Go East, young man.

Horace Greeley's advice to young men in 1851 to go west was sound because that's where the economy was booming, there was a labor shortage, and opportunities abounded. Today, young Americans are going to the Orient to find those conditions, according to this NYT story. The US has a labor glut, and there is no improvement in sight. The rate of job creation in the US has been falling steadily since 2001 and no longer even keeps up with population growth. Let's do something about this.

Update on Tuesday, September 1, 2009 at 12:05PM by Skeptic

Andy Harless presents 1992-2008 BLS data showing that the problem isn't job destruction, which has been occurring at normal or even subnormal levels.  The problem is inadequate job creation, which has been trending downward since 2000--even while GDP was growing.

What’s the future for unskilled workers, and will they have to be supported by highly-paid workers?

Gregory Clark suggests that in the future unskilled workers will have ever-declining incomes and that the only solution is to tax the better off to keep the masses out of poverty—a backdoor "from each according to his ability, to each according to his need." Mark Thoma quotes liberally from the Clark piece and says he isn't so sure the future for low-skill workers is that bleak. Among the many comments on Mark's blog is this one from Skeptic.

The distribution of incomes amongst high- and low-skill jobs will probably depend more on the total number of jobs created than on the mix of skill sets. If we don't create enough jobs in the aggregate, even degree holders will be scrambling for jobs waiting tables. We already have a shockingly large number of B.A. holders working in jobs for which no college is required, including one-quarter of travel agents and retail sales supervisors, one-third of flight attendants, and one-half of aerobics instructors according to this report.

The US private sector aggregate job growth rate has fallen seriously behind population growth. Between 1950 and 2000, the decennial rates of population increase were in the range 9.8% to 18.5% (0.98% to 1.85% annually without compounding). From July 2000 to July 2008, the population increase was 7.7% or 0.96% per year. As there are about 109 million private sector jobs, we needed to create more than 10 million incremental jobs just to keep pace with population growth between July 1999 and July 2009. What happened? Only 121,000 new jobs, according to this NYT report. The jobs growth rate was essentially zero. As a baseline against which to compare that disaster, the job creation rate was reliably about 2% annually from about 1967 to 2001 but has been steadily declining ever since according to the graphic in the NYT piece. In 2008 the job growth rate sank below the population growth rate for the first time since about 1965.

We need a demand-side jobs creation strategy more than we need a Field of Dreams supply-side education and skills strategy. If we can figure out how to create annually 1-2 million domestic private sector jobs of any mix, I would trust market signals to get the supply-side skill mix about right. If we don't create that many additional jobs, the chronic oversupply of labor must continue downward pressure on incomes in almost all job categories, and a mass upgrading of skills, as recommended by McKinsey and many others, would just put pressure on the wages of skilled workers as well.

Mark isn't sure about the long-term direction of wages, and neither am I. But I'm pessimistic because offshoring and trade deficits seem likely to continue, and I don't see what the next new big thing might be that would generate the necessary boom in overall job growth. What positive factors am I missing?

Update on Monday, August 10, 2009 at 09:05AM by Skeptic

Dean Baker points out that the Clark piece in WaPo is a rare contradiction of the editors' view that an ongoing worldwide demographic shift to much older populations will create a huge labor shortage in 20-30 years.

In short, Mr. Clark is exactly right that the Post is spewing nonsense in its demographic meltdown spiel, but he is wrong in worrying about an excess supply of people with few skills. The relative supply and demand for people with less education will be determined by politics, not the natural workings of technology or the market.

Update on Wednesday, August 12, 2009 at 04:13PM by Skeptic

Paul Krugman reacts to the Clark piece by republishing something he wrote in 1996 that was supposed to be an imaginary look backward from 2096. Here is what he said about one of 5 things prognosticators got wrong:

The devaluation of higher education. In the 1990s everyone believed that education was the key to economic success, for both individuals and nations. A college degree, maybe even a postgraduate degree, was essential for anyone who wanted a good job as one of those "symbolic analysts".

But computers are very good at analyzing symbols; it's the messiness of the real world they have trouble with. Furthermore, symbols can be quite easily transmitted to Asmara or La Paz and analyzed there for a fraction of the cost of doing it in Boston. So over the course of this century many of the jobs that used to require a college degree have been eliminated, while many of the rest can, it turns out, be done quite well by an intelligent person whether or not she has studied world literature.

This trend should have been obvious even in 1996. After all, even then America's richest man was Bill Gates, a college dropout who didn't seem to need a lot of formal education to build the world's most powerful information technology company.

Or consider the panic over "downsizing" that gripped America in 1996. As economists quickly pointed out, the rate at which Americans were losing jobs in the 90s was not especially high by historical standards. Why, then, did downsizing suddenly become news? Because for the first time white-collar, college-educated workers were being fired in large numbers, even while skilled machinists and other blue-collar workers were in high demand. This should have been a clear signal that the days of ever-rising wage premia for people with higher education were over, but somehow nobody noticed.

Eventually, of course, the eroding payoff to higher education created a crisis in the education industry itself. Why should a student put herself through four years of college and several years of postgraduate work in order to acquire academic credentials with hardly any monetary value? These days jobs that require only six or twelve months of vocational training -- paranursing, carpentry, household maintenance (a profession that has taken over much of the housework that used to be done by unpaid spouses), and so on -- pay nearly as much as one can expect to earn with a master's degree, and more than one can expect to earn with a Ph.D.. And so enrollment in colleges and universities has dropped almost two-thirds since its turn-of-the-century peak. Many institutions of higher education could not survive this harsher environment. The famous universities mostly did manage to cope, but only by changing their character and reverting to an older role. Today a place like Harvard is, as it was in the 19th century, more of a social institution than a scholarly one -- a place for the children of the wealthy to refine their social graces and make friends with others of the same class.

MGI sees disaster in the US labor market and proposes to shift income from the 22% of Americans whose incomes have risen to the 71% whose incomes have stagnated and fallen.

Between 1991 and 2005, 71 percent of US workers were hurt by being in jobs "for which there is low demand from employers, an oversupply of eligible workers, or both," according to this recent report from McKinsey Global Institute.

The analysis showed that migration and deunionization depressed levels of compensation for labor in repetitive manual jobs and administrative support in the four lowest-earning clusters across all industries.

At a deeper structural level, global economic integration and technological advances have combined to produce permanent changes in the skill levels required to flourish in the U.S. labor market, the research concludes. . . .

[A]ppropriate education and training plays [sic] a critical role in giving workers access to more attractive jobs. . . .

We believe that the experience of the 22 percent of workers qualified for attractive jobs in industries and occupations where demand and incomes have been growing over the past 15 years points to the root cause of the problem of very sluggish income growth for the majority of the workforce: too few have the skills for attractive jobs and, as a consequence, too many workers are employed in industries and occupations where demand has been falling, incomes have stood still, or both.

The challenge raised by the 27 percent of workers in jobs where demand and incomes are both falling is to equip them with skills relevant to sectors that are set to grow in the United States, not to defend failing employers or shrinking sectors. The 44 percent of workers in jobs for which demand is growing but the pay is static pose a somewhat different question: how can rates of pay in these sectors and occupations improve? We do not have clear answers . . . .

Finally, how could we bring together these multiple drivers into coherent labor market and human capital strategies?

. . . .

Unless the mass of America's workers can develop new skills over the next ten years, the nation risks another period in which growth resumes but . . . with Americans in the bottom and middle-earning clusters never really benefiting from the recovery. The redevelopment challenge is enormous. . . . .

To highlight it, the central concern of the report is that 71% of Americans in the most depressed job categories will not benefit from the end of the Great Recession "unless the mass of Americans can develop new skills over the next ten years." Several problems here: A mass upgrading of skills may be necessary, but it would not be sufficient. It is also necessary that higher-paying jobs be created here instead of offshore. The MGI report proposes no strategy for creation of high-quality domestic jobs but assumes, against experience and evidence, that good domestic jobs will magically appear. A mass upgrading of skills of the lower tiers would increase competitive pressures on the 22% of Americans who have so far been relatively insulated from competition. (Due to data limitations, the MGI study only considered the bottom 94% of US workers; rounding presumably accounts for the difference between 93% and 94%.) In other words, incomes would become more equal at the expense of the prospering 22% and not at the expense of any foreign workers.

No Demand Side Strategy

The authors recommend against "defend[ing] failing employers or shrinking sectors," and they propose no strategy for creating additional well-paying US jobs. Perhaps the lack of a job-creating, "demand-side strategy" is because the authors adhere to the conservative view that government should not "pick winners and losers." When other governments have aggressive industrial policies to dominate the most lucrative economic niches of the future, adhering to laissez faire free-market ideology would be a disaster for America. Unilateral disarmament.

Weak, Cannibalistic, and Uncertain Supply Side Strategy

The authors propose only a supply-side, Field of Dreams strategy, upgrading the skills of US workers so they are ready when and if the demand develops for them. The authors say they have no answer for the 44 percent of workers in mid-range jobs for which demand is growing but incomes are nevertheless stagnant. Well actually they do have an answer, a redistributionist one: They propose to improve the skills of the 27 percent who are even worse off so they can compete with the 44 percent whose incomes are stagnant. And if the 44 percent improve their skills, they can compete with the 22 percent at the top who have had rising incomes.

Their notion seems to be that a generalized upgrading of skills will lower incomes in today's best job categories by increasing competition there, and—perhaps--raise the incomes of less skilled workers because there will be fewer of them. Certainly one would expect an excess supply of high-skill workers to drive down the wages for high-skill jobs, but it would not necessarily bid up the wages of medium- and low-skill jobs. If there is an oversupply of high-skill workers, some of them will have to accept lower-skill, lower-paid jobs and be unable to recoup their investment in training. Either way, compensation to high-skill jobs should decline. The MGI plan to have a potentially-overeducated workforce should appeal to those who think the wage differential between high- and low-skill jobs is too big, but it's not a plan to raise aggregate US labor incomes.

High-skill jobs are being created offshore for several reasons, but those reasons do not include a lack of adequately skilled Americans to fill those jobs at home, and the authors do not contend otherwise. Americans are simply too expensive. Under current US policies, that unfavorable labor cost differential will continue to drive new jobs offshore, and this supply-side stuff is just deck chairs. We have a choice: We can continue to push down US incomes, increasingly in better job categories that so far have been less affected by foreign competition, or we can change policies.

How close is the MGI report to Obama Administration policy?

Certainly, the MGI recommendations that place the whole burden of American economic progress on more education is perfectly mainstream and politically safe. My argument that such a limited policy is inadequate is heterodox--and correct.

According to the preface to the MGI report, "Diana Farrell, former director of MGI provided strong leadership on this project." In January 2009, she moved from MGI to the White House where she is a Deputy Director of the National Economic Council reporting to Larry Summers. She is "an advocate of offshoring and innovation to produce economic growth," according to WhoRunsGov. (I advocate pixie dust to produce economic growth, but that isn't working either.) I wonder what Obama's Middle Class Task Force, run by Vice President Biden, thinks of this.

Update on Friday, September 11, 2009 at 05:45PM by Skeptic

I fixed the link rot to the executive summary of the MGI report from which all the quotations were taken.  In the course of that, I noticed that the first paragraph in the embedded quotation has been revised and the second has been deleted.  Also, my login profile at MGI no longer works, and they've stopped emailing me their news.  Hmmm.

The rank and file hold bankers in low regard

. . . and the feeling is mutual, according to this 53-second video.

The other meaning of “peak oil”

Worldwide demand for petroleum will peak in less than 10 years, according Arthur D. Little in a story about a similar report from Greenpeace, as reported in the Guardian:

Peter Hughes, who spent much of his career at BP and BG, and is now director for global energy at consultancy firm Arthur D Little, recently wrote a report titled 'The Beginning of the End for Oil?' He supports the Greenpeace view and said the correlation between oil demand and GDP growth has been weakened. "It is widely accepted that demand in OECD countries has plateaued and is going into decline but it has also been thought that would be massively outweighed by growth in China. But the Chinese think long-term and identified some time ago that the biggest threat to their economic growth was an increasing dependency on imported energy, which is anathema to them. The conclusion is clear – to reduce the reliance on hydrocarbons through energy efficiency and fundamental technology change. I think we will reach peak oil demand in the middle of the next decade."

The Chinese energy independence strategy will tend to hold down petroleum prices but increase CO2 emissions as China exploits coal instead of oil.

How cynical do you have to be to understand the politics of healthcare reform?

Jacob Hacker purports to be puzzled about why Blue Dogs (centrist Democrats in Congress) are resisting health care reform that would provide significant benefits to voters and small businesses in their typically rural and small town districts.

Yet the Blue Dogs have mostly ignored the huge benefits of a new public plan for their districts. They have also largely ignored the disproportionate benefits promised by new federal subsidies for low- and medium-income workers. Right now, large swaths of farmers, ranchers and self-employed workers can barely afford a policy in the individual market or are uninsured. They will benefit greatly from the premium assistance in the House legislation promised for workers whose earnings are up to 400 percent of the poverty line, from additional subsidies for small businesses to cover their workers, and from a new national purchasing pool, or "exchange," giving those employers access to low-cost group health insurance that's now out of reach.

Paul Krugman wonders if the Blue Dogs are just being corporate tools of drug and insurance interests that lately have been pouring cash into Blue Dog re-election coffers. But then he says he's not quite that cynical.

Mark Thoma stops short of saying the Blue Dogs are selling out their voters, but he links to Brad DeLong who says he has all the cynicism Paul and Mark lack:

The Blue Dogs have been bought and paid for. They do not want a fiscally-responsible bill. They want to please their masters from the health insurance industry by trying their best to keep there from being a bill at all.

Update on Thursday, July 30, 2009 at 08:47AM by Skeptic

Further evidence that it’s impossible to be too cynical is in this NYT story today about huge federal campaign contributions received from McAllen, Texas doctors and hospitals and specifically who seems to have been influenced. McAllen was featured in a June article in The New Yorker as a community where per capita healthcare spending is twice that in El Paso and places of renowned quality like the Mayo Clinic although there are no measurable benefits in outcomes or in disease loads, demographics, or anything else that would justify such a spending discrepancy. President Obama has repeatedly cited this in speeches and meetings as an example of how health care costs are breaking the backs of Americans.  

The Democratic Senatorial Campaign Committee collected nearly $500,000 at a reception here on March 30, mostly from physicians and others affiliated with Doctors Hospital at Renaissance, financial disclosure records show.

. . . .

Another event at Mr. Cantu’s home, in September 2007, brought in at least $800,000 for the committee’s House counterpart, the Democratic Congressional Campaign Committee, according to disclosure reports. The House speaker, Nancy Pelosi, was in attendance and cut a ribbon at the hospital’s new women’s center while in town.

. . . .

Although Congressional negotiations over health care legislation are continuing, Doctors Hospital seems to be getting much of what it wants. Thus far, physician-owned hospitals have been insulated from some of the most onerous potential restrictions in the health care legislation moving through Congress.

Representative Pete Stark, a California Democrat who wants to clamp down on physician-owned hospitals, said their formidable lobbying had helped eliminate his proposal to limit physician ownership to 40 percent at any hospital.

“Particularly led by these guys in Texas, these guys who have been raising tons of money for contributions,” Mr. Stark said in an interview. “I am sure that some of my colleagues have been willing to hear them out.”

Loss of middle class jobs is not a bug; it's a feature.

From Mark Thoma:

. . . [A]nother way some might describe the patterns in the labor markets during recent recessions is that a variety of economic policy decisions by both Democratic and Republican administrations have had the impact of dismembering the industrial base of the US without encouraging the growth of sufficient replacement jobs, thereby throwing the American middle class under the train. That, however, is such a dark interpretation, as opposed to say, cheering the efforts of policymakers to lessen the burden of work on Americans by encouraging foreign nations to forsake their own consumption to provide goods for our citizens.

Comparative Advantage – the Unicorn of Free Trade

(I finished the following essay in April 2006, before I had a blog and before I found additional relevant materials.  I have not updated the essay, and I apologize that the link to the Paul Davidson quotation redirects from IHT to NYT and then disappears.)

Advocates of liberalized trade often argue that the doctrine of "comparative advantage" articulated by economist David Ricardo in 1817 assures that all free-trading nations will be better off than if trade barriers remain. For example, in chapter five of the updated and expanded edition of Tom Friedman's The World is Flat—a Brief History of the Twenty-First Century, the author says, "My mind just kept telling me, 'Ricardo is right, Ricardo is right, Ricardo is right.'" At 261. He makes clear that he would otherwise have grave concerns about the effects of a flattening world on his family and America. For many others too, the decision to give intellectual and political support to trade liberalization depends significantly, sometimes solely, on faith that comparative advantage will inevitably make us glad one year, five years, and ten years later that we dismantled trade restrictions.

If the comparative advantage idea is incorrect (which I do not contend) or simply inapplicable to our real world (which is exactly what I contend), that does not mean trade liberalization is the wrong policy, but it does mean that trade liberalization has to be justified by other facts and less convincing arguments. The persuasive power of the comparative advantage idea is that it can be portrayed as a kind of "force of nature" like gravity or at least like the pervasive, familiar, and powerful economic force of "supply and demand." Such a force, it is argued, should not be resisted because (i) it is irresistible and if one attempts to resist it he will be catastrophically overwhelmed, and (ii) it is foolish and self-destructive to delay or prevent receipt of the enormous win-win benefits that will surely come to every nation that liberalizes trade. The myth that win-win results are inevitable is especially powerful politically because even people at risk are reluctant to frustrate "the greater good," especially when they seem to be foolishly tilting at windmills.

On the other hand, if comparative advantage and arguments (i) and (ii) above are excluded, we are left with decisions that look much more like difficult, closely-balanced business case analyses: How much new export business will be generated for American businesses? How much will business profits and asset values go up in the favored domestic businesses, and how much will profits and asset values decline in the disfavored domestic businesses? How much will domestic personal income go down as a result of lost jobs? How much will the aggregate cost of imported goods and services go down? Are these projections consistent with what we have actually measured following trade liberalizations of recent decades? Who wins and who loses and what adjustments, if any, will be made? In which time frames will each of these effects occur? Are the gains less certain than the losses? If favored domestic businesses invest more and create more jobs, will the investment and job creation be in America or elsewhere? On balance, deal or no deal?

When we do that kind of hardheaded analysis, we notice that a typical trade liberalization deal confers immediate, tangible, dollar benefits on certain domestic businesses while those domestic businesses and workers who suffer immediate ill effects receive only a promise that comparative advantage, operating like a deus ex machina to rescue the players from a predicament, will bring them bounty later. Once it is widely understood that the future benefits are speculative and will only occur if and when Americans win the competition for them, those who are about to be the immediate losers might well insist on making a better deal for themselves now. The political process might play out differently if it were more obvious that our trade negotiators are picking winners and losers among Americans and that in playing this game of political economy maintaining or raising a trade barrier is as legitimate as lowering one. Nothing personal; its just business.

Comparative advantage is not an idea with any predictive value in the real world but is only a minor hypothetical qualification to Adam Smith's demonstration that business tends to flow to a nation that has the absolute advantage in production costs.

Ricardo's comparative advantage idea is nothing more than a minor exception to Adam Smith's general rule that absolute advantage in cost explains how free international trade will play out. Smith asserted that liberalizing trade would cause each type of good to be made in the nation with an absolute cost advantage for that particular good. Ricardo said that is not necessarily always true and described a case where it is possible that balanced two-way international trade can occur between nations even where one has an absolute advantage in the production of every good.

Unfortunately, it is common for contemporary free trade advocates to ignore the limiting conditions on Ricardo's idea and to argue that comparative advantage insures there will always be balanced two-way trade and that both nations will inevitably benefit even when one nation has an absolute advantage with respect to every good. This is a blunder because in fact the conditions assumed in the idea of comparative advantage rarely if ever occur in the real world. Nobody has ever identified important real-world situations in which a nation having a substantial absolute cost disadvantage has actually increased its exports to an advantaged nation through the effects of comparative advantage. Nevertheless, comparative advantage advocates ignore or deny Adam Smith's rule of absolute advantage, which we can see operating everyday with our very own eyes and in the econometrics and trade statistics, and they distort Ricardo's hypothetical exception into a "theory" that purportedly predicts what will happen in every case, even though so far it has happened in none. (I do not call comparative advantage a "theory" because that is a word scientists use for a statement that attempts to explain a set of reproducible observations of real world phenomena and which can then be tested by other real world observations.)

Comparative advantage is only relevant where there is full employment within both trading nations and no international mobility of capital or labor.

Paul Davidson, editor of the Journal of Post Keynesian Economics, recently explained the conditions that limit the scope of comparative advantage and how they are wrongly ignored by those who rely on comparative advantage as a reason to liberalize trade:

This law of comparative advantage is the basis of the conventional wisdom that free trade globalization is a 'win-win' game – where IF TRADE IS FREE, then there will be enough ADDITIONAL goods and services produced that even if the winners compensated the losers (losers of jobs, of profits for import competing firms, etc.), there would be more goods and services for everybody.

This win-win conclusion of this LAW OF COMPARATIVE ADVANTAGE requires two basic assumptions: (1) there is full employment in all the trading nations before free trade and there is full employment in all nations after free trade is established, AND (2) there is no international mobility of either capital or labor across national boundaries. If either of these assumptions are [sic] not applicable to the existing situation – and in our world both assumptions are false – then logically it can NOT be demonstrated that free trade is a 'win-win' situation. If capital is internationally mobile and full employment is not universal in all trading nations, then trade patterns based on free trade globalization circumstances will be based on the theory of ABSOLUTE ADVANTAGE – where capital will place jobs in the lowest cost labor nations – with considerable real economic losses possible for those nations whose labor costs exceed those in the low cost nations. In other words – until and unless the real income of workers in industries of developed nations falls to the level of Chinese and Indian unskilled and semi-skilled workers, and social safety nets in the US, Europe, etc are reduced to levels of comparable social safety nets with those cheap labor nations, free trade will be a no win situation for workers in developed natinos [sic] whose jobs can be outsourced. Only semi-skilled workers whose jobs can not be outsourced, e.g., waiters, plumbers, electricans, [sic] personal trainers, etc. will see gains due to cheaper imports from free trade."

http://blogs.iht.com/tribtalk/business/2006/01/angelina_teaches_an_economics.php posted January 27, 2006. (Emphasis in original.) [UPDATE 1/4/2001: This link to www.archive.org might work.]

In his online textbook on international economics, Steven Suranovic concludes a lengthy comparative advantage overview chapter this way:

"The usual way of stating the Ricardian model results is to say that countries will specialize in their comparative advantage good and trade them to the other country such that everyone in both countries benefit [sic]. Stated this way it is easy to imagine how it would not hold true in the complex real world.

"A better way to state the results is as follows. The Ricardian model shows that if we want to maximize total output in the world then,

"first, fully employ all resources worldwide;

"second, allocate those resources within countries to each country's comparative advantage industries;

"and third, allow the countries to trade freely thereafter.

"In this way we might raise the well being of all individuals despite differences in relative productivities. In this description, we do not predict that a result will carry over to the complex real world. Instead we carry the logic of comparative advantage to the real world and ask how things would have to look to achieve a certain result (maximum output and benefits). In the end we should not say that the model of comparative advantage tells us anything about what will happen when two countries begin to trade, instead we should say that the theory tells us some things that can happen."

http://internationalecon.com/v1.0/ch40/40c000.html (Emphasis in original.)

Special attention should be paid to the relationship between comparative advantage and the level of employment. Proponents often suggest or imply that comparative advantage guarantees there will be full employment, or at least no decline in overall employment. To the contrary, unless there is already full employment (and the other conditions also exist) comparative advantage does not predict any economic effect at all (although the theory of absolute advantage certainly does). In America, where we have never had full employment, the unemployed may find work, as the unemployed mostly have in the past, but they can be sure that comparative advantage had nothing to do with it. And policy makers concerned with creating domestic jobs for today's unemployed and tomorrow's new workers need to look elsewhere for solutions.

Still not convinced?

If you still believe a theory or force of comparative advantage operates in the real world and will secure free trade benefits to America, here are some additional points to consider.

Why is it that comparative advantage advocates always use hypothetical examples to support their idea? Ricardo used a hypothetical example about wine and cloth, and a variety of hypothetical examples have been advanced by others. Since Ricardo's time, have there not been at least a few cases where comparative advantage actually worked and, if so, why does nobody base the argument on observed facts about the real world? If it hasn't happened yet or we can't measure it, why have faith in it? Isn't comparative advantage like a unicorn – a beneficent creature prominent in the literature of political economy that has never actually been captured or photographed by mere mortals?

If comparative advantage is working for third world countries, why do international non-profit organizations concerned with eliminating poverty and fostering economic development in undeveloped regions of the world, so uniformly decry the actual results of trade liberalization?

If comparative advantage is working for America, why are aggregate personal incomes and wealth accumulation expanding greatly in China and India and less so or not at all in America? Is that not a relative decline in America's economic position in the world?

American companies like Boeing and Microsoft appear to have worldwide absolute and comparative advantages and to be able to increase their exports after trade liberalization. In fact, however, Boeing agreed to manufacture important parts of its airplanes in China as a condition for getting airplane orders from the Chinese government, and Microsoft opened a large technology development center in China and employed Chinese there to invent the next new thing. Whether you think those moves and others like them are good or bad for America, can we not agree that they are not predicted by or the result of comparative advantage? Is it not true that comparative advantage, if it works at all, is overwhelmed by other forces such as the increased importance and mobility of capital and technology and the governmental powers of our trading partners who subordinate market considerations to long-term strategic goals?

If comparative advantage is working for America, why have our imports increased dramatically more than our exports of goods and services? Is it not true that nations with which we have large current account deficits, such as China and Japan, have bought American debt and equity securities and American real estate, businesses and other assets instead of American goods and services? Is it not bad for America that instead of being able to balance our imports with exports of goods and services we are exporting ownership of our patrimony and have become the world's largest debtor nation? Could this be happening if comparative advantage were working as advertised?

Have you considered that you might be wrong about the efficacy of comparative advantage in particular or trade liberalization in general? Are you so certain America will be better off that you do not even need to think about what might happen if good results do not materialize when and in the amount you expect? (Incidentally, have you even made estimates of when and how much?) If you were to consider free trade and globalization without reference to comparative advantage, would you perhaps begin to give credence to observations like these?

(a) Every trade liberalization deal should be approached like a business deal in that some deals are profitable and some turn out to be the opposite. A particular transaction may or may not be "win-win."

(b) America should not willy-nilly grab every available trade liberalization deal but should bargain with knowledge, skill, leverage, and determination to try to make only those deals that are demonstrably good for America.

(c) Trade liberalization tends to raise wages and prices in low-cost nations (like China) and to reduce them in high-cost nations (like America,) and depending on how rapid and extensive the increased trade is, there can be a problematic amount and duration of inflation in one nation and/or deflation in the other; these effects should be accounted for as costs in the business case analysis or mitigated in the terms of the deal.

(d) If the gross domestic product and wealth of China, India, and other nations with which trade is liberalized rise faster than America's, then either we have not bargained for our "fair share" or our government should acknowledge that it made a bad deal or decided to confer a gift on another nation and explain why.

(e) Trade liberalization tends to increase the share of domestic income and wealth that accrues to capital and decreases the share captured by labor (while recent tax law changes and proposals decrease taxes on capital and proportionately increase the burden on labor). Capital and the owners of capital are mobile and can leave America more easily than workers. For example, as the Dutch economy collapsed in the 18th Century, Dutch money decamped to England, and Holland lost its position in the world. K. Phillips, Wealth and Democracy – A Political History of the American Rich at 183 (Broadway Books 2002). International arrangements that purport to be only about liberalizing trade also tend to facilitate other aspects of "globalization." In this larger sense, trade liberalization is also about capital flight from America and about the evolution of large and powerful stateless institutions operating like cargo ships under flags of convenience.

Is our faith in the unicorn so complete that we will risk all that and more?

Update on Monday, August 31, 2009 at 11:16AM by Skeptic

The Wikipedia article on comparative advantage does a pretty good job of laying out the assumptions upon which the proof of the comparative advantage concept rests and criticisms that those assumptions are seldom if ever true in the modern world. 

Update on Tuesday, September 15, 2009 at 01:54PM by Skeptic

I've been noticing a lot referrals to this page from search engines.  When I Googled "comparative advantage" today, I found this page is ranked #11 out of 25.5 million pages! 

I looked again at Professor Suranovic's online textbook, which is pretty good if you keep in mind the wise precaution of my college economics professor, Alvin Tostlebe, about the Paul Samuelson (4th edition) introduction to trade theory: In the real world it will almost always be absolute advantage that matters, but if you want to sound like an economist you have to talk about comparative advantage.  Certain incantations must be learned before admission to any priesthood.

BTW, I'm still waiting for an example of where comparative advantage works as advertised in the real world, where resources are never fully employed. Another thing I'd like to see is an economic model of what "will happen" or "can happen" if trade is liberalized in an environment where resources are not fully employed and one trading partner allocates internal resources to "inappropriate" industries for strategic reasons or to serve oligarchic interests.  Since that's what we are actually doing most of the time, that model might generate some useful insights instead of misleading ones. 

---

Update on Tuesday, September 15, 2009 at 05:39PM by Skeptic

Rummaging through old posts, I found this one pointing out that Ricardian trade theory also assumes balanced trade, whereas the US has had a trade deficit for 27 years, averaging almost 3% of GDP since 1981.  Link.  Also in the first linked post are links to Paul Krugman statements and papers affirming the balanced trade assumption. 

Update on Tuesday, September 29, 2009 at 09:30PM by Skeptic

Ralph Gomory agrees that the reality is much different from the theory:

Manufacturing should not be given up but rather rebuilt, as G.E. CEO Jeffrey Immelt has recently advocated. We cannot afford to get out of manufacturing unless and until there are new things that we are good at and that add up to the same scale. But today that condition is nowhere near being met.

Update on Friday, October 23, 2009 at 10:48PM by Skeptic

Here's a counterargument from Paul Krugman at a time when he could refer to a 1995 publication as "recent." I say again that the idea is clearly correct and clearly not working in the real world because the required conditions do not exist and countervailing forces are also at work.

Update on Friday, October 23, 2009 at 11:09PM by Skeptic

It turns out I was not the first to use the unicorn metaphor with free trade.  Pat Buchanan did it in a 1998 speech: 

by PATRICK J. BUCHANAN

Address to the Chicago Council on Foreign Relations

November 18, 1998

To [the] new corporate elite, putting America first betrays a lack of loyalty to the company. Some among our political elite share this view. Here is Strobe Talbott, Clinton's roommate at Oxford and architect of his Russian policy: "All countries," said Talbott in 1991, "are basically social arrangements...No matter how permanent and even sacred they may seem at any one time, in fact they are all artificial and temporary...within the next hundred years...nationhood as we know it will be obsolete; all states will recognize a single, global authority".... This is the transnational elite, our new Masters of the Universe.

This is a prestigious forum; and I appreciate the opportunity to address it. As my subject, I have chosen what I believe is the coming and irrepressible conflict between the claims of a new American nationalism and the commands of the Global Economy.

As you may have heard in my last campaign, I am called by many names. "Protectionist" is one of the nicer ones; but it is inexact. I am an economic nationalist. To me, the country comes before the economy; and the economy exists for the people. I believe in free markets, but I do not worship them. In the proper hierarchy of things, it is the market that must be harnessed to work for man - and not the other way around.

As for the Global Economy, like the unicorn, it is a mythical beast that exists only in the imagination. In the real world, there are only national economies -- Japan's that has lost its animal spirits, South Korea's that is deep in recession, China's which is headed for trouble, Brazil's which is falling, Indonesia and Russia's which are in collapse.

More.

Update on Tuesday, December 15, 2009 at 10:47AM by Skeptic

In this tribute to Paul Samuelson, Paul Krugman quotes Samuelson’s 1964 paper Theoretical Notes on Trade Problems:

“With employment less than full and Net National Product suboptimal, all the debunked mercantilist arguments turn out to be valid.” And he went on to mention the appendix to the latest edition of his Economics, “pointing out the genuine problems for free-trade apologetics raised by overvaluation”. The solution, of course, was to end the overvaluation rather than restrict trade; Samuelson understood that good macroeconomic policies are a prerequisite for good microeconomic policies.

So, isn’t less-than-full employment and suboptimal NNP pretty much always true?  And isn’t some major country (currently China) pretty much always manipulating exchange rates to its advantage? 

The whole Samuelson paper is here (pay wall) and here [link broken as of 6/26/2011], and it contains this gem on page 145:

Currency Overvaluation.  In 1948 I shocked at least one of my teachers by saying that the theory of comparative advantage does not guarantee a country against balance-of-payments difficulties, nor does it even keep a country from being undersold in terms of every good.  Then it was a question of dollar shortage rather than of American gold loss, and I am not displeased to reread what was said there.

Update on Tuesday, February 2, 2010 at 01:14PM by Skeptic

Paul Krugman is continuing today with posting of “class notes,” I assume for a course he’s teaching.  In this 14-page PDF he presents typical crossing lines and curves to illustrate several theories about the effects of international trade.  On page 10, he uses an example to show that although there are positive effects from trade, the impact is rather small.  He summarizes with these "two big lessons:"

 Major growth effects from trade policy, if they exist, must come from unconventional channels.  Conventional trade theory DOES NOT justify claims of huge positive payoffs from free trade. 

In the politics of trade policy, distributional effects can easily swamp concerns about efficiency.

(Emphasis in original.)

Update on Thursday, October 7, 2010 at 12:25PM by Skeptic

John Duffield claims he has devised "a definitive refutation of Comparative Advantage on its own terms." PDF here. Errata and comments are here. I don't understand the details of the argument, but was able to discern that it exploits what is claimed to be an internal inconsistency in the Ricardian argument which makes it fail as a matter of math/logic.  

Update on Monday, December 6, 2010 at 08:27AM by Skeptic

In response to the Obama Administration's claim it will boost the US economy by opening up foreign trade, Paul Krugman uses standard economic theory to demonstrate that increasing exports doesn't help the domestic economy and can hurt it if they are matched by increased imports. It's an increase in net exports we need.  PK ends his post with this paragraph:

If you want a trade policy that helps employment, it has to be a policy that induces other countries to run bigger deficits or smaller surpluses. A countervailing duty on Chinese exports would be job-creating; a deal with South Korea, not. If you want the Korea deal, fine; but don’t claim virtues for it that it doesn’t possess.

Update on Tuesday, December 21, 2010 at 09:37PM by Skeptic

Ian Fletcher discusses here 7 critical assumptions required to make comparative advantage work as claimed, many or all of which assumptions are absent in important current US trading relationships.

Update on Tuesday, July 19, 2011 at 01:43PM by Skeptic

Although comparative advantage still seems to dominate political discussions, professional economists have developed other theories to explain and/or defend international trade.  Sunanda Sen at the Levy Economics Institute of Bard College surveys the principal thought currents in International Trade Theory and Policy: A Review of the Literature (November 2010).  

Abstract: This paper provides a survey of the literature on trade theory, from the classical example of comparative advantage to the New Trade theories currently used by many advanced countries to direct industrial policy and trade. An account is provided of the neo-classical brand of reciprocal demand and resource endowment theories, along with their usual empirical verifications and logical critiques. A useful supplement is provided in terms of Staffan Linder’s theory of "overlapping demand," which provides an explanation of trade structure in terms of aggregate demand. Attention is drawn to new developments in trade theory, with strategic trade providing inputs to industrial policy. Issues relating to trade, growth, and development are dealt with separately, supplemented by an account of the neo-Marxist versions of trade and underdevelopment.

Update on Saturday, October 1, 2011 at 10:27AM by Skeptic

Steve Keen points out another flaw in the Ricardian argument for free trade: It ignores the fact that converting from autarchy to free trade destroys the value of capital equipment in both nations. (Wine presses can't be converted to spinning jennies or vice versa.) Keen also refers to the 2001 work of Dani Rodkrik finding that the utopian vision of trade liberalization also misleads developing nations. 

These and many other failings that explain why, when Dani Rodrik took a careful look at the empirical record of trade liberalisation, he found that it had frequently reduced material welfare rather than increasing it. Writing back in 2001, he summarised his findings for Foreign Policy magazine with the statement that:

“Advocates of global economic integration hold out utopian visions of the prosperity that developing countries will reap if they open their borders to commerce and capital. This hollow promise diverts poor nations’ attention and resources from the key domestic innovations needed to spur economic growth.”

Obama Administration happy talk about middle class incomes is not supported by any strategy or plan.

Larry Summers said this today in a speech at the Peterson Institute:

The rebuilt American economy must be more export-oriented and less consumption-oriented, more environmentally oriented and less fossil-energy-oriented, more bio- and software-engineering-oriented and less financial-engineering-oriented, more middle-class-oriented and less oriented to income growth that disproportionately favors a very small share of the population.

The clear implication is that it is Obama Administration policy to bring middle-class income growth rates up to, or at least nearer to, the growth rates enjoyed by the top few percent. (That they have been lagging since about 1973 is documented here and here.)  Another clear implication is that exporting more and reducing imports of consumer goods is the route to this goal. I suggest the Administration has no plan to achieve either of these goals and that mushy thinking and immense political obstacles stand in the way.

Every middle-class income is some employer's labor cost. For 3 decades the policy levers of the federal government have been consistently and vigorously employed to help drive down or at least restrain labor costs. Examples:

• Reagan's unprecedented firing of striking air traffic controllers
• Hostile treatment of labor unions by the NLRB
• Lax enforcement of rules against employing undocumented workers
• Granting of H-1B visas even when qualified domestic workers are available
• Failure to increase the minimum wage to keep up with inflation
• Manipulation of BLS consumer product index methodology to reduce cost of living adjustments
• Deregulation of transportation to increase price/cost competition
• Privatization of government jobs
• Facilitating the substitution of defined contribution retirement plans for more generous defined benefit plans
• Approval of mergers (and consequent job eliminations) that were previously regarded as anticompetitive
• Negotiating foreign trade agreements that are designed to facilitate transfer of American jobs to lower-cost nations
• Desultory and reluctant use of remaining means to protect American jobs from illegal foreign competition

If Obama's goal is to reverse the stagnation and decline of middle-class incomes, which of those does he propose to undo? How is he going to overcome the visceral institutional resistance of powerful employers to policies that tend to drive wages up? Is he prepared to use any political capital to that end?

With respect to Summers' statement that the route to increasing middle-class incomes is by exporting more, how can the US increase exports without making US industries more competitive in global markets by reducing their labor costs? Furthermore, it is fundamental mainstream economic doctrine that increasing economic integration—globalization—leads to a convergence of labor rates; for high-wage nations like the US, that means declining or stagnant middle-class wages while wages in developing nations rise. Among those who have said that globalization has in fact been driving down the general level of US wages are Alan Greenspan, Dani Rodrik, Paul Samuelson, Paul Krugman, Alan Blinder, Larry Summers, Joseph Stiglitz, the New York Times editorial board, and the National Bureau of Economic Research. Does the Obama Administration intend to increase domestic middle-class wages and simultaneously increase exports by negotiating different kinds of foreign trade agreements than the kinds we have been entering into in recent decades? If not, by what magic can employers and wage earners both be served?

There is a widespread fuzzy notion that despite disappearing manufacturing jobs the US will be able to raise the general wage level by creating a supply of more highly-educated people. This is said to be our "comparative advantage."  There are several problems with this, not the least of which is that other nations are not ceding high-skill jobs to the US but are using their governmental powers to implement strategies for dominating the high-skill industries of the future. (One example is reported here.) It seems to be true that the US has the best universities and colleges, but increasingly they are educating fiercely bright foreign students who are funded by their governments and will take their skills home with them. As developing world living standards increase and government-funded strategic opportunities to employ their new skills at home increase, the benefits of US higher education will be more and more dispersed around the world instead of underpinning new US industries.

Furthermore, the numbers show that education is doing a lot less for the economy than we thought it would. Education continues to aid the upward mobility of those who have it, but it does not create jobs or industries or magically raise general wage levels. The law of supply and demand applies to education as well as pork bellies. If we have too many college educated citizens, some of them will be waiting tables and swinging hammers, and the income differentials versus high school will continue to shrink. Having a demand-side strategy is also vital. The US, practically alone among nations, lacks an explicit jobs creation and economic dominance strategy and is paralyzed by the rhetorical foolishness that the "government should not pick winners and losers." Of course, in reality, the process of picking winners and losers in government offices, and at fundraising events, has never abated.

I would not say, as Ralph Nader and George Wallace did, that there's not a dime's worth of difference between the national Democratic and Republican parties, but when it comes to the fundamental battle about whether middle class incomes should go up or down, the differences between Obama, Bill Clinton, and other Wall Street Democrats, on the one hand, and the Republican Party, on the other, are minor. I don't expect the Democratic Party to start acting like a labor party.

Update on Tuesday, July 21, 2009 at 12:06PM by Skeptic

General Electric CEO Jeff Immelt is on a mission to improve U.S. exports and says this about labor costs:

Labor costs are also a factor. Immelt says: "In the places where you have relatively high labor costs, they've got to be more productive." The labor in any facility, he says, has to be able to compete on a "global basis."

Update on Monday, August 3, 2009 at 10:19AM by Skeptic

To those who contend globalization as implemented by the US has substantially reduced the general level of wages in the US, add Josh Bivens, who published this careful analysis in October 2007.  He says the cost of globalization to many middle class families is about the same size as their federal income tax burdens. UPDATE 10/8/09: Bivens has this later paper showing these effects are predicted by mainstream economic theory. 

California Supreme Court asked to declare unconstitutional provisions requiring supermajorities to pass budgets and raise taxes.

The California Supreme Court has been petitioned to issue a writ of mandate declaring invalid two amendments to the State Constitution that require 2/3 majorities of both houses of the legislature to pass budget bills or raise tax rates. The first provision was adopted by the electorate in 1933 and the second (Proposition 13) was passed by the voters in 1978. Both are now challenged on the ground that they were approved by a procedure appropriate for "amendments," but were in fact "revisions" and could not be adopted in that way. This is a distinction peculiar to the California constitution and was most recently addressed by the California Supreme Court when it found in Strauss v. Horton that Proposition 8, banning same-sex marriage, was in fact an "amendment," not a "revision" as contended by the challengers.

The petition was filed July 10, 2009 on behalf of Charles Young, a citizen, and defendants are Gregory Schmidt, in his capacity as Secretary of the California State Senate, and E. Dotson Wilson, in his capacity as Chief Clerk of the California State Assembly.  A pdf of the petition is here.  Lead counsel for the Petitioner is retired Ninth Circuit judge William A. Norris, who was lead counsel for parties who unsuccessfully challenged Prop. 13 on other grounds in Amador Valley Joint Union High School District v. Board of Equalization, 22 Cal. 3d 208 (1978).

Update on Monday, August 10, 2009 at 01:12PM by Skeptic

The Supreme Court's online case summary is here.

Update on Wednesday, August 26, 2009 at 03:29PM by Skeptic

The Supreme Court today denied the petition without opinion and without having received briefing on the merits.

Update on Wednesday, December 28, 2011 at 07:12AM by Skeptic

LAT reported on December 26 that the parties and lawyers involved in this case have filed another suit, but it doesn't say where or when or if it raises the same or slightly different issue. UPDATE: The Chronicle says it was filed in the state appeals court in Los Angeles. 

Scientists are much more liberal than the general public

Only 6% of scientists are Republicans, and only 9% are conservative, according to this recent Pew survey.

Not just divergent attitudes toward evolution, which you would expect, but attitudes toward government and business are different:

Why?

Update on Friday, August 21, 2009 at 04:20PM by Skeptic

Another odd thing about scientists, according to Sam Harris who writes about atheism:

Although it is possible to be a scientist and still believe in God — as some scientists seem to manage it — there is no question that an engagement with scientific thinking tends to erode, rather than support, religious faith. Taking the U.S. population as an example: Most polls show that about 90% of the general public believes in a personal God; yet 93% of the members of the National Academy of Sciences do not. This suggests that there are few modes of thinking less congenial to religious faith than science is.

What will the new economy look like? And when will it be here?

Robert Reich suggests we should stop waiting for the old economy to recover because the old economy was unsustainable.

My prediction, then? Not a V, not a U. But an X. This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.

The X marks a brand new track -- a new economy. What will it look like? Nobody knows. All we know is the current economy can't "recover" because it can't go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin. More on this to come.

Mark Thoma agrees and explains.  If they're right, and I'm inclined to think they are, it's very hard to see what the new economic drivers will be.  We need something to drive up domestic wages, but core policies are still oriented toward reducing labor costs.  Obama's green jobs push seems too small to have a big effect on the whole economy.  We've run a trade deficit for 26 of the last 27 years, so an export led recovery seems unlikely.  What are the realistic possibilities?

Update on Saturday, July 11, 2009 at 08:52AM by Skeptic

The media and technology moguls at the Allen & Co. annual Sun Valley conference are discouraged too, according to this LATimes report.

"I'm shocked at the business mood, which is talking about either that we're at the bottom or going lower," News Corp. Chairman and Chief Executive Rupert Murdoch said in an interview he gave during the conference to his Fox Business Network. He had just emerged from spending a morning with the most powerful people from Wall Street, Silicon Valley and Hollywood. What was the word from inside?

"It's going to take years and years, like five years at least before we see any real growth coming out of this," Murdoch said.

"We don't see things improving," added Martin Sorrell, chief executive of WPP Group, one of the world's largest conglomerates of advertising agencies and someone pretty close to knowing the willingness of companies to spend money.

. . . .

Google Inc. Chief Executive Eric Schmidt offered a sobering dose of reality, calling today's economic environment "the new normal" and advising everyone to "figure out how to be happy and get our lives together in this new configuration." And this comes from an executive whose company saw its revenues increase 6% in the first quarter.

Update on Friday, July 24, 2009 at 09:50AM by Skeptic

Mark Thoma says differences of opinion about the expected shape of the recovery are bottomed mainly on different views about whether the post-recovery economy will be very similar to the pre-crash economy or will be quite different:

I increasingly think that the debate between V and other shaped recoveries is really a debate over the degree of structural change occurring in the economy. If you believe this is a typical cycle, and that what was demanded and how it was produced is roughly the same after as before the recession, a V-shaped recovery is your likely candidate. If you believe that the current recession is simply intensifying a period of intense structural change, than you are looking for a U or L-shaped recovery. Notably Bernanke, by acknowledging that the US consumer is in no shape to continued its 25 year role as a shaper of global economic trends, seems to be siding with the structural change side of the coin.

Update on Tuesday, August 25, 2009 at 09:57AM by Skeptic

Not only does Obama's green jobs push seem too small to have a big effect on the whole economy, but it doesn't look like American companies and American workers are going to be a big factor.

This NYT piece describes the Chinese government's push to dominate production of photovoltaic panels, providing subsidies, protecting home markets, and even selling products at less than the variable costs.  Interestingly, the Chinese manufacturer, Suntech, is planning to build at least one assembly plant in the US to avoid having us block imports, which we could because China has not signed on to that part of the WTO agreements that require it not to discriminate in government procurement.  So US protectionist policies may create 75-150 jobs in Texas or Arizona and, given the Chinese strategy of "buying" market share dominance, the US selling price of those solar panels is unlikely to be affected--at least in the near term. 

On Wall Street, repeating the same behavior that got you into trouble is the way to get out.

Banks are required to hold capital reserves against the risk that their investments may go bad.  Under the Basel II agreements, riskier investments require higher capital ratios.  Widespread downgrades of the ratings of their investments (as well as huge losses) are forcing banks to raise more capital.  For example, the downgrading of a CDO from AAA to BB+ would require an increase in capital from 0% to 8% of the face amount.  Bloomberg reports here that as ratings of CDOs are downgraded, they are being packaged into CDO-squareds so that a substantial amount of the face value gets a brand new AAA rating, reducing the amount of capital they have to raise. 

Work at the Harvard Business School, summarized here, shows that CDO-squareds have much more systemic risk than CDOs with the same ratings.

The most important macroeconomic statistics you never heard of

Jeff Frankel, who is on the NBER Business Cycle Dating Committee (no it's not an E-Harmony subsidiary), makes a persuasive case that the index of Aggregate Weekly Hours Worked is a sensitive and important indicator for calling business cycle tops and bottoms. For example, the ends of the 1991 and 2001 recessions coincided exactly with upturns in this index. Unfortunately, despite all the sightings of "green shoots," reduced numbers of new unemployment claims filed, rationalizations that unemployment rates are lagging indicators, etc., the index of Aggregate Weekly Hours Worked declined in May at the same rapid rate seen since September (about 0.7% per month).

Aggregate Weekly Hours Worked equals the total number of private sector employees multiplied by the average length of the workweek for the average worker. Since labor is the largest input to goods and services, total economic output (GDP) necessarily tracks very closely to total hours worked.

On the other hand, the more frequently cited Aggregate Weekly Payrolls statistic tends to be distorted by lags in hourly wage rate changes, by severance pay, and by "labor hoarding." When orders dry up, employers tend to cut overtime, impose furloughs, and otherwise reduce the number of hours worked to avoid laying off employees. In a recovery, employers cautiously resume normal work schedules and overtime before they risk hiring new employees. Thus, total payroll dollars are not as responsive an indicator of total output of goods and services as is the index of total hours worked. Compare the volatility of one with the other in the following 2 graphs.

 

Both data sets are in Table B-5 of the BLS Employment Situation Report, which is released within a week after the end of each month. Historical data and graphs, including the two above, are available here.

Update on Wednesday, July 1, 2009 at 11:30AM by Skeptic

After studying the graph and data again and exchanging emails with Professor Frankel, I have to retreat and say I overrated the value of this metric.  Although the Aggregate Weekly Hours index reached a cyclical bottom in May 1991, only one month after the official end of that recession, there was no such near coincidence in 2001.  The index continued downward for another 17 months after the official end of the 2001 recession.  What Prof. Frankel says was meaningful to him was that the rate of decline slowed in November 2001, and it did do that.  I have not compared AWH index tops and bottoms with the beginnings and ends of earlier recessions. 

This raises another question in my mind, and that is whether we can reasonably say a "recovery" is under way (measured by GDP) when hours worked are still declining.  Martin Feldstein's answer in October 2003 was, There's No Such Thing As A 'Jobless" Recovery.  He attributed the surge in productivity then to implementation of new information technologies.  What might cause a similar dramatic increase in productivity at the end of the current recession?

Update on Wednesday, July 1, 2009 at 01:19PM by Skeptic

Since it appears that increasing productivity (equals output per hour of labor input) caused GDP to start rising while hours worked were still falling in the 2001 recession, it’s worth pondering what caused productivity gains. My first reaction was that offshoring by a company of whole departments or functions may increase the average productivity of the remaining domestic employees. For example, I’m familiar with a company that had revenues of about $100,000 per employee until it subcontracted to foreign suppliers 100% of its manufacturing function. Now it has one-tenth as many domestic employees and revenues of about $1,000,000 per employee. Of course, that’s not a ten-fold increase in productivity because the cost of goods sold has to be deducted. Nevertheless, the company’s gross margin increased (why else would it have made the change?), and it would seem value added per hour of in-house labor must have increased.

Others have been looking at this. Some examples: Houseman concluded, “Although it is impossible to fully assess the impact that mismeasurement and cost savings from outsourcing and offshoring have had on measured productivity growth in manufacturing, I point to several pieces of evidence that suggest it is significant, and I argue that these issues warrant serious attention.” Daveri and Jona-Lasinio concluded, “Overall, our statistical evidence shows a remarkably consistent pattern of correlation between offshoring and labour productivity growth with various statistical techniques. First of all, it appears that not all types of offshoring positively correlate with productivity growth. The type of good being outsourced indeed matters: the offshoring of intermediates is positively related to productivity growth, while the international outsourcing of services is either not related or - at times - even negatively related to productivity growth.” Olsen found, “The most apparent conclusion drawn from the review is that there appears to be no clear patterns as to how offshore outsourcing affects productivity, and that much depends on both sector and firm-specific characteristics.”

Perhaps the productivity increases of the early 00s had something to do with technology implementation, as Feldstein suggests, and perhaps also something to do with offshoring. These factors, and others, could tend to decouple hours worked from GDP, making it hard to be confident that the AWH index will accurately mark the bottom of the current Great Recession.

Update on Thursday, July 2, 2009 at 07:20AM by Skeptic

BLS reported this morning that the index of Aggregate Weekly Hours dropped another 0.8% from May to June.  UPDATE 7/3/09: And Jeff Frankel discusses the June AWH index and why it's a better measure than the unemployment rate and number of employed persons here.

Update on Saturday, July 11, 2009 at 04:21PM by Skeptic

Mark Thoma has posted here a graph from the St. Louis Fed of Average Weekly Hours with recessions since 1965 shown.  An upturn in this statistic seems highly correlated with the ends of recessions.  Oddly, a dip in this statistic seems less highly correlated with the beginnings of recessions.

Update on Wednesday, July 29, 2009 at 08:15AM by Skeptic

Ben Bernanke explains in a town hall meeting organized and reported by The News Hour why the unemployment rate usually continues to rise after recovery from a recession has started.  It's because population is growing and people are entering the workforce about 2.5% annually faster than retirements reduce the workforce.  That continually increases the denominator in the equation Unemployment Rate = Number of Members of the Workforce Out of Work / Number of People in the Workforce.  At the end of a recession, GDP usually starts to grow only slowly.  So long as the annual rate of increase in GDP remains below 2.5% the calculated unemployment rate will still be increasing. 

The significance of an upturn in GDP is that it sets a new trajectory, raises hopes, and encourages producers to take the risk of increasing production.  But the collective economic misery of ordinary people continues to get worse until GDP per Workforce Member hits bottom. 

Update on Friday, August 7, 2009 at 10:09AM by Skeptic

The AWH index was unchanged from June to July, according to today's BLS release. But don't crack open the champagne yet because declining industries far outnumbered rising industries. By far the biggest increase was in Motor Vehicles and Parts, +12.0% on a seasonally adjusted basis, but the index for that sector actually declined by 0.6% before seasonal adjustment. BLS explains that this industry normally has large summertime layoffs for retooling, but this year so many workers had already been laid off that the expected "seasonal" layoff was much smaller than usual.  Without the uptick in the seasonally adjusted Motor Vehicle and Parts sector, the AWH for all private employment would have declined again, although not as much as in June. Jeff Frankell seems cautiously optimistic. Mark Thoma aggregates here many expert comments on todays employment report. 

Update on Friday, September 4, 2009 at 07:52AM by Skeptic

After rising 0.1 percent from June to July, the seasonally adjusted AWH index declined again by 0.3 percent in August to 98.9. Compared with monthly declines averaging 0.7 percent from September through April, perhaps a shift to an average montly rate of decline of only 0.3 percent from May through August is the bottoming signal that Frankel is looking for, but look how noisy these data are.  The index leveled off and gained a bit in July-August 2008, and then resumed a steep decline.  The same thing happened October-December 2001.  Furthermore, as pointed out above and by Paul Krugman here, "[T]he purpose of stimulus is, first and foremost, to mitigate unemployment. The fact that the economy may be technically in recovery is irrelevant."

Update on Friday, October 2, 2009 at 12:24PM by Skeptic

The downward trend in the AWH index resumed from August to September, declining from 99.0 to 98.5.  The leveling from June to July looks like an aberration. We're nearing the 2003 low, which is very bad because now we have a substantially larger population.  Other than 2003, one must look back more than 10 years to find a time when so little private sector work got done in the US. 

"Ma'am, I want to do those things, but you must make me."--FDR

If we supported Obama in the election and are disappointed or angry because he isn't doing what we expected or hoped, it's our own fault.  Robert Reich says it well here.

OPEC likes crude oil at $60-70.

OPEC met yesterday and left output quotas unchanged, "banking on a recovery of oil demand toward the end of this year" and trying to avoid stressing the economy now with higher oil prices, according to this NYT report.

“The market is oversupplied, it’s true,” Abdalla Salem el-Badri, the OPEC secretary general, told a news conference afterward, saying the group had decided against cutting output to avoid sending the “wrong signal” and disrupting an economic recovery. “If we are able to keep this $60 to $70 price for the remainder of the year, it will be fine,” he said in a Bloomberg Television interview.

Bruce Bartlett gives fellow Republicans a history lesson and survival advice

GOP stalwart Bruce Bartlett describes how the Republican Party was in such trouble in the 1970s that there was doubt it would survive, and how under the leadership of the late Jack Kemp and others the GOP invented and used supply side economics to change the conventional wisdom of economic policy and become a dominant political force.  He says the GOP is once again teetering on the brink because it is welded to economics talking points (it doesn't have real policy) that are not relevant to changed times. 

Thanks to Mark Thoma for flagging the Bartlett piece. 

Young Americans today are less likely to get a college education than either their parents or youth in 10 other nations.

In the age group 55-64, the US has the highest proportion of college graduates in the world, but in the 25-34 cohort the US has fallen to tenth place behind Canada, Japan, South Korea, New Zealand, Belgium, Ireland, Norway, Denmark and France, and is tied with Australia, Spain and Sweden, according to this NYRB essay by Andrew Delbanco. Not only is the US losing its competitive educational advantage versus other nations, but the American Dream that children will have better lives than their parents is increasingly out of reach.

Too many students are unable to continue their education beyond high school, and of those who do, too many find themselves in underfunded and overcrowded colleges.

A report released in January by the Lumina Foundation, Trends in College Spending, concludes that "higher education is becoming more stratified," with enrollment growing in the institutions with the least resources—the public community colleges—as more and more students are "pushed out of higher-priced institutions."

And those lower on the income scale are also being pushed out of lower-priced and 2-year institutions. A 2002 federal advisory committee reported that “more than 400,000 students nationally from families with incomes below $50,000 met the standards of college admission but were unable to enroll in a four-year college because of financial barriers,” and 160,000 of those qualified did not even enter a two-year institution.

[T]he college-going rates of the highest-socioeconomic-status students with the lowest achievement levels is the same level as the poorest students with the highest achievement levels. In short, bright and focused kids from poor families are going to college at the same rate as unfocused or low-scoring kids from families much better off.

Not only is college less accessible, but the quality of a typical US college education is declining. There is even discussion of reducing from 4 years to 3 the requirement for a BA degree (while other nations are considering raising their requirements).

The global economy is tanking faster than it did in the Great Depression.

Many comparisons of current US economic conditions with the beginning months of the Great Depression indicate that things are not as bad as they were 80 years ago, but if one looks globally, as Eichengreen and O’Rourke have, the situation is worse today than then. “[W]orld industrial production, trade, and stock markets are diving faster now than during 1929-30.” They include graphs of these metrics and of policy responses (central bank discount rates, money supply, and government deficits) comparing now to then. They conclude:

[T]he world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

The good news, of course, is that the policy response is very different. The question now is whether that policy response will work.

While the US dithers, China is using advanced technology to reduce CO2 emissions from coal.

China is surging ahead of the US in cleaner coal combustion technology, according to this NYT article.

China has emerged in the past two years as the world’s leading builder of more efficient, less polluting coal power plants, mastering the technology and driving down the cost.

While the United States is still debating whether to build a more efficient kind of coal-fired power plant that uses extremely hot steam, China has begun building such plants at a rate of one a month.

Construction has stalled in the United States on a new generation of low-pollution power plants that turn coal into a gas before burning it, although Energy Secretary Steven Chu said Thursday that the Obama administration might revive one power plant of this type. But China has already approved equipment purchases for just such a power plant, to be assembled soon in a muddy field here in Tianjin.

It appears that China has implemented a policy that encourages the use of these advanced coal combustion technologies. I wonder what it is. Has China subsidized the more advanced—and more expensive—plants, or has it started denying permits to use the older, less-efficient technologies? There have been no reports that China has adopted a cap and trade system, but has it raised the price of coal or imposed a tax on CO2 emissions? Something else, or a combination, perhaps?

It also appears that China has made a long-term commitment to greatly expanded use of its domestic coal resources for power generation. In contrast, it is by no means clear that any more coal fired power plants will be welcome in the US unless they include carbon capture and sequestration. In the US, the policy trends seem to be demand reduction and green power (including nuclear) and, if any new fossil fuel power plants are necessary, natural gas.

There is great political resistance in Congress to adopting a cap and trade (or other regulatory) regime that will increase the cost of burning coal in US power plants. Part of that resistance is based on the absence of an international regime that requires emerging nations like China to do “their fair share” to limit CO2 emissions. If China is determined to make coal a cornerstone of its energy supply system, the prospects for an effective international agreement do not seem rosy.  China's unilateral moves may limit US policy options. 

Update on Thursday, May 14, 2009 at 04:01PM by Skeptic

 A friend in the energy business emailed these comments:

It may be the NYT a bit overstates what's happening in China and I'm not sure how much to read into it except that there does seem to be a push underway. Can't say whether it's the result of a new policy. At least 2 Western companies with established gasification technology have been trying to move into that market, but primarily with lower pressure petrochemical plant gasifiers. I don't believe that any has sold an advanced IGCC unit. But a new US consortium seems to be making inroads. See http://www.greatpointenergy.com/pdfs/newsandevents/GPEInksHugeChineseDeals.pdf and http://www.gasification.org/Docs/Legis/2007%20China%20Roundtable/Senate%20RT%20Review%20DOW%20JPH%202007%2003%2023.pdf

But like the US, the Chinese don't yet seem to have yet built a true commercial plant. I sent the NYT article to a friend doing some work over there who states that most of the plants proposed are Chinese models and supposedly not very efficient. My guess is that the Chinese are balking at the costs of the foreign gasifiers and trying to go it alone. The fact that they're trying is good,but doesn't mean the plants will function well. The only two commercial IGCC plants I'm aware of are in Spain and Netherlands, and have had lots of problems.

There are several US IGCC plants still in some state of development, despite the DOE pulling out last year. IGCC has always been driven by natural gas prices and looked pretty good when gas prices were pushing up to $12+ or so an MCF, but now that they're half of that (and with major new domestic reserves looking probable), it will be tough to justify IGCC (and renewables generally) without huge ongoing subsidies.

US cap and trade. Starting to sound like cap, give away CERs, then trade. (i.e., take the "carbon tax" out of the system.) If the credits are substantially free, I'm not sure what this really means and accomplishes, and might even allow more conventional coal fired plants. But my guess is that the energy source of choice for power generationwill be natural gas for quite some time.

The second link above is to a PowerPoint presentation, the 20th slide of which says the strongly-supportive Chinese central government has a strategy of maximizing energy independence by using domestic coal efficiently.  Incentives include grants to government owned entities, tax credits, and assistance with land, infrastructure, water, and logistics at the provincial and local levels.

Update on Friday, May 15, 2009 at 08:38AM by Skeptic

Paul Krugman, returning from a week in China, reports:

In January, China announced that it plans to continue its reliance on coal as its main energy source and that to feed its economic growth it will increase coal production 30 percent by 2015.

Krugman also heard "outraged declarations" that it is unfair to expect China to inhibit its growth by limiting fossil fuel consumption when the developed nations caused the atmospheric buildup of CO2 with their relatively profligate use of fossil fuels in the past. That seems to me an argument the developed world cannot win in negotiations among nations to ameliorate global climate change. As I have suggested elsewhere, we may garner more cooperation and success if we can make the issue whether every nation that uses coal is using the best available technology for minimizing CO2 emissions. Reframing the issue that way would recruit the powerful forces of national pride to the cause of doing what needs to be done--no nation, and China in particular, wants to be criticized as being technologically backward. In that context, it is interesting that China seems to be trying to take the worldwide lead in clean coal technology.

Incidentally, the UN has published today "the first draft negotiating texts outlining widely varying options for rich nations to cut greenhouse gas emissions."  I haven't read them.

Update on Sunday, June 7, 2009 at 09:14PM by Skeptic

President Hu's Special Representative on Climate Change outlines here China's goals, strategies and actions and what it thinks other nations should do to.  Joe Romm reports that China is considering carbon taxes and energy efficiency standards.