Globalization without Globalism

Posted on January 8, 2017 by jackheidel

Ever since the November election, when Donald Trump eked out a victory in the Electoral College, I have been trying to understand the significance of his win. Of course it has a lot to do with populism and anti-elitism as I have said previously.

In yesterday’s Wall Street Journal the economics journalist, Gregg Ip, makes a strong argument that what is happening has more to do with globalism than with globalization:

Globalization refers to people, capital and goods moving ever more freely across borders. Globalism is the ideology that globalization should lead to global governance over national sovereignty. This refers to such global structures as the European Union, the World Trade Organization, NATO, the United Nations and the North American Free Trade Agreement.
The problem is not globalization itself, which just means specialization and trade across borders, but rather the damage which breakneck globalization has inflicted on ordinary workers. Since China joined the WTO in 2000 a wave of Chinese imports wiped out 2 million American jobs, with no equivalent boom in the U.S. from exports to China.
Globalists have been blind to the nationalist backlash because their world – entrepreneurial, university-educated, ethnically diverse, urban and coastal – has thrived as the whiter, less-educated hinterlands have stagnated.
Globalists should not equate concern for cultural norms and national borders with xenophobia. Large majorities of Americans welcome immigrants so long as they adopt American values, learn English, bring useful skills and wait their turn. Opposition to open borders does not imply racism.

Conclusion. Says Avik Roy, President of the Foundation for Research on Equal Opportunity, “There is a middle ground between a nationalist and globalist approach.” This is what we should be looking for.

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Rising Prosperity around the World

Posted on August 18, 2016 by jackheidel

My last post responds to a reader who is pessimistic about the future of our country and in fact of the whole world. He thinks that the environment is deteriorating, that rapid economic growth is unsustainable and that there is too much income inequality between high and low wage earners.
My response to him is to refer to the recent book, “The Rational Optimist: how prosperity evolves” by Matt Ridley. Mr. Ridley persuasively argues that not only has the human race made huge strides in recent times but that this progress is intrinsic to evolved human nature and is likely to continue indefinitely:

Since 1800 the population of the world has multiplied six times, yet average life expectancy has more than doubled and real income has risen more than nine times.
Between 1955 and 2005, the average human on earth earned nearly three times as much money (adjusted for inflation), ate one-third more calories of food, and could expect to live one-third longer, all this while world population doubled.
The rich have got richer but the poor have done even better. For example, the Chinese are ten times as rich, one-third as fecund, and 28 years longer-lived than fifty years ago. (Also see the above chart).
The spread of IQ scores has been shrinking steadily – because the low scores have been catching up with the high ones. This is known as the Flynn effect.
The four most basic human needs – food, clothing, fuel and shelter – have grown markedly cheaper during the past two centuries.
The most notorious robber barons of the late 19^th century: Cornelius Vanderbilt, John D. Rockefeller, and Andrew Carnegie, got rich by making things cheaper.
Exchange and specialization, not self-sufficiency, is the route to prosperity.

Conclusion. As long as human beings are free to engage in exchange (trade) and specialization (acquisition of skills), prosperity will continue to evolve and human life will become better and better.

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The Best Way to Stop Donald Trump

Posted on December 15, 2015 by jackheidel

The main sources of background information for my posts are The New York Times and the Wall Street Journal. I read the Economist but most of the time it is either too esoteric or else too far removed from the specifics of U.S. fiscal and economic policy which I am interested in. But this week they have hit the nail on the head regarding Donald Trump and his fellow right-wing populists around the world.

Says the Economist:

Populists differ but the bedrock for them all is economic and cultural insecurity. Stagnant wages hurt a cohort of older working-class white men whose jobs are threatened by globalization and technology. Jihadist terrorism pours petrol on this resentment and extends populism’s appeal.
Nobody should underestimate how hard it is to take the populists on. It is a huge mistake to dismiss their arguments by calling them fascist or extremist. Such disdain risks suggesting that political leaders are uninterested in the real grievances the populists play on.
The best way to overcome resentment is economic growth – not putting up walls. The best way to defeat Islamist terrorism is to enlist the help of Muslims – not to treat them as hostile.
Voters are often more reasonable than the populist leaders who are trying to appeal to them. Most of them would sooner hear something more optimistic than rage against a dangerous world.
Politicians also need to deal with the populists’ complaint that government often fails them. Reluctance to deploy more troops against the ISIS caliphate in Syria and Iraq does not appear to be a serious strategy to defeat it.

Conclusion: There is a clear path forward for candidates with a positive message of openness and tolerance and realistic plans to make the economy grow faster. Who is best situated to deliver such a message? Stay tuned!

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Can the U.S. Economy Grow Faster?

Posted on June 25, 2015 by jackheidel

The U.S. economy has grown at the rate of only 2.2% since the end of the Great Recession in June 2009. This is much slower than the average rate of growth of 3% for the past fifty years.
The economists Glenn Hubbard and Kevin Warsh, writing in the Wall Street Journal, “How the U.S. Can Return to 4% Growth,” point out that:

After the severe recession of 1973-1975, the economy grew at a 3.6% annual real rate during the 23 quarters that followed.
After the deep recession of 1981-1982, real GDP growth averaged 4.8% in the next 23 quarters.
Recent research has shown that steep recoveries typically follow financial crises.

The economist John Taylor, also writing in the WSJ, “A Recovery Waiting to Be Liberated,” explains that the growth of the economy, i.e. growth of GDP, equals employment growth plus productivity growth. He then points out that:

Population is growing about 1% per year. However the labor-force participation rate has fallen every year of the recovery, from 66% in 2008 to 62.9% in 2014. Even turning this around slightly would increase employment growth above the 1% figure coming from population growth alone.
Although productivity growth has hovered around 1% for the past five years, this is less than half of the 2.5% average over the past 20 years.

Given the strong headwinds of globalization and ever new technology affecting the U.S. economy, we especially need new policies such as:

Fundamental tax reform directed at increasing the incentives for work and driving investment in productive assets.
Regulatory reform that balances economic benefits and costs (e.g. lightening the burdens of Obamacare and Dodd-Frank).
Trade agreements to break down barriers to open global markets.
Education policies to prepare all young people for productive careers.

In other words, rather than accepting our current situation as “the new normal” or as unalterable “secular stagnation,” we need to “give growth a chance”!

What’s Wrong With U.S. Manufacturing Policy

Posted on June 7, 2015 by jackheidel

The Brookings Institution’s Martin Baily has an informative article, “what’s wrong with U.S. manufacturing policy,” in a recent issue of the Wall Street Journal.
Says Mr. Baily, “Of the 5.7 million manufacturing jobs that disappeared in the 2000s, only 870,000 have returned so far, according to the Bureau of Labor Statistics, and the claim that millions more are coming back is nothing more than a myth. … If the U.S. is serious about promoting a recovery in manufacturing, it will stop measuring success by the number of people employed in the sector and start supporting the technological advancements that are making factories more productive, competitive and innovative.”
According to Mr. Baily the technological shift taking place is powered by three developments:

The internet of things in which machines are able to communicate with each other.
Advanced manufacturing including 3-D printing, new materials and more accurate digital logistics.
Distributed innovation in which crowdsourcing is used to find solutions to technical challenges more quickly.

Such advances must be supported even if it means putting robots in place of workers. It follows that:

there will still be good jobs in manufacturing for those with big data, programming and other specialized skills
a shortage of qualified workers means we want highly qualified immigrants to stay in the U.S. instead of returning to their home countries
propping up uncompetitive jobs with tax breaks and subsidies won’t work for long and just interferes with introducing a lower corporate tax rate to drive new investment
new trade agreements strengthen U.S. manufacturing by reducing foreign barriers to U.S. goods
Displaced workers Should be supported with retraining programs especially through community colleges
Government can further help with infrastructure improvements and expedited permitting processes.

Conclusion: U.S. manufacturing will continue to thrive in a rapidly changing environment as long as it is properly supported with intelligent government policies.

Globalization Is a Messy Process

Posted on April 28, 2015 by jackheidel

Globalization is having a dramatic effect on income distribution around the world as I discussed in a previous post. Middle incomes in the developed world are stagnating while at the same time they are growing rapidly throughout much of the rest of the world.
At the same time as western world economies are stagnating, turmoil and instability are breaking out elsewhere, especially in eastern Europe, the Middle East and northern Africa. Fortunately the U.S. and its allies are stepping in with military force to help maintain local order in many parts of the world where it is breaking down.
In short, at the same time, whether connected or not, the postwar geopolitical system is breaking down and the economic stability of the Great Moderation has given way to the Great Recession and its aftermath of macroeconomic volatility.
An interesting article by Chrystia Freeland in the latest issue of The Atlantic, “Globalization Bites Back” addresses both of these issues together. She says “I believe that capitalist democracy has proved itself to be the only compelling, universalist vision of how to live the good life. But the stable world order many of us assumed this thesis foretold has not come to pass.”
As the above chart shows, one very positive result of this messy process is likely to occur. The middle class worldwide is predicted to grow from 1.8 billion in 2009 to 4.9 billion in 2030. All of this enormous growth in the size of the middle class will occur outside of North America and Europe.
The implications for the continued prosperity and world leadership of the U.S. are clear. We need to get our own economy back on track, growing at a faster rate. We also need to get our fiscal house in order so that the dollar will continue to be the international currency of choice.
Our dominant role in world affairs is beneficial to all but it is by no means assured without much effort on our part.

The Problem of Soaring World Population

Posted on November 9, 2014 by jackheidel

As I remind readers from time to time, this blog is focused on the fiscal and economic problems of the U.S. Our biggest fiscal problem is not having enough tax revenue to pay our bills. Our biggest economic problem is a stagnant economy which leaves too many people unemployed or underemployed.
My last three post have been on the subject of climate change. This is a worldwide problem which has a huge effect on the U.S. There’s going to be a cost in cutting way back on carbon emissions. But there will soon be a much greater cost if we don’t cut back and therefore suffer the growing adverse environmental effects.
Now there is another looming problem. The journal Science has just published the article “World population stabilization unlikely this century,” reporting that world population, now 7.2 billion, is likely to reach 9.6 billion by 2050 and 10.9 billion by 2100. Much of the increase will take place in Africa due to higher fertility rates because of a recent slowdown in the pace of fertility decline.
The implications of a growing world population are huge:

First of all, it will add even more stress to an environment which is already being increasingly stressed by global warming.
Secondly, it will aggravate a slowdown in middle-income wage growth throughout the developed world. This is very evident in the above chart. What is happening is that the force of globalization is shifting lower skilled work to lower paid workers in the developing world. A larger population in the developing world will simply exacerbate this trend.

The noted economist, Tyler Cowen, has a different perspective on this problem, “A Strategy for Rich Countries: Absorb More Immigrants,” in today’s New York Times. But Mr. Cowen’s approach is untenable for the long run. The idea that you can offset an increase in the elderly population with an even bigger increase in the younger population will lead to an ever-growing overall population.
What then is the answer to over-population? It is either more birth control or less sex. Take your pick!

An Economy Doing Half Its Job

Posted on September 9, 2014 by jackheidel

The Harvard Business School has just conducted its third alumni survey on U.S. competitiveness and finds “An Economy Doing Half Its Job.” “Our report on the findings focuses on a troubling divergence in the American economy: large and midsize firms have rallied strongly from the Great Recession, and highly skilled individuals are prospering. But middle- and working-class citizens are struggling, as are small businesses. We argue that such a divergence is unsustainable.”
Highlights of the survey are:

Survey respondents were pessimistic on balance, although less so than in previous surveys. By a ratio of three to two, those who foresaw a decline in U.S. competitiveness in the next three years outnumbered those who predicted an improvement. Respondents were much more hopeful about the future competitive success of America’s firms than they were about the future pay of America’s workers.
Respondents saw weaknesses in those aspects of the U.S. business environment that drive the prospects of middle- and working-class citizens, for instance, the education system, the quality of workplace skills, and the effectiveness of the political system.
Alumni working in small businesses had more negative views of virtually every aspect of the U.S. business environment. This finding echoes growing evidence from other sources that small businesses are disadvantaged in America.

The authors of the report “see a need for business leaders to move toward strategic, collaborative efforts that make the average American productive enough to command higher wages even in competitive global labor markets. Without such actions, the U.S. economy will continue to do only half its job, with many citizens struggling.” What’s interesting about this report is that it describes the problems of the American economy in a straightforward and practical way with no apparent ideological slant. Of course, addressing these issues requires political action with all of its messy, partisan overtones. Nevertheless perhaps all parties can at least agree on what the basic problem is.

Raising America’s Pay

Posted on June 8, 2014 by jackheidel

The Economic Policy Institute has just issued a provocative new report, “Raising America’s Pay: Why It’s Our Central Economic Policy Challenge”. It is based on the now widely accepted view, as summarized in the chart below, that wages for the typical (i.e. median, not average) American worker have been stagnant since the early 1970’s, even though productivity has continued to increase at its historical rate.
First of all, the authors make reasonable arguments that:

The slumping of hourly wage growth for the vast majority explains the overall trends in income inequality.
Wage stagnation stalls progress in reducing poverty.
Wages are the root of economic security for the vast majority. This includes the fact that Social Security benefits depend upon wage earnings before retirement.

Then they ask: “Why has wage growth faltered for the vast majority, and what can be done?” Here is where the report becomes controversial!

The authors do agree that globalization of markets and technological change have contributed to the wage growth slowdown but argue that this overlooks the impact of labor market and tax policy and business practices as follows:
Falling top tax rates have increased the income share of the top 1 percent.
The Federal Reserve has prioritized low rates of inflation over low rates of unemployment in recent decades and high unemployment suppresses wage growth.
The erosion of the inflation adjusted minimum wage and the share of the workforce represented by a union explain much of the entire rise of wage inequality over this time period.

The authors are completely correct that stagnant wages for American workers is a critical, even “central,” problem facing the economy at the present time. The question, of course, is how to address this problem most effectively. In my opinion, the authors have completely neglected to take into account how a faster rate of economic growth would contribute to a solution of the problem and how this could be accomplished. I will address this question in my next post in a couple of days.
They conclude by saying that this report is only the first in a multiyear research and public education initiative of the EPI. We have a lot to look forward to!

Is Capitalism in Crisis?

Posted on April 17, 2014 by jackheidel

The economist and public lecturer, Richard Wolff, gave an address in Omaha NE last night, entitled “Capitalism in Crisis: How Lopsided Wealth Distribution Threatens Our Democracy”. His thesis is that after 150 years, from 1820 – 1970, of steadily increasing worker productivity and matching wage gains, a structural change has taken place in our economy. Since 1970 worker productivity has continued to increase at the same historical rate while the median wage level has been flat with no appreciable increase. This wage stagnation has been caused by an imbalance of supply and demand as follows:

Technology has eliminated lots of low skill and medium skill jobs in the U.S.
Globalization has made it less expensive for low skill jobs to be performed in the developing world at lower cost than in the U.S.
At the same time as jobs were being replaced by technology and disappearing overseas, millions of women entered the labor force.
A new wave of Hispanic immigration has caused even more competition for low skilled jobs.

In addition, stagnant wages for the low skilled and medium skilled worker have been accompanied by an increase in private debt through the advent of credit cards and subprime mortgage borrowing. This enormous increase of consumer debt led to the housing bubble, its bursting in 2007-2008, and the resulting Great Recession.
Five years after the end of the recession in June 2009, we still have an enormous mess on our hands: a stagnant economy, high unemployment, massive and increasing debt and a fractious political process. How in the world are we going to come together to address our perilous situation in a rational and timely manner?
Mr. Wolff believes that capitalism’s faults are too severe to be fixed with regulatory tweaks. He also agrees that socialism has proven to be unsuccessful where it has been tried. He proposes a new economic system of “Workers’ Self-Directed Enterprises” as an alternative.
I agree with Mr. Wolff that capitalism is in a crisis but I think that it can be repaired from within. The challenge is to simultaneously give our economy a sufficient boost to put millions of people back to work and to do this while dramatically shrinking our annual deficits in order to get our massive debt on a downward trajectory as a percent of GDP. How to do this is the main focus of my blog, day in and day out!

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

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