deaths per capita as other OECD nations, spends 1.5 times as much of its GDP on health care as any other OECD nation and twice as much as the OECD average, produces twice as much CO2 per capita as the OECD average, is the only one of 25 nations with zero days of mandatory paid vacation, and is behind 29 other nations in the percentage of women in senior government positions. 

Update on Thursday, April 3, 2014 at 11:52AM by Skeptic

This Nicholas Kristof column in NYT links to some other surveys showing USA way back in the pack of developed nations and by several metrics is in the middle of the pack of the 132 nations surveyed. 

In the Social Progress Index, the United States excels in access to advanced education but ranks 70th in health, 69th in ecosystem sustainability, 39th in basic education, 34th in access to water and sanitation and 31st in personal safety. Even in access to cellphones and the Internet, the United States ranks a disappointing 23rd, partly because one American in five lacks Internet access.

Update on Friday, September 25, 2015 at 04:22PM by Skeptic

Lane Kenworthy has another group of 22 rankings over time here. 

Update on Monday, December 21, 2015 at 07:45AM by Skeptic

David Ruccio at Real-World Economics Review Blog posts 12 other charts making the USA-is-in-relative-decline point.  Council of monkeys – 12 exhibits comparing the U.S. to other countries. 

Update on Sunday, November 12, 2017 at 10:33AM by Skeptic

The World Economic Forum posted selected comparisons of Europe and USA in October 2015.  Hat tip to John C.

Update on Thursday, July 2, 2020 at 10:08AM by Skeptic

David Leonhardt at NYT has a new piece updating much of the statistics in this post and adding some others, like labor share of GDP, which is much lower than in the EU.  Many good graphs.  https://www.nytimes.com/interactive/2020/07/02/opinion/politics/us-economic-social-inequality.html?action=click&module=Opinion&pgtype=Homepage 

Glenn Beck, the Tea Party, and WaPo discover there are elites in America.

This Washington Post article describes a class of elite Americans who are physically, educationally, and culturally isolated from ordinary people to the point that they basically have no first hand information about how non-elites live and think. It is interesting for its numbers, detail and references to similar findings in other writings including the author's own. Hat tip to Christine.  Among the factoids in the article: 

Although only 55% of high-schoolers taking the SAT have at least one college educated parent, 87% of those scoring over 700 do. 

Harvard seniors surveyed in 2007 were headed toward a small number of elite graduate schools (Harvard and Cambridge in the lead) and a small number of elite professional fields (finance and consulting were tied for top choice). Jobs in businesses that provide bread-and-butter goods and services to individual Americans, which make up the overwhelming majority of entry-level openings for aspiring managers, attracted just 1.7 percent of the Harvard students who went to work right after graduation.

Part of the isolation is political. In that Harvard survey I mentioned, 72 percent of Harvard seniors said their beliefs were to the left of the nation as a whole, compared with 10 percent who said theirs were to the right of it. The political preferences of academics and journalists among the New Elite also conform to the suspicions of the tea party.

The description of the New Elite seems pretty accurate to me, but is this really different?  I remember Presidential Candidate George Wallace telling voters he was going to go to Washington and throw all of those pointy-headed liberals and their brief cases into the Potomac River.  When have we not had elites running our institutions? 

Is there a call for action here?  Or is it enough to improve our understanding? 

US employment back to normal in 2016, 2027, or never?

The New York Times visualized here three scenarios for how long it will be before we get back to the 1990-2007 percentage of the US population over age 16 that is working. Clearly, if we continue adding jobs at the 2010 pace, the answer is never--an ever-shrinking fraction of our population will have to generate all the personal income that will support all of us, meaning that on average American families will have less and less income every year.  If jobs are added at the same rate they were during the "recovery" years of 2004-07, it will take until about 2027 to get back to the baseline percentage of the population in jobs.  Even if we suddenly start to add jobs at the highest rate we ever did in the last 20 years--the brightest scenario that anyone can even imagine--the percentage of people working will still be below baseline until 2016. 

Our two major political parties agree that nothing substantial can be done, or should be done, to improve these outcomes.  Both parties are saying, in effect, that they will be better at managing America's economic decline.  Doesn't this create a big opening for a third party with a commitment to, and a believable plan for, rapid growth in employment and real wages to restore the prosperity of the 1990s?  I'd join.

Update on Friday, November 5, 2010 at 07:21AM by Skeptic

Based on what some say is a "strong" jobs report today, employment will return to the baseline level by 2030 or so, according to Paul Krugman's estimate. 

Update on Saturday, January 1, 2011 at 07:44AM by Skeptic

Here, Paul Krugman uses FRED data to demonstrate Okun’s Law—the relationship between growth and unemployment. He finds that it takes 2.5% annual GDP growth to keep the unemployment rate from increasing and 2 additional percentage points of growth each year to bring down the unemployment rate 1%.

Put it this way: suppose that from here on out we average 4.5 percent growth, which is way above any forecast I’ve seen. Even at that rate, unemployment would be close to 8 percent at the end of 2012, and wouldn’t get below 6 percent until midway through Sarah Palin’s first term. 

Where do I sign?

An international student movement to free standard economics curriculum from its neoclassical straightjacket was launched last week at UC Berkeley. Courtesy of Real-World Economics Review, here it is: 

Kick It Over Manifesto 

We, the undersigned, make this accusation: that you, the teachers of neoclassical economics and the students that you graduate, have perpetuated a gigantic fraud upon the world. 

You claim to work in a pure science of formula and law, but yours is a social science, with all the fragility and uncertainty that this entails. We accuse you of pretending to be what you are not.

You hide in your offices, protected by your mathematical jargon, while in the real world, forests vanish, species perish and human lives are callously destroyed. We accuse you of gross negligence in the management of our planetary household.

You have known since its inception that one of your measures of economic progress, the Gross Domestic Product, is fundamentally flawed and incomplete, and yet you have allowed it to become a global standard, reported day in, day out in every form of media. We accuse you of recklessly projecting an illusion of progress.

You have done great harm, but your time is coming to a close. Your systems are crumbling, your flaws increasingly laid bare. An economic revolution has begun, as hopeful and determined as any in history. We will have our clash of economic paradigms, we will have our moment of truth, and out of each will come a new economics – open, holistic, human‑scale.

On campus after campus, we will chase you old goats out of power. Then, in the months and years that follow, we will begin the work of reprogramming your doomsday machine.

Sign the manifesto at
www.kickitover.org

Update on Tuesday, October 26, 2010 at 06:55AM by Skeptic

This is getting personal at Berkeley. The Manifesto was nailed to the door of a Nobel laureate, and an adjunct professor sends an email denying he's irrelevant.  Link.

If 86% of Americans agree on something, why can't they get their way?

A Wall Street Journal/NBC News poll released September 28, 2010 found outsourcing was the top factor cited by Americans as the cause of the country's continuing economic distress. As reported by WSJ--

Eighty-six percent of those surveyed said outsourcing of jobs by U.S. companies to low-wage foreign countries contributed to economic sluggishness. Among other factors cited, 76% pointed to corporate profit-seeking and 72% blamed high health-care costs.

The poll also found that 53% of respondents believe free-trade agreements have hurt the U.S., up from 30% in late 1999. The shift was mostly attributable to a change in thinking by upper-income people, according to the poll.

The following Justice Louis Brandeis quotation answers the title question.

We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can't have both.

Update on Wednesday, November 10, 2010 at 06:10AM by Skeptic

A recent poll from the Pew Research Center shows support for free trade agreements has collapsed among Republicans, apparently under the influence of the Tea Party. Amongst Democrats, Republicans and Independents, Dems are now the most supportive of free trade and Republicans the least. Here's one of the findings that surprised me:

Roughly six-in-ten independents (63%) and Republicans (58%) say that free trade agreements lead to job losses in the United States; fewer Democrats (47%) agree. Independents (49%) and Republicans (48%) are more likely than Democrats (34%) to say that trade agreements slow the U.S. economy. There are only slight partisan differences in views of the other effects of free trade agreements, including their impact on wages in the United States.

Hat tip to Dani Rodrik.

Why teenagers don't want to raise the retirement age

The French parliament is about to raise the national retirement age by two years, and high school students are at the barricades.  Link.  Why?  Truly, I don't know why teenagers do anything, but it's easy to see how this change will adversely affect them in the short term:  During the transition period, there will be fewer jobs open to young people because there will be more sexagenarians hanging on to job slots that would otherwise trickle down to new labor market entrants. 

Older workers have the power of incumbency:  As long as their jobs aren't actually eliminated, they can generally keep working as long as health and motivation permit.  So, when there is a labor surplus (job shortage), the burden falls most heavily on the young who have not yet established themselves in the work force.  This pops out of US age-and-education-dissected unemployment data for the Great Recession: The greatest increase in the unemployment rate has been among college graduates under 25. Link.

Some in the US want to eliminate Social Security entirely on the ground that it is wrong to tax the young and middle-aged to pay pension benefits to the old.  (They don't say whether it is also wrong to tax the middle-aged and old to pay for the even more valuable benefit of free public educations.)  Those who simply want to put US Social Security on an actuarily sounder long-term financial footing propose raising the retirement age but do not discuss the adverse impacts of that on youth unemployment (or other human effects). 

Perhaps some readers will object that I'm assuming the Lump of Labor Fallacy (aka the Lump of Jobs Fallacy), but I'm not. The "fallacy" originated in proposals to reduce unemployment rates by reducing the work week from 40 hours to 35 hours and spreading the work among 12.5% more employees.  Economists pointed out that, for a variety of reasons believed to be present in real labor markets, that wouldn't happen--or at least would not happen to the extent claimed.  The criticism is, I think, correct, but some misuse that fallacy to try to prove the opposite--that nothing will happen to the unemployment rate, which is also a fallacy: The Lump of Labor Fallacy Fallacy?  I don't assume that the number of jobs in the US will not expand if general economic conditions improve, but it would be equally false to say that because the number of people in the work force increases, an equivalent number of jobs will magically appear for them.  In fact, the number of US jobs as a percentage of working age US population has actually been shrinking--not just during the Great Recession but ever since 2000 and is lower now than in 1991. Link.  Whatever the number of jobs existing at any time, the competition for them will be more intense if sexagenarians stay in the work force longer, and the cohort most disadvantaged by that increased competition will be the youngest.

If we're going to increase the retirement age, what's the plan to increase the number of jobs?

Update on Sunday, October 24, 2010 at 12:41PM by Skeptic

Another question to ponder:  If we were to create as many new jobs as would be necessary to allow later retirement without diminishing the prospects of the young, wouldn't Social Security actuaries probably calculate that we don't need to raise the retirement age after all? 

Update on Monday, October 25, 2010 at 09:28AM by Skeptic

More reporting on how unemployment hits the young hardest is in this LAT piece and, echoing other reports, it says cohorts that get off to a slow start tend to lag behind throughout their careers. 

As the nation struggles with the aftermath of the Great Recession, few groups have suffered greater setbacks or face greater long-term damage than young Americans — damage that could shadow their entire working lives.

Unemployment for 20- to 24-year-olds hit a record high of more than 17% earlier this year. Even for young adults with college degrees, the jobless rate has averaged 9.3% this year, double the figure for older graduates, according to the Labor Department.

Adding to the impact, surveys by the Pew Research Center indicate, a greater share of workers in their 20s lost hours or were cut down to part-time status than any other age group. And their incomes have fallen more sharply, even as they are far more likely than others to say they are working harder than ever.

Update on Thursday, November 4, 2010 at 11:24AM by Skeptic

More LAT reporting from Paris finds French youth indeed worried about the impact of the retirement age increase on their already-bleak job opportunities. 

They may be showing solidarity with their older compatriots, but for many of the teens, the motivation resonates closer to home. With unemployment estimated at 23% for 15-to-24-year-olds, fresh graduates can feel as though they're on the outside of the job market looking in, and they don't think the government is doing enough to help them.

"They aren't only in the streets because they are worried about their future retirement," said Jean-Baptiste Prevost, head of the largest student union, UNEF, as he led a protest march through Paris. "It's not the future in 40 years; it's the future in two years that they're worried about."

Update on Tuesday, December 7, 2010 at 02:27PM by Skeptic

Another way raising the retirement age fails to work as intended is that there will be more applications for disability retirement, which comes out of the same fund.  That is the prediction of the Government Accountability Office as reported by Mark Thoma. 

Update on Friday, December 24, 2010 at 08:05AM by Skeptic

Commenter Sandwichman has written extensively about the lump of labor fallacy, most recently here. And here (added 12/27/10) and here (added 1/4/11) and here (added 1/4/11).

Update on Saturday, January 15, 2011 at 01:49PM by Skeptic

Floyd Norris reports in NYT that the percentage of Americans 55+ holding jobs has increased 7.6% since the start of the Great Recession.  Meanwhile, the employment rate among those 45-54 declined 4.6%, among those 25-44 the decline was 7.5%, and 16-24 year-olds dropped 13.2%. Three years is much too short a period for these changes to have been substantially influenced by demographic changes. People who had jobs are keeping them, and those trying to break into the work force are being shut out.

The Citigroup Plutonomy Memos

The ongoing agony of the Great Recession has focused public discussion on the dramatic increase in the inequality of income and wealth among Americans. The real cash incomes and wealth of middle class and working class have stagnated since 1973 while there has been a spectacular rise in income and wealth for the owners, managers, and servants of capital. Realitybase readers know that I think this is in large part due to unbalanced foreign trade and even more to globalization by exposing Americans to foreign labor competition. That view is vigorously denied in public by banks, other business organizations, their trade groups, editorial boards, economists, policy elites, and other guardians of conventional wisdom. So it's interesting when we catch them agreeing with me when they give private advice to the investor class. In one of the two memos made famous in Michael Moore's film Capitalism: A Love Story, Ajay Kapur, then Citigroup's chief global equities strategist, says this:

Back in October, we coined the term 'Plutonomy' (The Global Investigator, Plutonomy: Buying Luxury, Explaining Global Imbalances, October 14, 2005). Our thesis is that the rich are the dominant drivers of demand in many economies around the world (the US, UK, Canada and Australia). These economies have seen the rich take an increasing share of income and wealth over the last 20 years, to the extent that the rich now dominate income, wealth and spending in these countries. Asset booms, a rising profit share and favorable treatment by market-friendly governments have allowed the rich to prosper and become a greater share of the economy in plutonomy countries. . . . [T]he lawyers and bankers who intermediate globalization and productivity, the CEOs who lead the charge in converting globalization and technology to increase the profit share of the economy at the expense of labor . . . contribute to plutonomy.

. . . .

[W]e think that global capitalists are going to be getting an even greater share of the wealth pie over the next few years, as capitalists benefit disproportionately from globalization and the productivity boom, at the expense of labor.

. . . .

RISKS—WHAT COULD GO WRONG?

. . . . [A] policy error leading to asset deflation, would likely damage plutonomy. Furthermore, the rising wealth gap between the rich and poor will probably at some point lead to a political backlash. . . . At some point it is likely that labor will fight back against the rising profit share of the rich and there will be a political backlash against the rising wealth of the rich. This could be felt through higher taxation (on the rich or indirectly though [sic] higher corporate taxes/regulation) or through trying to protect indigenous laborers, in a push-back on globalization—either anti-immigration, or protectionism.

From Citigroup, Equity Strategy, March 5, 2006 (emphasis added). The October 2005 memo is here.

Do we think this is what Citi, through its trade associations, lobbyists, and flacks, was contemporaneously telling lawmakers and the public and, if not, which should we believe? Here's a clue: The last 4 pages of this 18-page report consist of conflict disclosures and disclaimers, starting with this "Analyst Certification."

We, Ajay Kapur, Niall MacLeod and Narendra Singh, research analysts and the authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

The SEC requires this so investors will not be misled. No such requirement applies when Citi speaks to the rest of us—we expect to be lied to, and we are seldom disappointed.

Update on Thursday, November 11, 2010 at 06:18AM by Skeptic

The March 2005 Plutonomy memo, quoted above, has been taken down from the linked site at the request of Citi.  It is still available here, but for how much longer?  Hat tip to Edward Fullbrook at Real-World Economics Review Blog. 

Update on Wednesday, December 1, 2010 at 01:34PM by Skeptic

PIMCO's Bill Gross is also advising investors in the world's largest mutual fund that policies that protect US wages from developing world competition would be bad for investment returns.

Update on Sunday, January 2, 2011 at 08:53AM by Skeptic

Edward Fullbrook has posted some new locations for the Plutonomy Memos. 

http://www.cps-news.com/wp-content/misc_pdfs/Citigroup_Plutonomy_Part_1_Oct162005.pdf

http://www.cps-news.com/wp-content/misc_pdfs/Citigroup_Plutonomy_Part_2_Mar52006.pdf

The second one took a very long time to download, but it's there.

Update on Monday, May 30, 2011 at 03:34PM by Skeptic

Picking up on the advice in the plutonomy memos, advertisers are being urged to give up on the middle class and target the 1-2% with the highest incomes because the middle class can no longer afford much of what they are selling. Sam Pizzigoti discusses and links to the recent Ad Age story, with this lede:

The American middle class, concludes a new study from the ad industry’s top trade journal, has essentially become irrelevant. In a deeply unequal America, if you’re over 35 and your income hasn’t yet topped $200,000 a year, you don’t matter.

Update on Thursday, October 6, 2011 at 10:15AM by Skeptic

Both memos can be downloaded as PDFs from here.

Update on Tuesday, January 24, 2012 at 11:29AM by Skeptic

Both memos can be downloaded here, but the first one seems to be a bit corrupted.

Update on Wednesday, March 14, 2012 at 01:08PM by Skeptic

Edward Fullbrook has found and written about another Citi plutonomy memo. From his post (bolding is his):

Report no. 3

This is the longest of the three reports.  Significantly it notes that:

The rise of this inequality is not universal. In a number of other countries – the non-plutonomies – income inequality has remained around the levels of the mid 1970s. Egalitarianism rules.    (p.9)

It singles out Japan, France, Switzerland and the Netherlands as examples and dubs them “The Egalitarian Bunch”.  Their deviance is then illustrated with a graph titled “The Income Share of the Top 1% Is Relatively Small Compared to Plutonomies”.

Further on, after reminding the readership that “plutonomy countries” are those with “economies powered by a relatively small number of rich people” and geared to “financial wealth creation”, and noting that the previous week a “Plutonomy Symposium” was held in London, “the risks to plutonomy” are, as in previous reports, considered.

Perhaps the most immediate challenge to Plutonomy comes from the political process. Ultimately, the rise in income and wealth inequality to some extent is an economic disenfranchisement of the masses to the benefit of the few. However in democracies this is rarely tolerated forever. One of the key forces helping plutonomists over the last 20 years has been the rise in the profit share – the flip side of the fall in the wage share in GDP. As plutonomists or capitalists tend to be long {on} the profit share, they have benefited from trends like globalization and the productivity revolution, disproportionately. However, labor has, relatively speaking, lost out. We see the biggest threat to plutonomy as coming from a rise in political demands to reduce income inequality, spread the wealth more evenly, and challenge forces such as globalization which have benefited profit and wealth growth.  [emphasis added]

Nonetheless:

Our own view is that the rich are likely to keep getting even richer, and enjoy an even greater share of the wealth pie over the coming years.

These three plutonomy tracts, being windows both into the plutonomist’s mind and to their strategies, contain many interesting points, but for democrats the most significant one is that plutonomists see the subversion of democratic process as the ultimate key to their success.  If the “political enfranchisement remains” and is allowed to remain, then the “economic disenfranchisement of the masses” is only possible if they can be bamboozled into voting against their interests.  It seems inevitable therefore, that plutonomists and their agents have gone to great lengths to suppress these documents.

Fullbrook has a longer, more comprehensive, and worthwhile paper on all the Plutonomy Memos in Real-World Economics Review.

Update on Tuesday, April 30, 2013 at 04:11PM by Skeptic

All three Citi plutonomy memos are available here.  

More on hedgehogs and foxes

To try to figure out why another blog links to my post about hedgehog economists and fox economists, I found this very interesting post at Economic Dreams--Economic Nightmares. There Dave Iverson quotes liberally from a Louis Menand New Yorker review of Philip Tetlock's 2005 book Expert Political Judgment:  How Good Is It?  How Can We Know? According to the review, Tetlock is a Berkeley psychiatrist who over 18 years tracked 82,361 predictions by 284 paid prognosticators and then graded them to see how accurate the predictions were.  He also collected data from these pundits about their thinking processes.  Some surprising findings (quotations are from the Menand review):

As a group the pundits did worse than a random number generator.

Tetlock also found that specialists are not significantly more reliable than non-specialists in guessing what is going to happen in the region they study. Knowing a little might make someone a more reliable forecaster, but Tetlock found that knowing a lot can actually make a person less reliable.

. . . .

The experts' trouble in Tetlock's study is exactly the trouble that all human beings have: we fall in love with our hunches, and we really, really hate to be wrong. . . .

Tetlock's experts were also no different from the rest of us when it came to learning from their mistakes. Most people tend to dismiss new information that doesn't fit with what they already believe. Tetlock found that his experts used a double standard: they were much tougher in assessing the validity of information that undercut their theory than they were in crediting information that supported it.

[Tetlock believes] that he discovered something about why some people make better forecasters than other people. It has to do not with what the experts believe but with the way they think. Tetlock uses Isaiah Berlin's metaphor from Archilochus, from his essay on Tolstoy, "The Hedgehog and the Fox," to illustrate the difference. He says:

Low scorers look like hedgehogs: thinkers who "know one big thing," aggressively extend the explanatory reach of that one big thing into new domains, display bristly impatience with those who "do not get it," and express considerable confidence that they are already pretty proficient forecasters, at least in the long term. High scorers look like foxes: thinkers who know many small things (tricks of their trade), are skeptical of grand schemes, see explanation and prediction not as deductive exercises but rather as exercises in flexible "ad hocery" that require stitching together diverse sources of information, and are rather diffident about their own forecasting prowess.

A hedgehog is a person who sees international affairs to be ultimately determined by a single bottom-line force: balance-of-power considerations, or the clash of civilizations, or globalization and the spread of free markets. A hedgehog is the kind of person who holds a great-man theory of history, according to which the Cold War does not end if there is no Ronald Reagan. Or he or she might adhere to the "actor-dispensability thesis," according to which Soviet Communism was doomed no matter what. Whatever it is, the big idea, and that idea alone, dictates the probable outcome of events. For the hedgehog, therefore, predictions that fail are only "off on timing," or are "almost right," derailed by an unforeseeable accident. There are always little swerves in the short run, but the long run irons them out.

Foxes, on the other hand, don't see a single determining explanation in history. They tend, Tetlock says, "to see the world as a shifting mixture of self-fulfilling and self-negating prophecies: self-fulfilling ones in which success breeds success, and failure, failure but only up to a point, and then self-negating prophecies kick in as people recognize that things have gone too far."

Tetlock did not find, in his sample, any significant correlation between how experts think and what their politics are. His hedgehogs were liberal as well as conservative, and the same with his foxes. (Hedgehogs were, of course, more likely to be extreme politically, whether rightist or leftist.) He also did not find that his foxes scored higher because they were more cautious—that their appreciation of complexity made them less likely to offer firm predictions. Unlike hedgehogs, who actually performed worse in areas in which they specialized, foxes enjoyed a modest benefit from expertise. Hedgehogs routinely over-predicted: twenty per cent of the outcomes that hedgehogs claimed were impossible or nearly impossible came to pass, versus ten per cent for the foxes. More than thirty per cent of the outcomes that hedgehogs thought were sure or near-sure did not, against twenty per cent for foxes.

Why did I like Iverson's post? Confirmation bias probably.

Update on Saturday, October 29, 2011 at 02:26PM by Skeptic

We, all of us, overestimate the accuracy of our judgments--even when we are presented with hard evidence that our judgments about such matters in the past have been no better than random guesses, or even much worse, according to Daniel Kahneman in The Surety of Fools. 

As one example, Kahneman analyzed the rankings of 25 individual advisors in a wealth management firm over 8 years. These ranking were used by the firm to set annual bonuses. Analysis showed there were no consistent stars or consistent losers. The pattern over 8 years was almost totally random--the average correlation was 0.01. In other words, all bonuses were based on luck. Did this information, when reported to the advisors and executives, affect any behavior at all?  No, and Kahneman was not surprised by that. 

Kahneman suggests that humans have a "bias toward coherence," which makes us overconfident when an idea is internally consistent, comes easily to mind, and fits with what we think we know:

The confidence we experience as we make a judgment is not a reasoned evaluation of the probability that it is right. Confidence is a feeling, one determined mostly by the coherence of the story and by the ease with which it comes to mind, even when the evidence for the story is sparse and unreliable. The bias toward coherence favors overconfidence. An individual who expresses high confidence probably has a good story, which may or may not be true.

The moral basis for limiting immigration and not offshoring American jobs

Matt Miller says liberals have an immoral position on trade and that big companies are the true "progressives," but I say he and other advocates for open borders are the morally obtuse ones. The evidence is overwhelming, as Miller partially concedes, that the offshoring of actual and potential American jobs and the uncontrolled immigration of foreign workers is a major factor in chronic US unemployment and stagnant and declining real middle-class incomes. Yet, he says, that's the right thing to do because it increases the incomes of the even less fortunate Chindians.

The mother of all inconvenient truths is this: Global capitalism's ability to lift hundreds of millions of people out of poverty in China, India and other developing countries comes partly at the expense of tens of millions of workers in wealthy nations. This awful, inexorable fact will soon pose an enormous moral and intellectual challenge for the American left.

To understand why, ask liberal trade foes how they square their hopes for the millions of workers striving to improve their lives here in America with a defensible moral stance toward the billions beyond our borders who seek better lives themselves -- some of whom want to come here, and nearly all of whom want to trade with us in ways that may put American jobs or earnings at risk.

. . . .

. . . . Seen in this light, for example, big business may turn out to be a more "progressive" global force than American labor or government in the next few decades. Why? Because corporate America is generally the strongest voice for the reciprocal free trade and access to markets that poor nations need to thrive.

Okay, Matt, I'll answer your question: In short, it's because Americans have a duty, which is fundamental to cohesiveness of national union, to treat other Americans better than non-Americans. Consider the Parable of the Improvident Mom:

A single mom in a low-wage job walked home after work on a Friday and had this conversation with her two children: 

Kids:   Hi, mom.  What's for dinner? 

Mom:  Remember we've been talking about the Good Samaritan?  After I cashed my check, I was walking on Skid Row and feeling sorry for all those homeless and hungry people.  So I invited them to McDonalds and bought big meals for all of them.  They were very appreciative, and it made me feel really good, but I spent all the money and didn't have anything left for groceries.  There's some cold cereal and a little bit of milk you can have for dinner. 

Kids:   But what about tomorrow and Sunday?  There's no food in the house.

Mom:  We can all go down to Skid Row and ask those people to share with us—just like I shared with them.  And on Monday you'll get free breakfast and lunch at school. 

First, I think Mom misunderstood the Parable of the Good Samaritan, which assumes, I think, that the fortunate are able to aid the unfortunate without privation or great cost.  Being neighborly and merciful is something less than sharing equally, and certainly less than treating a stranger better than one's own.  When our policies allow non-Americans to take the livelihoods of Americans, especially in a prolonged period of high unemployment, we are doing to millions of American citizens what Mom did to her kids. 

It is moral to give preferences to in-groups over outsiders, nuclear family over extended family, family over other community members, members of one's religion, political party, union, or other organization over non-members, tested and loyal members over applicants and probationary members, etc.  Neither our civilization nor even our species can survive without cohesive groups whose members are loyal to and support each other to the partial or total exclusion of others.  The ability to form and maintain groups of composition, function, and commitment appropriate to life's difficulties, perils, and threats is fundamental. 

Second, individuals with the power to make decisions affecting other members of their group act morally when they protect and enhance the welfare of the group members and immorally when they take actions that do the opposite.  Mom has an inherited moral duty to protect, nourish, and nurture her children.  [UPDATE 10/25/10: I meant to say "inherent" instead of "inherited," but they both sorta work, don't they?]  In the US we have many layers of representative democracy in which those elected are empowered to make decisions for the groups they represent.  They are functionally the moms of these groups, and they act contrary to their moral duty if without informed consent they take food out of the mouths of their constituents and hand it to foreigners. 

We have moral obligations to residents of other countries, but I don't think those include the obligation to let them all move in with us or to transfer away the livelihoods of our group members.  If a majority of US voters, being fully informed, were to favor conferring benefits on the peoples of other nations and paying for that by depriving millions of Americans of their livelihoods, I might be able to go along, but I'd certainly be troubled by the fact that the victims can't drop out of the American club in protest.  Anyway we haven't done that.  By large and consistent majorities, Americans do not want themselves or other Americans to suffer in that way.  The prevailing view, and a moral one, is that we must take care of our own first. 

Unlike the improvident mom who, it may be assumed, will share the hunger with her children, proponents of open borders generally are not personally sharing in any sacrifice but actually benefit from selling out their fellow Americans. If they feel no shame about that, they are the ones who need to swing their moral compasses.

I suggest that a big reason voters report increasing alienation and eagerness to vote out whichever political party is in at the moment, is that there is a persistent sense that the ins are out of touch and "don't care about people like me." How else can these disaffected voters understand the long-term bipartisan failure to enforce existing immigration laws against US employers and the flood of jobs being offshored? They still have to pay heavy "dues" in this "club," but the benefits are going to free-riding non-members. They see this as an immoral betrayal by their elected decision-makers, and so do I.

Update on Thursday, October 14, 2010 at 04:04PM by Skeptic

An email says my argument is "bigoted, narrow, and unpersuasive."  I'll cop to unpersuasive and try again with a lifeboat analogy.  Assume a fully-loaded lifeboat encounters other victims in the water.  They will die if not taken on board, but if they are taken on board the lifeboat will be overloaded and sink.  Under what circumstances, and by what decision-making mechanism, should some of the people in the boat be ejected and left to drown to make it possible to save those now in the water? 

In the fully-loaded lifeboat case and in the Parable of the Improvident Mom, one can make the moral problem disappear if it's not a zero-sum game, i.e., that mom can feed the Skid Row homeless and her own children and that the life boat won't sink if all the swimmers are pulled out of the water.  But if it is a zero sum game, as I think the evidence clearly shows, or if there is substantial uncertainty about whether it's a zero-sum game, there is a moral problem whether we choose to acknowledge it or not. It's not as though those in the lifeboat can save a swimmer by levying the same tax on everybody in the boat--some one person presently in the lifeboat must change places with the swimmer who will otherwise die, a child must go hungry if mom feeds the homeless, and an American who has or hopes to have a livelihood won't if it goes instead to a foreigner. 

There are all sorts of theoretical arguments about why this is not a zero-sum game, e.g., the Lump of Labor Fallacy fallacy.  But I'm looking at the evidence of what has happened in terms of US employment and am unpersuaded by theoretical arguments that what I'm seeing can't happen. 

Update on Sunday, October 24, 2010 at 04:16PM by Skeptic

The Lump of Labor Fallacy is explained here. 

Update on Saturday, December 18, 2010 at 11:21PM by Skeptic

Before we can feel much for others, we must in some measure be at ease ourselves. If our own misery pinches us very severely, we have no leisure to attend to that of our neighbour . . . . 

Adam Smith, Theory of Moral Sentiments.

Update on Tuesday, January 11, 2011 at 11:14AM by Skeptic

Here is a related post, A neurological basis for group cohesion?  But who's in my group?

Update on Friday, March 4, 2011 at 06:01PM by Skeptic

Princton economist Uwe E. Reinhardt continues writing about the case for and against free trade and immigration, concluding that the "dictatorial, collectivist" norm of economists to favor open borders neglects other considerations that are relevant and often paramount:

The issue of free trade, like the issue of immigration, is too important to be left to the cerebral structures of economists. We may be just good enough to fire the opening salvo in a wider national conversation on these themes — which should be discussed and resolved by a wider group of stakeholders.

Reinhardt refers to the debate about a 2005 Forbes article “Xenophobia and Politics: Why Protectionism Is a Lot Like Racism" by Steven Landsburg.  He also links to a rebuttal by Pat Buchanan that closely approximates my views: It's not racism at all; it's patriotism. 

To be more concerned about the well-being of one’s fellow Americans is not “xenophobia,” which means a fear or hatred or foreigners. It is patriotism, which entails a special love for one’s own country and countrymen, not a hatred of any other country or people. Preferring Americans no more means hating other peoples than preferring one’s family means hating all other families. An icy indifference as to whether one’s countrymen are winning—be it in a competition for jobs or Olympic medals—is moral treason and the mark of a dead soul.

We are all born into families, clans, tribes, neighborhoods, countries, all of which—as well as the friends we make, the schools that nurture us, the churches at which we worship—have a claim upon our love and loyalty.

Hat tip to Christine.

American People Hire High-Powered Lobbyist To Push Interests in Congress

From The Onion. Hat tip to Yves Smith.

The damage done to US job markets by MNCs won't be easy to fix.

Continuing his fine reporting on the effects of globalization on domestic employment, Don Lee writes Jobs remain a booming U.S. export in today's LAT (different headline online).  The piece has two graphs showing that between 2000 and 2008 non-bank US-based multi-national companies eliminated about 2.7 million domestic jobs and created more than 2 million jobs overseas.

Of the more than 8 million US jobs that disappeared since the start of the Great Recession, here are nearly 3 million that pretty clearly are not coming back. What will replace them?  Clearly not financial services--that sector is shrinking.  Clearly not home construction--it will be decades before we're building at that rate again.  Not green energy--it has zero potential to employ millions. Then what?

Why are big banks suspending foreclosure proceedings?

As Yves Smith describes here, it's because mortgage securitization practices evolved in a way that, to reduce costs, many of the mortgage notes were never conveyed to the trustees responsible for bringing the foreclosure actions.  In 45 23 states a creditor can't foreclose without exhibiting the original note in court.  This widespread problem has been "solved" by a new industry of document forging.  Obviously, there are going to be criminal prosecutions and jail time, but what does this do to the value of mortgage-backed securities, many of which have been purchased, probably at face value, by the Fed in its "quantitative easing" program? Perhaps the trustees of these securities will discover merit in loan modifications which, if nothing else, will give them new notes and a second chance not to foul up the paperwork. [corrected 10/12/2010.]

Update on Monday, October 4, 2010 at 04:49PM by Skeptic

Gretchen Morgenson is digging out more facts.  Her NYT front page piece today is accompanied by a picture of the signature blocks of three documents all purportedly signed by Tywanna Thomas, Asst. Secretary.  The signatures are so vastly different that at least two must be forged.  Sorry the graphic is not with the story online.

China will not permit the US to build an economy based on dominance of innovation.

The de facto US trade/globalization policy is that we gladly give away blue collar jobs and will keep the high-value-added jobs in innovation.  That, in a nutshell, is our national economic strategy.  It is doomed to failure. As the military understands in its milieu, the enemy gets a vote, and here, courtesy of Foreign Affairs, is the Chinese vote in a 2006 state-issued report: 

. . . . China will become “an innovative nation in the next 15 years and a world power in science and technology fields by the middle of the twenty-first century.” By 2020, the report states, China should reduce its “degree of dependence on technology from other countries to 30 percent or less” (down from 50 percent today, as measured by the spending on technology imports as a share of the sum of domestic R&D funding plus technology imports). Noting that reliance on other countries--especially the United States and Japan -- is a threat to Chinese national and economic security, the paper calls for China not to purchase any “core technologies in key fields that affect the lifeblood of the national economy and national security,” such as next-generation Internet technologies; high-end, numerically controlled machine tools; and high-resolution earth observation systems.

New Chinese policies prompted by the report have raised the hackles of foreign governments and technology enterprises. In 2009, for example, China’s government, a massive consumer of high-tech products, announced that in order to be a recognized vendor in the government’s procurement catalog, a company would have to demonstrate that its products included indigenous innovation and were free of foreign intellectual property. Yet since R&D is a global, collaborative process, no individual high-tech product is completely independent of technology from outside of China. In April 2010, Beijing ordered those high-tech companies seeking to be listed on its procurement catalog to turn over the encryption codes to their smart cards, Internet routers, and other technology products.

Wake up, America. 

Britain free-traded away its world economic dominance, and the US is well down the same road.

America Aping Britain's Decline Through Free Trade is a provocative post by Ian Fletcher highlighting the parallels between Britain in the second half of the 19th Century and the US now. As told, Britain had become the world's dominant economic power, and they thought they could broaden their markets for manufactures through free trade without a risk that competitors would gain the upper hand. It didn't work out that way, and Britain tried to recoup by financializing its economy.  Sound familiar?  Some key passages from Fletcher:

So despite British preaching, free trade was falling apart. Britain practiced it unilaterally in the vain hope of imitation, but the United States emerged from the Civil War even more explicitly protectionist than before, Germany under Bismarck turned in this direction in 1879, and the rest of Europe followed. During the 1880s and 1890s, tariffs went up in Sweden, Italy, France, Austria-Hungary, and Spain. There was good reason for this: they worked. A recent study by the Irish economist Kevin O’Rourke shows a clear correlation between protection and economic growth rates in Europe in the 1875-1914 period.

. . . . Britain’s economy still grew, but inexorably lagged: from 1870 to 1913, industrial production rose an average of 4.7 percent per year in the U.S., 4.1 percent in Germany, but only 2.1 percent in Britain.

. . . .

But despite the mounting failure of its great strategic gamble, Britain stuck to free trade abroad and a laissez faire absence of industrial policy at home. Fundamentally, the country was lulled by the Indian summer of its industrial supremacy—it was surpassed economically by the U.S. only around 1880—into thinking that free trade was optimal as a permanent policy. The clarity of British thinking was not helped by the fact that certain vested interests had fattened upon free trade and established a grip upon the levers of power that was hard to break. The British establishment, seduced by the City of London’s financiers, turned towards wealth manipulation rather than wealth creation, a story familiar to us on Wall Street today.

Britain’s decline did not go unnoticed at the time, either at home or abroad. Neither did the underlying problem: in the 1906 words of Member of Parliament F.E. Smith, later famous as a friend of Winston Churchill:

We give to our rivals a free market of 43,000,000 persons in the United Kingdom to add to their own free market. Thus the United States possess an open market of 82,000,000 persons in the United States, plus an open market of 43,000,000 persons in Great Britain, making, altogether, 125,000,000. Similarly, Germany possesses an open market of 43,000,000 in Great Britain. As against this, we possess only such residual of our open market of 43,000,000 as the unrestricted competition of foreign nations leaves unimpaired….We call ourselves free traders, but we have never secured free trade for ourselves; we have merely succeeded in enlarging the area within which our protectionist competitors enjoy free trade.

Another difference between Republicans and Democrats

The GOP, under the guidance of Karl Rove and before, has built electoral success on total commitment to the ideas of its Base, however whacky and ugly. In contrast, Democrats, led by the Obama White House, are again abusing their Base and excoriating them for not being more enthusiastic.  Glenn Greenwald at Salon has collected typical quotes:

Speaking of inspirational messaging, Vice President Joe Biden yesterday said we must "remind our base constituency to stop whining."  Last week, Obama condemned "Democrats griping and groaning," and the day before he mocked Democrats who "just congenitally, tend to get -- to see the glass as half empty."  That, of course, was preceded by Robert Gibbs announcing that liberal critics of the President who complain about continuation of Bush policies "need to get drug tested," while Rahm Emanuel had previously shared his view that dissatisfied liberals are "fucking retarded."  Echoing those sentiments almost verbatim, Matt Yglesias called this week in The Daily Beast for a "little less whining and a little more cheerleading from the left," and accused those who fail to comply of "self-pity and self-indulgence" on the ground that the enthusiasm gap could jeopardize gains in health care coverage.

The beatings will continue until morale improves.

One chart refutes three myths about US foreign trade.

Paul Krugman refutes the myth that US prosperity after WWII resulted from the destruction of our competitors by drawing on the BEA database that generated the following chart.  The chart depicts data that also contradict two other myths that pollute conventional wisdom about foreign trade.  First the chart and then the myths. 

 

Myth #1:  The US economy boomed after WWII because the rest of the world was in ruins.

To the contrary, the chart shows that, except for the war and Marshall Plan years, there was no US export boom until about 1973.  Krugman points out that our competitor nations were also our customer nations, and when they couldn’t produce after WWII they couldn’t buy from us either.    

Myth #2:  The Smoot-Hawley Tariff Act caused the Great Depression, or at least made it much longer and deeper. 

This act, signed into law June 17, 1930, was intended to protect American jobs and farmers from import competition by increasing tariffs from historic lows of about 5% to an average of about 25%, levels more characteristic of the 19^th Century.  Other nations retaliated by raising their tariff rates.  Imports and exports both declined, but how much of those declines were caused by the tariff war, and were they a major factor contributing to the Great Depression? 

In recessions, imports and exports decline even without changes in tariff rates, an effect that is obvious in the chart for the 1982 and 1991 recessions and the current Great Recession.  The chart and database show that exports declined 39% from 5.7% of GDP in 1929 to 3.5% in 1933, the worst year of the Great Depression, while imports declined 37% from 5.4% to 3.4%.  However, foreign trade was the smallest part of the US economy in those days, and the largest domestic sectors and the economy as a whole declined even more.  Total GDP declined 46% from 1929 to 1933, and the two largest components of GDP, personal consumption and domestic private investment, declined by 41% and 90%, respectively.  (The fourth component of GDP, government spending, fortunately declined only 10%.)

If raising tariffs caused immediate foreign trade decreases, then reversing the tariff changes should quickly increase foreign trade by about the same amount, right?  Roosevelt promptly began making bi-lateral tariff reduction deals under authority of the Reciprocal Trade Agreements Act of 1934 and average rates were reduced to pre-Smoot-Hawley levels by 1947 when GATT was adopted.  See graph here.  Can we see the effects on foreign trade?  Nope.  In contrast to these dramatic tariff changes, the chart shows that imports grew very modestly from 3.4% of GDP in 1933 to just 4.3% in 1951.  After that the value of imports as a portion of GDP was stable through 1965 before rising to 6.0% in 1972 (just before the Arab Oil Embargo). 

One could reasonably say, as many did at the time, that raising tariffs in 1930 was wrong-headed because it was unlikely to ameliorate the Great Depression (and apparently did not ameliorate it). But there’s nothing in the data to suggest the tariff increases made things a great deal worse either, is there?  I submit that the only significant ill effect of Smoot-Hawley was to dissipate the political energy that might otherwise have been directed at doing something useful for the economy in 1930, instead of waiting three more years for Roosevelt and Keynes. 

Myth #3:  If the US government just stays out of the way, foreign trade will balance itself out and share the benefits among all nations. 

According to the chart, the last year the US did not have a trade deficit was 1975, and the average deficit in the 34 years since has been 2.36% of GDP.  In the last ten years, the average deficit has been 4.25%.  This is important because net exports add to our GDP, and net imports subtract from GDP—that’s not theory or conjecture but in fact how GDP is defined.  When we run a chronic trade deficit, we are restricting the growth of our domestic economy—and restricting the growth of wages and salaries that would be earned by Americans if they were producing the goods and services here instead of importing them.  The benefits of having an export-based economy are going to other nations, many of whom pursue aggressive mercantilist policies intended to shift into their domestic economies growth and employment that would otherwise occur in the US and other nations. 

In 2009, ten nations accounted for 89.6% of the US trade deficit.  They were China (45.3%), Mexico (9.5%), Japan (8.9%), Germany (5.6%), Ireland (4.1%), Canada (4%), Venezuela (3.7%), Nigeria (3.1%), Italy (2.8%), Malaysia (2.6%). (Source.) Of these, at least China and Japan overtly engage in currency manipulation and buy-local policies to maintain their advantages.  They are, in effect, imposing economic sanctions on us and their other trading partners.  This also serves the bottom lines of some powerful US-based interests; for them, a trade deficit is a feature, not a bug.  The long-term persistence of our chronic trade deficit shows that it is not a random and transient departure from equilibrium, and it won’t change without policy changes in our federal government. 

Update on Saturday, October 9, 2010 at 07:58AM by Skeptic

Economist Douglas A. Irwin of Dartmouth is the author of two books due out next year, Peddling Protectionism: Smoot-Hawley and the Great Depression and Trade Policy Disaster: Lessons from the 1930s. He previews some of the ideas here.

In his famous 1993 debate with Ross Perot over the North American Free Trade Agreement (Nafta), Vice President Al Gore claimed that Smoot-Hawley "was one of the principal causes, many economists say the principal cause, of the Great Depression in this country and around the world."

In fact, economists across the political spectrum reject this view. Previous tariff hikes, some even larger than Smoot-Hawley, had reduced trade and efficiency, but they didn't produce a macroeconomic catastrophe. When asked if Smoot-Hawley caused the Great Depression, the University of Chicago economist and Nobel laureate Milton Friedman replied: "No. I think the Smoot-Hawley tariff was a bad law. I think it did harm. But the Smoot-Hawley tariff by itself would not have made one-quarter of the labor force unemployed." As Mr. Friedman's own work showed, the money supply and domestic prices had fallen by a third during the Depression, largely because of a malfunctioning gold standard and inept monetary policy on the part of the Federal Reserve. These were the fundamental causes of the economic disaster.

The Smoot-Hawley tariff did not have a huge macroeconomic impact because at the time it was enacted, unlike today, the U.S. was not very open to international trade. Total imports were just a small fraction of gross domestic product, and two-thirds of those imports were consumer goods (coffee, tea) and industrial raw materials (silk, tin) that were exempt from the tariff. In 1929, dutiable imports amounted to just 1.4% of GDP. Smoot-Hawley increased the average tax on them from 38% to 45%. A tax increase of this size on 1.4% of GDP is not enough, by itself, to generate an enormous economic contraction.

Irwin goes on to propose monetary policy remedies for our current problems, remedies that Paul Krugman and others may see as unworkable because we are already at the "zero lower bound" of interest rates, i.e., the Fed can lower interest rates to zero--and it has--but it's not possible for the Fed to push interest rates into negative territory. Hat tip to Mark Thoma for the link.

Update on Sunday, February 20, 2011 at 09:20PM by Skeptic

David Warsh reports that it was WSJ editorial writer Jude Wanniski who in 1978 originated the myth that Smoot-Hawley caused the Great Depression--and not only the Great Depression but the stock market crash that started nine months before Smoot-Hawley was enacted.  Warsh also quotes from a Michelle Bachman speech on the House floor perpetuating the myth, and he discusses Douglas Irwin's book which "refudiates" it.  [UPDATE 2/21/11: Paul Krugman weighs in on Warsh's piece and even includes a photo of Senator Hoot Smalley, as Bachman called him.]

Update on Sunday, July 12, 2020 at 12:29PM by Skeptic

Here is an update on the international trade graphic.

A traitor to his class?

Garrett Gruener's op ed in today's LATimes deserves a read. It's a call from "one of the fortunate few in the top echelon of American earners" for raising tax rates on the rich back to the levels of the prosperous 1990s. Echoing some of my themes, he says this:

The supply-side, trickle-down economic policies of the last decade benefitted people like me, but the wealth didn't trickle down. So while we did quite well, people who live from paycheck to paycheck didn't.

When inequality gets too far out of balance, as it did over the course of the last decade, the wealthy end up saving too much while members of the middle class can't afford to spend much unless they borrow excessively. Eventually, the economy stalls for lack of demand, and we see the kind of deflationary spiral we find ourselves in now. I believe it is no coincidence that the two highest peaks in American income inequality came in 1929 and 2008, and that the following years were marked by low economic activity and significant unemployment.

What American businesspeople know, and have known since Henry Ford insisted that his employees be able to afford to buy the cars they made, is that a thriving economy doesn't just need investors; it needs people who can buy the goods and services businesses create. For the overall economy to do well, everyday Americans have to do well.

And then Gruener denies the whole supply-side argument for low tax rates on high earners:

Remember, paying slightly more in personal income taxes won't change my investment choices at all, and I don't think a higher tax rate will change the investment decisions of most other high earners.

What will change my investment decisions is if I see an economy doing better, one in which there is demand for the goods and services my investments produce. I am far more likely to invest if I see a country laying the foundation for future growth. In order to get there, we first need to let the Bush-era tax cuts for the upper 2% lapse. It is time to tax me more.

Meanwhile, Paul Krugman demolishes the idea that our current problem is not a deficiency in aggregate demand but is instead a mismatch of skills to jobs—a structural problem that just needs to left to work itself out or perhaps be assisted with retraining and education.

Every single major industry has seen a rise in involuntary part-time work; so has every major occupation. There's no hint that any major kind of labor, in any sector, is in short supply.

He goes on to present a chart showing that employers' dissatisfaction with the quality of labor has declined markedly in the Great Recession.

This strongly suggests that it's a weak labor market for everyone out there, and businesses have no trouble finding the workers they need; they just don't know what to do with those workers, given weak demand.

Why we are not going to recover from the Great Recession

Bob Herbert's NYT column today summarizes the implications of much of my criticism about US macroeconomic policies.  We can't reasonably expect to recover from the Great Recession because three-plus decades of bipartisan policies have crippled the economic ability of America's middle class to buy the goods and services that fellow Americans would like to sell.  The most important point that Herbert did not make is that, although the pain of economic decline has been felt first by those with the lowest incomes and then by those in the middle, it is spreading like a cancer that will engulf many of the heretofore comfortably clueless as well. 

The stagnation is reflected in this graph that shows the percentage of working age adults in the workforce (either working or looking for work) has been declining since 2000. 

 

Notice that the workforce participation rate declined right through the recent economic expansion, which occurred only because people were increasing consumption by spending borrowed money.  Graphs showing stagnation of inflation-adjusted median wage rates and household incomes are collected here. 

Clearly it's time to face the new reality, but too many of our leaders are clinging to current policies that will continue to shrink our national income instead of proposing new policies that will increase our national income by full employment and rising middle-class wages. We can't shrink our way to greatness, and we can't expect the outcomes to change if we don't make significant policy changes. The title to this post reflects my view that the most powerful political forces in our society will successfully defend the status quo for quite a while yet. 

Update on Tuesday, September 14, 2010 at 12:34PM by Skeptic

This graph (from Catherine Rampell on the NYT Economix blog) shows how lack of sales demand is the most important problem small businesses report.

Update on Saturday, October 2, 2010 at 11:16PM by Skeptic

In a 2009 survey by the Atlanta Fed, fully 55% of respondents reported deficient sales/revenues as a reason for not borrowing.