Salam on the US Economy

QOTD:

This is why it is so damn frustrating when people say, “Hey, Barack Obama has been great for the private sector economy. Check out those huge corporate profits!” Huge corporate profits reflect product markets that are not sufficiently competitive. Product markets become less competitive in economies defined by high barriers to entry, including costly labor market regulations. This isn’t about President Obama. Rather, it is about the accretions that happen in any stable, affluent society.

And this:

I really want to live in a world in which center-right types would say, “Yes, enormous corporate profits are a bad thing — they’re bad because they’re a symptom of crony capitalism. The solution isn’t to tax away profits and use them to expand an inefficient public sector. Rather, it is to facilitate exploratory innovation by reducing barriers to firm entry.”

This is something that center-left folks (and progressives) also do not understand. The TBTF problem and huge profits in finance are reinforced by regulations. Regulations, even the well-crafted and necessary, will tend to support large incumbent firms almost all the time. And not just because they can lobby more effectively, but because they have the resources and market base to comply more easily than new competitors would. The fact that our financial sector is so profitable and so top-heavy is a strong sign that our regulatory code is seriously screwed up. As is the rise of the shadow banking system.

Although perhaps desirable for other reasons, raising taxes does not solve this problem and could even exacerbate it, by reducing the gains to entry even further.

I would like to see a program along the lines that Salam suggests later in the post, including an overhaul of the tax code using Simpson-Bowles as a starting point. The swiss cheese system of deductions, depreciation write-downs, loopholes, and credits is distortionary and generally benefits those who don't need much help rather than those that do. I would like to see policies designed to reward innovators rather than incumbents, and that will mean less regulation in some areas. I would like to see a program of work supports similar to what Salam describes, which sounds (to me) like something similar to the German system. I do not want to see major cuts in entitlement programs, as Salam does, as I believe a stronger safety net is more important in a more-competitive and more skills-driven economic system.

In short, at the same time the US worked to make the global economy more open and competitive, it did not enact policies that made itself more open and competitive. For a long time, our dominant global position meant that we could collect rents from the rest of the world, which we then distributed according to political demand. But those rents are now being competed away while the political demands have not. It's a fixable problem*, I think, but not until we recognize what the problem is. Right now it doesn't appear that either major political party does.

*And, at the global level, it isn't a problem at all. Competing away US rents is a good thing for the world.

Follow-Up on TGS Graphs

Daniel Davies and Alex Tabarrok objected to the graphs of GDP I included in this post on The Great Stagnation. Specifically, they didn't like the fact that the hypothetical lines I drew reflect constant linear growth rather than constant percentage growth. I.e., I didn't compound the growth when i drew those lines. They're right that the latter is a better measure of trend (it's what is used in almost all statistical analyses), so here's a new graph that takes that into consideration.

This graph shows the actual GDP per capita growth (circles) for the US, OECD, and entire world. The lines that begin in 1974 reflect what GDP per capita would look like if it had continued to grow at the 1960-1973 rate*. Note that a "Great Stagnation" hypothesis would expect significantly weaker growth post-1973, not the same amount and certainly not more. So the fact that the US was above the trend line until the early 2000s provides fairly strong evidence that if we're in a Great Stagnation it's more recent than Cowen argues, and doesn't correlate with stagnating median incomes all that well. In fact, the US does better than either the OECD or the globe, if "better" is defined as "closest to 1960-1973 trend", although the OECD trend line is quite a bit steeper**.

Anyway, just wanted to make sure I didn't leave the impression that my main point (about distribution) relies on faulty extrapolation.

*Specifically, I regressed a year counter on the log of GDP per capita (constant dollars, via WDI) from 1960-1973. The coefficient estimate represents the average growth in GDP per capita per year during that period. I then took that coefficient estimate and added it to 1973's GDP per capita to get 1974's predicted point, added the same constant to the predicted 1974 to get the predicted 1975, and so on.

**Of course the US is a big part of both OECD and world economies; if you removed the US from those groups the US would likely look still better in comparison. Although in the OECD's case, they added some countries during the series (e.g. Mexico, Slovakia) with lower per capita GDP than more established industrialized countries.

There Is No Great Stagnation, Only Great Redistribution

Tyler Cowen's The Great Stagnation has gotten a lot of attention for both its form and content. (I.e., there's more than a little irony in the fact that a book alleging that technological progress has markedly slowed was the first notable electronic-only book, although it has since been released in pulp-and-glue as well.) In the video above he presents his main thesis at TEDxEast. For those unaware, the argument runs basically like this: since 1973 or thereabouts, there has been a slowdown in median American income growth, and that trend has increased in the past decade. That slowdown is mostly attributable to a decline in technological innovation. We've reaped the gains of past innovations -- cars, planes, electricity, plumbing -- but haven't made many new ones. We tweak the old innovations to our advantage -- we've made cars safer and added GPS -- but those are marginal improvements, not fundamental advances. The exception is the internet and communications more generally, but while those improve quality of life they do little to improve typical incomes.

Cowen's argument has bothered me on a number of levels. First, I think he understates the real, and monetary, value of the internet and improved communications technology for standards of living. Second, I think he makes a mistake by looking almost entirely at the U.S., and almost entirely at median income. I want to focus on the second of these, placing it in the context of the first.

I'm really late to this party... Cowen's book has been covered by everyone in the blogosphere and almost everyone in the corporate press, so I'm sure someone has written more or less exactly what I'm about to write, but I've haven't seen it in quite this form before. So to see why I think Cowen's thesis is wrong, or at least incomplete, let's start with some global data.



This graph shows global real gdp per capita from 1960-2009 (blue line). I've highlighted 1973's income level -- $1,148 -- to show what the world looked like around the time that Cowen thinks the Great Stagnation started in the US. In the following 35 years, per-person income increased by nearly 800%. If the pre-1973 trend had continued (red line), that number would be more than halved. If growth post-1973 had stagnated, we'd be below the red line. But that didn't happen, as we can see from this series. First, global growth in the 1970s was faster than in the 1960s. And while that trend wasn't consistent through the 1980s and 1990s (dark green line), global GDP growth in the 2000s was the fastest during the period. In fact, by the end of the decade we'd caught back up to where we'd be if the 1970s trend had been consistent, before the financial crisis knocked us back a bit. But the story here is of pretty rapid growth on a global scale that actually accelerated in the most recent decade. No Great Stagnation, on a global level at least.

Cowen agrees that global growth has been strong as other countries adopt the innovations the U.S. has already exploited. This "catch-up" growth may be fine for developing countries, which have a lot of low-hanging fruit, but he wants to focus on those at the edge of the technology frontier, especially the US. So let's look at what's happened to US growth over the same period.



The green line represents approximately where US incomes would be if we had stayed at the pre-1973 rate of growth. Average incomes would be less than half what they are now. If the economy had stagnated, as Cowen claims, average incomes would be below the green line. Instead, the rate of US growth actually increased over that period, at a more rapid pace even than the increase in global growth depicted in the first graph. This doesn't look like stagnation at all, much less a Great Stagnation. So what is Cowen going on about?



Ah, the picture looks a bit different if you compare mean GDP/capita to median GDP/capita. Before 1973 the two tracked each other very closely. Post-1973, mean GDP/capita (the white circles) kept growing at roughly the pre-1973 trend rate, while median GDP/capita (black diamonds) stagnated. But the economy overall did not. Just median incomes. That indicates, to me, that Cowen's preferred causal mechanism -- a stagnation due to slowdown in innovation -- is missing what's actually happened. There's been enough growth, it just hasn't gone to the median earner. The result has been higher inequality.

Why has that happened? Theories abound. Some political scientists have recently made the case that rising inequality is a result of wealthy groups hijacking politics for their own economic benefit. In other words, the distribution of growth is zero-sum, and it's been redistributed towards the wealthy in the form of tax cuts, decline in union membership, erosion of the welfare state, and deregulation. I think there's something to that, but I think it's too focused on developments specific to the US. To get the whole picture, I think we need to situate the US in a global context.

It's difficult to find reliable estimates of global median income in a time series (in fact I couldn't... pointers welcome), but indications are that inequality is increasing within many countries, and across them as well. This is also not consistent with Cowen's argument, since the movement towards the technology frontier in the US was associated with rising median income, not rising inequality. If that's the process that rapidly-growing economies like China and India are in, then we should see less inequality, not more. And if the Great Stagnation is something that afflict the US specifically, we might expect the gap between the US and the rest of the world to narrow, not widen.

So I think a more nuanced theory is needed. Specifically, we need to be able to explain two things: stagnating median, but not mean, incomes; global, not just local, trends. So what do we know about the major ways in which the global economy has changed over the past 40 years? I think three things are most relevant:

1. The global economy has become more integrated. This is partially due to politics, as more countries opened their economies to trade and investment. Average tariff rates have fallen dramatically during the GATT/WTO tenure. Capital accounts have been opened by many countries. Additionally, technological improvements have lowered transaction costs. International trade and investment have increased dramatically as a result. The consequence of this movement is a larger (global) market with more middle- and high-income consumers, and increased competition in production. This leads to point #2.

2. The US's post-WWII advantage was conducive to broad-based growth. The US share of global manufacturing was nearly 50% immediately after the war. The other industrialized economies were mostly decimated by the war, and many countries had not yet industrialized. For an American worker during this period, a high marginal product (relative to a foreign worker) did not require large amounts of human capital. Relatively low-skilled workers could mix with (non-human) capital in fairly lucrative ways. In a sense, the median American worker was able to collect rents from the rest of the world from 1945-1973, because the de-industrialization in Europe and pre-industrialization in much of the rest of the world operated as barriers to competition. By the early 1970s those advantages had waned, and trade agreements made it difficult for the US to protect domestic workers. The increased competition from workers in Europe and the Asian NICs (which shifted to export-biased development in the 1960s-70s) led to the US's share of global manufacturing output to fall to 20-25% by 1973, where it has stayed more or less ever since. This hit high-wage/less-skilled workers in tradable industries the hardest, since those were the workers that would face international competition directly. It isn't surprising that incomes would stagnate as those "rents", born of circumstance, are competed away.

3. These same processes benefit high-skilled workers with lots of human capital, as did the technological improvements, particularly in information technology and communications. The rise of the rest has increased the market into which they can sell their labor (demand curve shifts right), but the high skills required to compete with them provide a continuing barrier to entry (supply curve sticks). Compensation for those high-skill workers (and innovators) goes up, but is stuck for everyone else. We get a weak version of "superstar economics", where the highly-skilled are able exploit lower transaction costs to sell into an ever-enlarging global market, while the lower-skilled face increased competition. It's a two-track economy.

Cowen dismisses globalization-rooted theories of the Great Stagnation (around minute 12 in the video above), but (to my knowledge) he hasn't dealt with the sort of mechanisms I'm discussing in any kind of detail. Somewhat bizarrely, Cowen also claims that modern innovations (the internet, satellite-based telephones) have not contributed to GDP very much. But then how to explain how GDP growth, and total worker productivity, have increased post-1973 at the same rate as pre-1973? Median incomes have stagnated because those innovations, unlike previous innovations in manufacturing, do not require the mobilization of huge numbers of workers to increase output. A few computer programmers or financiers can create generate output on their own.

There's another aspect to this that I think Cowen has missed. Increased inequality and a move to a superstarish economy should create more of an incentive for innovation, not less. And while Cowen complains that scientists are no longer heralded by society as they once were, innovators most definitely are. We make movies about them and their social networks, and then give awards to the movies. We make them the richest people in the world. And, contra Cowen, we have seen a lot of innovation in the past 35 years. Cowen focuses on innovations in two major areas that led to the pre-Stagnation growth: transportation and energy. He may be correct that innovation in transportation has declined, although the rise in high-speed rail (outside the US) might be one counterpoint), but part of that is because innovations in communication and information technology has made transportation less necessary. In terms of energy, there have been more breakthroughs in new energy sources from 1980-now than there was from 1945-1973.

There's more I could discuss, but this is long enough. So in short: I do not see a world economy that has stagnated overall. I don't even see a US economy (pre-2008) that has stagnated. I see a redistribution from a certain class of American workers to workers with similar skills in other countries, and to workers with very high skills in the US that can market those skills to a global economy. This doesn't have to be a bad thing, if the government can respond by encouraging innovation by high-skilled workers, and even encourage a lot of compensation for them, but provide for the rest with a fairly robust safety net. And, in fact, the major political cleavages of the present focus on precisely these issues. The political battles aren't about stagnation, but about distribution.

UPDATE: A few folks thought the graphs above are misleading, and they've got a point. So rather than just draw some lines in Powerpoint, I did a more reasonable comparison here. It doesn't change the substantive conclusion of this post, but it was worth doing.

Who's Winning the Future? Someone's Gotta Keep Score

Now it looks like someone will be. Clyde Prestowitz, former US trade negotiator (among other things), has a new blog dedicated to globalization and trade. Very interesting so far. This is from the introduction:

I hope with this blog to contribute to better understanding of the conflicts and ultimately to contribute to a future of truly win-win globalization for all players. In particular, I'll be watching the strategic trade and industrial policies of Asia and Europe and at how they interact with the more laissez-faire American approach in determining the shape of the future.

My approach will be somewhat contrarian. I am firmly convinced that globalization is not always a win-win proposition, that countries do compete economically, and that there are winners and losers in this competition. So I'll be keeping score. But most importantly, I'll be trying to take my readers beyond the knee jerk orthodoxies and mythologies of globalization to show them what is really happening. I look forward to receiving, learning from, and responding to lots of criticism.

And here is a very good post on the iPhone:

But quick, let me ask you where these iconic Apple products really are made.

If you said China (and I know most of you did), you were wrong, and thereby hang a number of tales. ...

In actuality, says the ADBI, China's assembly of the iPhone parts accounts for only about 3 percent, or $6, of the final value and because China actually imports some of the more expensive parts from the United States, it actually has a deficit on iPhone trade with America. ...

That raises more interesting questions. The other Asian countries [that make part of the iPhone] -- particularly Japan, but also Korea and Taiwan -- do not have low labor costs. Indeed, Japan and Korea are members of the Organization for Economic Development (OECD), the long time rich nations club. Furthermore, the parts they supply for the iPhone -- semiconductor chips, displays, lenses, etc. are not labor intensive. They are capital and, above all, technology intensive. Exactly the kind of products in which the United States is supposed to be the leader. So if America actually did produce the stuff it says it is good at producing, it wouldn't have a trade deficit with Asia for which China is the proxy at all. It would have a trade surplus and 20-40,000 more jobs than it has.

Why then, doesn't America make the stuff it says it ought to be good at making?

I look forward to reading more.

(ht: Art Gibb)

The "New Rules": Not New, Not Rules, and Not Helpful

In anticipation of his new book The Globalization Paradox, Dani Rodrik imagines what a new Bretton Woods arrangement would/should look like, and comes up with this bizarre list of seven "new rules for the global economy". I'll take them in turn.

1. Markets must be deeply embedded in systems of governance. The idea that markets are self-regulating received a mortal blow in the recent financial crisis and should be buried once and for all. Markets require other social institutions to support them. They rely on courts, legal frameworks, and regulators to set and enforce rules. They depend on the stabilizing functions that central banks and countercyclical fiscal policy provide. They need the political buy-in that redistributive taxation, safety nets, and social insurance help generate. And all of this is true of global markets as well.

Umm... are there no courts? No laws? No regulators? No safety nets? No social insurance? No countercyclical fiscal policy? Rodrik and I are looking at different economies. Perhaps the precise mix of these does not satisfy Rodrik (although that shouldn't matter, since he adopts a pluralist position below), but he cannot seriously argue that they do not exist. As for "all of this is true of global markets as well", I'm not sure what he means, he doesn't elaborate, and this seems to contradict some of his later points. To whit:

2. For the foreseeable future, democratic governance is likely to be organized largely within national political communities. The nation state lives, if not entirely well, and remains essen­tially the only game in town. ...

Agreed. But again, this is the status quo. We have some international agreements (he lists the Basel Accords and some WTO rules), but we maintain national standards in addition to those, and all of them are subject to approval from domestic polities. Is Rodrik asking for less international cooperation? What problem does he think that would solve?

3. Pluralist prosperity. Acknowledging that the core institutional infrastructure of the global economy must be built at the national level frees countries to develop the institutions that suit them best. The United States, Europe, and Japan have produced comparable amounts of wealth over the long term. Yet their labor markets, cor­porate governance, antitrust rules, social protection, and financial systems differ considerably, with a succession of these “models” – a different one each decade – anointed the great success to be emulated. ...

Right. Again, this is the status quo. The Washington Consensus is well and truly dead, if in fact it was ever alive. The Brazilian model is different from the UAE model is different from the Chinese model is different from the Indian model is different from the German model, etc. No one is trying to coerce anyone else to adopt their system.

4. Countries have the right to protect their own regulations and institutions. ... We should therefore accept that countries may uphold national rules – tax policies, financial regulations, labor standards, or consumer health and safety rules – and may do so by raising barriers at the border if necessary, when trade demonstrably threat­ens domestic practices enjoying broad popular support. If globalization’s boosters are right, the clamor for protection will fail for lack of evidence or support. If wrong, there will be a safety valve in place to ensure that contending values – the benefits of open economies versus the gains from upholding domestic regulations – both receive a proper hearing in public debates. ...

This is a major part of his previous book, One Economics, Many Recipes. I see this largely as status quo too, although I can see why there would be an argument. It's true that emerging countries were often bullied in previous trade rounds, but the failure of the Doha round is partial indication that emerging economies now possess a stronger bargaining position. As for the specifics he lists -- tax policies, financial regulations, labor standards, or consumer health and safety -- there are no international prohibitions limiting national sovereignty in these areas. In fact, WTO rules make explicit exceptions for things like consumer health. To the extent that governments are pressured to change national policies in these issue-areas, that pressure comes mostly from markets or global civil society, not foreign governments. Which is why there is so much cross-national heterogeneity over those policies.

5. Countries have no right to impose their institutions on others. Using restrictions on cross-border trade or finance to uphold values and regulations at home must be distinguished from using them to impose these values and regulations on other countries. ...

Oh, I see. So you can use protectionism to uphold your own values, but only if that does not impose on others. Excuse me? A tariff or border adjustment is by definition coercive. Either you adopt my values or else you cannot make money in my markets. One cannot have this both ways, no matter how much one would like to.

6. International economic arrangements must establish rules for managing interaction among national institutions. Relying on nation states to provide the essential governance functions of the world economy does not mean that we should aban­don international rules. The Bretton Woods regime, after all, had clear rules, though they were limited in scope and depth. A completely decentralized free-for-all would benefit no one.

What we need are traffic rules for the global economy that help vehicles of varying size, shape, and speed navigate around each other, rather than imposing an identical car or a uniform speed limit. ...

I guess the disclaimer is meant to head-off criticism that this explicitly violates everything that came before it. Other than the fact that it does, it is also meaningless. Traffic rules? Not including a speed limit? Does he mean, like, using your turn signal? I wish there was a for-instance here, because I cannot guess what Rodrik is driving at.

7. Non-democratic countries cannot count on the same rights and privileges in the international economic order as democracies. ...

Look, either the norm of national economic sovereignty and the need for local decision-making and autonomy is important or it isn't. If it is, then regime type should be irrelevant. If it isn't, then #s 1-5 are irrelevant. Rodrik justifies this by saying that "legitimacy" comes from democratic deliberation, but what happens when democracy yields illiberal outcomes? When majorities oppress minorities? When majorities in one country oppress minorities in others? This is to elide the most obvious criticism, which is that democracy itself is in the eye of the beholder.

Looking over this list, there isn't a single thing that addresses any of the major issues facing the global economy, which Rodrik lists as "the eurozone crisis, global recovery, financial regulation, international macroeconomic imbal­ances, and so on". There are very few things that even count as functional "rules" in a way analogous to Bretton Woods. As general principles, almost all of them are already present in the status quo, and the ones that aren't (#7) are almost surely wrongheaded.

This column is intended as a precis of his forthcoming book, so maybe he offers better argument and example there. I hope so, because what's in the column is weak sauce.

An Inequality Post

In the middle of a pretty good post on inequality, Ezra Klein writes:

In the 1970s, median household income begins stagnating. But it's not until the mid-1980s -- and really beginning in 1987 -- that the income share of the top 1 percent begins skyrocketing. ...

What happened in 1987? From about 1952 to about 1986, the top 1 percent's share of income fluctuates between 7 percent and 10 percent. But between 1987 and 1988, it jumps sharply -- rising from 10 percent to 13 percent in a single year -- and never comes back down. So what happened in 1987? There's a massive stock market crash that year, but it's not a crash that's considered to have had profound or lasting impacts on the real economy. Most explanations peg it as a market-driven, rather than economy-driven, event. And yet something that year does seem to have profoundly changed income equality in this country, and in a lasting way. But what?

As it happens I wrote my senior undergrad thesis largely on this question. It's almost a very good question. I say "almost" because Klein (I assume) is using pre-tax/pre-transfer tax return data. If so, 1987 returns reflect 1986 income, so the question should really be "What happened in 1986?" And the answer to that is, quite simply, one of the largest restructurings of the tax code since WWII, the Tax Reform Act. As Showdown at Gucci Gulch describes in detail, TRA86 was all about the distribution of benefits via the tax code, but a few changes would have an especially large effect on measured income inequality after passage.

First, it eliminated many deductions and loopholes, especially for real estate holdings. That meant that a lot of income that was going essentially unreported in 1986, because it was being sheltered, was now reported in 1987. Almost all of that income belonged to the upper tiers of the tax code that could take advantage of those loopholes, so TRA86 shone the light on a lot of income that was previously held in the dark. Second, capital gains income was taxed at the same rate as labor income. Previously, capital gains were taxed at much lower levels than ordinary income -- 20% versus 50% for the top earners. After TRA86, capital gains taxes would rise from 20% to 28%. This heavily incentivized workers that were able to do this to take income in the form of capital rather than cash. These gains would be taxed when realized... but not until then. So quite a lot of income was given to richer workers in the form of stock options and the like, and these were all exercised in 1986 to take advantage of the low rate before it went up. All of this is explained in the very long "summary" report issued by the Joint Committee on Taxation (very large pdf). Third, once corporate and individual tax rates were brought into balance by TRA86, there was a lot of "income shifting" from corporate to individual tax returns.

The net result of these for our purposes is that, among the rich but not the poor and middle classes, a lot of income was reported in 1987 that was not reported previously. So the jump in 1987 was largely a statistical artifact. The rich in 1987 were essentially as rich as they were in 1986, but the vagaries of the tax code meant that the situation looked quite a bit different when looked at in a time series. Alan Reynolds of Cato has written about this quite a lot, see e.g. here. He goes so far as to say that income inequality has basically not changed at all since 1988 (and thus since 1979 or so), and for this he has been beaten down quite severely (e.g. here and here and here and here etc.). But I think he's got this one point -- about 1987 -- basically right.

So do the academics. In their landmark inequality 2003 QJE study, Thomas Piketty and Emmanuel Saez write:

One additional motivation for constructing long series is to be able to separate the trends in inequality that are the consequence of real economic change from those that are due to fiscal manipulation. The issue of fiscal manipulation has recently received much attention. Studies analyzing the effects of the Tax Reform Act of 1986 (TRA86) have emphasized that a large part of the response observable in tax returns was due to income shifting between the corporate sector and the individual sector [Slemrod 1996; Gordon and Slemrod 2000]. We do not deny that fiscal manipulation can have substantial short-run effects, but we argue that most long-run inequality trends are the consequence of real economic change, and that a short-run perspective might lead to attribute improperly some of these trends to fiscal manipulation.

So the shift in 1987 is probably just a statistical mirage. The longer-run shift, encapsulated somewhat by this graph reproduced by Klein, is not.



Derek Thompson takes a stab at it here, and comes away perplexed. Scott Sumner characterized this as a shift in compensation from "producers" (the 1945-1973 economy) to "discoverers" (1973-2010 economy):

Today the most productive members of society are not those who produce things, they are those who discover the things that need to be produced. Once you have the blueprint, it is easy to produce many types of software and pharmaceuticals. The big money goes to those who figure out the blueprint, but also to those who allocate capital to the guy who has the idea for a Google, or Facebook, or Twitter. In contrast, the technicians who actually implement the vision often earn modest salaries. Thus companies are “discovered” in much the same way as an iron deposit is discovered by a skilled geologist.

I think that's part of it. Viewed in that light, the "breaking" of productivity and median compensation comes from the fact that productivity has not gone up because the skills of the median worker have improved, but because the skills of the "discoverer" and those who give him capital have improved. They have improved because of political and technological developments over the past quarter-century or so have pushed the production possibilities frontier way out for those with good ideas and access to capital to develop them. The nouveau riche are not Andrew Carnegie and John D. Rockefeller, but Bill Gates and Roc-A-Fella, and those who finance them.

"Discovery" has become more important because the world's labor supply and consumption markets are now essentially globalized. There isn't anything an American worker can do that a worker someplace else can't do. That wasn't necessarily true in 1945. And even if it was, corporations didn't have the same access to foreign workers that they have now. At the same time, we now have many machines that allow us to produce much more with much less labor. So the supply of labor accessible to markets has increased tremendously over the previous three or four decades at the same time the demand for labor has slowed. If the labor supply curve shifts right, the price of labor goes down. If the labor demand curve shifts left, the price of labor goes down. Viewed in that light it's no surprise that median incomes have stagnated in richer countries.

So, basically, I'd boil it down to two factors:

1. Labor supply (demand) has gotten larger (smaller), depressing the price of labor.

2. Consumption markets have gotten much larger, heightening the price of invention.

Put together, this means rising inequality and stagnating median wages.

This view is not incompatible with Cowen's "short on volatility" story, nor with the economics of superstars. But it doesn't require either of those either, and ultimately I find it more satisfying because it incorporates elements outside the domestic economy. It is mostly incompatible with stories from Pierson/Hacker and Krugman and others that inequality is about rent-seeking and manipulation of the state for private ends, although I think a lot of that goes on too (maybe another post on that soon). In other words, it's mostly an economic story rather than a political story, which is why we see some common trends across countries and not just within them.

The plus side of this, for workers, is that nonmonetary standards of living are going up even if monetary rewards are not. I find the argument that consumption inequality has decreased even as income inequality has increased to be pretty persuasive, and I don't think all of that was pre-crisis credit-based. In 1975 the richest person in the world couldn't own an iPhone; now everyone I know has one. I don't, but I have a Macbook and a flat screen television and easy access to more information and entertainment than almost anyone in history. To paraphrase Eddie Izzard, my standard of living would make King Solomon blush. It just doesn't show up in the statistics.

US-Saudi Arms Deal

It looks like my post early this morning about arms sales and economic-political decision making had some pretty fantastic timing. Al-Jazeera and The Guardian are reporting that President Obama is on the verge of authorizing a record $60 billion arms deal with Saudi Arabia in which the US will sell the Saudis "as many as 84 new F-15 fighters, upgrade 70 more, and [...] three types of helicopters - 70 Apaches, 72 Black Hawks and 36 Little Birds" as well as other sophisticated weapons systems.

There are some pretty interesting political questions and angles to this story. The first question: Why? The official explanation being bounced around by both administration officials and analysts is about countering growing Iranian influence in the region. This deal will modernize Saudi defense capabilities and advance short-range offensive capabilities. The administration is trying to use Saudi Arabia to balance Iranian power in the region (not necessarily a new idea). This deal will also deepen and further solidify US-Saudi Arabian cooperation in the Middle East for years to come, as the delivery of the entire package is expected to take roughly a quarter-century.

But why only F-15 aircraft? F-15's are one of the most successful fighter aircraft around (so they're dependable), but they aren't the most advanced nor newest toy on the market. They've been around since the early 1970's. Saudi Arabia has enough resources to splurge on top-caliber fighter aircraft and weapons systems, so money isn't particularly a constraint. Why not the F-22 or the F-35? It looks like Israeli influence played a strong role in preventing the transfer of newer long-distance aircraft with stealth technology to the Saudis as this would decrease Israeli primacy as far as weapons technology in the region. The Israelis also objected to including long-range capabilities on the F-15's that will be delivered as they sought to limit long-range strike capabilities by the Saudis, thus reducing the risk of a future Saudi air strike. Also, the Israelis have put in their own orders for the new stealthy F-35 which is another reason they don't want the US to also sell them to the Saudis.

What does the US get out of all this? Well, the administration will absolutely push the jobs angle pretty hard. During these slow economic times, with mid-term elections coming up in November and a 9.5% unemployment rate, the Obama administration will seek to sell this agreement to the American public by arguing that the deal will create about 75,000 jobs for Americans, although the majority of these jobs will be at companies like Boeing, GE, and Lockheed Martin. These companies don't typically hire construction workers, financial professionals, real estate agents or other employees from hard-hit sectors of the economy. These new jobs will go to highly skilled, college-educated workers, or the types of workers that already have good jobs in a sector with relatively low unemployment rates. Recent graduates in engineering, physics, project management and other aircraft-manufacturing related sectors will also benefit. Yes, there may be indirect employment gains in retail and other sectors as those 75,000 workers in those new jobs spend their salaries, but I wouldn't count on these new jobs to make much of an impact on aggregate demand or unemployment numbers. But that doesn't necessarily matter in the short run. In the eyes of the Obama administration, stronger military ties with Saudi Arabia, countering Iranian influence in the Middle East and the perception that new jobs for Americans are being created is enough of a reason to proceed with the agreement right now.

Rage Against the Machine

Remember when I wondered where the anti-globalization protesters went? Turns out they migrated to Canada. It's hard to find clear reporting on the numbers of protesters or their specific activities, but apparently about 180 have been arrested so far. Still nothing like the Battle in Seattle, but it's not nothing.

More on the (Lack of an) Anti-Globalization Movement

Well. I type up a late-night blog post to give myself a temporary break from paper-writing, and wake up to find it the weekend topic du jour in the IPE blogosphere.

First, Drezner builds me up ("rising young blogger"... I'm not that young, and not rising that much either) before tearing me down:

Hmmm.... no, I don't think Winecoff is correct. Even if it's true that the kids today care more about environmental degradation than labor abuses, this shouldn't stop them from protesting at economic summits. Indeed, from the mid-nineties onwards, protests against labor and emvironmental abuses have gone together like racism/sexism/homophobia accusations.

Also, I would dispute the empirics of Winecoff's assertion. The protests didn't die out with the change in the decade -- they were pretty robust at G-8 summits in the first part of the naughties, as well as the 2003 Cancun WTO Ministerial and the 2005 Hong Kong Ministerial. This is a more recent phenomenon.

If I'd done a better job of anticipating criticisms I would have addressed Drezner's first point ahead of time. Of course I agree that protests against labor and environmental practices often go hand-in-hand, but that's because protestors often see both of those issues as symptoms of a bigger disease: globalization forces developing countries into a race-to-the-bottom that erodes labor and environmental standards (and erodes cultural diversity and norms of reciprocity, etc.).

(An aside: those sorts of protests have generally be focused at the WTO and G-8/20. The IMF doesn't have anything to do with environmental politics, and the proximate cause for this discussion is an IMF protest.)

However the focus of environmental activists in the recent past has not primarily been about how globalization leads to race-to-the-bottom dynamics in the developing world; instead, it's been about how to convince national governments and their citizens in the developed world to agree to reduce carbon consumption. The WTO doesn't have much to do with this, although it eventually could if nations start slapping carbon tariffs on each other. But a prerequisite to that is getting national governments to agree to meaningful cap-and-trade regimes or carbon taxes, so activism has shifted to the national level for the time being.

As to my "empirics"... I don't have any. It was just a casual observation, and I didn't mean to imply that there was a strict shift in protest activity from "Tons" to "None" around the turn of the millennium. Merely that anti-globalization protests have tapered off over the past decade as the institutions associated with globalization have been less active. I still think that correlation holds pretty well, and it's even pretty consistent with what Drezner says. I think he's completely wrong about his Business Cycle Theory of Economic Protests, however:

During boom times, antiglobalizers score political points by stoking fears of cultural debasement and environmental degradation. During leaner years, naked self-interest becomes the salient concern: in the current economic climate, American opponents of globalization talk less about its effect on the developing world and more about the offshore outsourcing of jobs.

First of all, there's nothing in that that suggests that overall protests against globalization should decline during lean years, only that the anti-globalizationists should be complaining about slightly different things. In fact, we've seen an uptick in protest activity in the U.S. since the financial crisis, as we should probably expect. It's just that they're not complaining about globalization because the IMF/WB/WTO are not perceived to have had much to do with the current crisis. Instead, focus has shifted to other issues like deficits, health care, and corporate welfare.

Simon Lester agrees with my earlier point that there are fewer globalization protestors because there is less to protest about: the WTO, IMF, and WB have been much less active in recent years than they were in the 1990s. He also suggests that some protestors may have switched from anti-globalization to anti-war, and Stephanie Carvin pops up in comments here to say something similar. This makes a lot of sense to me (although those protests have also mostly dried up too, in the States at least; Carvin suggests they are alive and well in Europe).

It also backs up what was my original point: protestors have one-track minds. If they're focused on the war in Iraq then they aren't focused on labor rights in Latin America. If they're focused on getting the U.S. government to institute a cap-and-trade regime then they pay less attention to the World Bank subsidizing undemocratic governments. And if the IMF hasn't done anything onerous in a decade, then there just isn't much to protest.

I don't think this is permanent. I think protest activity changes with events. If we end up getting a wave of sovereign debt crises, and the IMF imposes austerity as a condition of loans, then we'll likely see IMF protests pick back up. If Doha ever moves towards completion without environmental protections built in, then we'll likely see more anti-WTO protests. But right now those issues just aren't very pressing, so protestors have moved to other things.

Will the Last Anti-Globalizationist Turn Off the Lights?

Drezner points to this WaPo item, noting that IMF protests ain't what they used to be:

Opponents of the International Monetary Fund and the World Bank are protesting in the nation's capital.

About 20 activists gathered early Friday afternoon ahead of IMF and World Bank meetings this weekend in Washington. They say the international institutions favor banks and corporations and drive struggling economies into debt and poverty.

20 whole activists? Well blow me down. The G-20 protests in Pittsburgh last year weren't much more impressive. (The protest was at its largest when unaware Pitt students joined protestors and started chanting "Let's Go Pitt!") But this doesn't actually surprise me too much. In teaching over the past few semesters I've noticed that my students generally have no idea that the IMF, World Bank, and WTO are controversial organizations. Even fewer of them know why they're controversial. This is in stark contrast to my undergrad days, which coincided with the Battle in Seattle and other large protests. Then the anti-globalizationists were loud, proud, numerous, and armed to the teeth with a brainful of "Did you know?" statistics and the good humor of Adbusters (where the image above originated). Now nobody on campus seems to care too much.

I wonder why? I can think of a few possibilities. First, the protests were loudest in the 1990s because of NAFTA (1994), the establishment of the WTO to supplant the GATT (1995), the fairly brutal "Big Bang" liberalization of the post-Soviet economies throughout the 1990s, the harsh austerity measures that came with IMF aid following the East Asian financial crises (1997-8), and the accession of China to the WTO (2001). It was a pretty active decade for neoliberals, which means it was a fairly active decade for anti-capitalists and anti-globalizationists despite the collapse of the Soviet system a few years prior.

Since 2001? Not much has happened on the globalization front. Doha is stuck in limbo, even modest FTAs with small countries have been slow in progressing through Congress, and the IMF had basically nothing to do for nearly a decade. Now that the IMF has been pressed into action again it's largely taken a more accommodating line toward recipient states, and it's pretty difficult to argue that Greece, e.g., is a victim of Western economic imperialists. The globalization of the Naughties was a kindler, gentler, calmer globalization compared to the Brave New World Is Flat globalization of the 1990s.

But I think that's only part of it. I think a better explanation is that people in general, and college students in particular, only have attention for one cause at a time, and environmentalism has definitely become the sexy issue over the past 8-10 years. When I hear people complain about China's trade practices these days, the arguments are less about the use of sweatshop labor and more about environmental degradation. To me it seems that the one has simply supplanted the other as the most pressing issue for the socially conscious.

I don't have a good explanation for why the shift has occurred, and maybe my experience isn't representative. I'd love to hear views from others that either confirm or deny my impression. Then again, if only 20 bother to show up for an IMF protest in D.C., maybe there's something to it.

(UPDATE: Drezner responds, and I fire back here.)

The Intellectual Drift of Thomas Friedman

Thomas Friedman, c. 1999: Hallelujah! The Golden Straightjacket will save us all!

Thomas Friedman, c. 2005: Globalization 3.0 is cool! Who needs states or MNCs?

Thomas Friedman, c. 2010: ZOMG! EVERYTHING IS HORRIBLE! BACK TO MERCANTILISM AND ISOLATIONISM, PRONTO!

One takedown here.

Royale with Cheese

Warning: Above video has Tarantino language in it, so it's probably NSFW.

So the French love McDonald's so much that they're putting one in the Louvre. And somewhat surprisingly, everybody seems pretty nonplussed. Why? Because McDonald's (at least in France) may now be of better quality than local bistros:

Part of McDonald’s success in France can be explained by the company’s efforts to adapt to local taste buds. “The French eat McDonald’s in a French way,” said Caroline Deleuze, a spokeswoman for McDonald’s France. “They come less often but spend more because they want a proper meal.” That is defined as a sit-down experience with two courses.

Local menus offer sandwiches that aim to please local tastes. Le Royal Deluxe features a whole-grain mustard sauce on top of the standard beef patty, cheddar and vegetables, and it is now the second-largest selling burger in France, after the Big Mac. Le Big Tasty, a seasonal offering with a sauce that imitates the charred flavor of meat grilled on a barbecue, promises “le goût de l’Amérique,” or the taste of America.

McDonald’s France offers its version of the Caprese salad, called Little Mozza, and beer and espresso are also available. The company emphasizes the French origin of the beef and vegetables in its restaurants. ...

Mr. Drouard is untroubled by the McDonald’s in the Louvre. “We’re in a process of industrialization,” he said. “The French have become eaters of convenience food.”

McDonald’s popularity, he said, is the result of declining standards in what the French consider traditional fast food. “Bistros don’t know how to make a good sandwich anymore,” Mr. Drouard said. “McDo is a legitimate competitor.”

That's kind of funny to me, but not terribly surprising. Though nobody wants to admit it, even in the States the fast food chains are often of similar or better quality than local diners in the same price range. And McDonald's is very good at adapting its menu to suit local tastes. In Paris you can get the Caprese salad and "local" beef as mentioned above, but also jambon buerre (baguette with ham and butter). (Keep this in mind whenever you hear that globalization equals American cultural imperialism; it ain't true.)

In America, fast food is a countercyclical asset, so it always does well in recessions. The current one is no different. But in Iceland, the collapse of the krona made the inputs for McDonald's burgers too expensive to import without charging much higher prices. Instead, all three restaurants in the country will be closed in a few days.

Despite the setback in Iceland, the Big Mac is so ubiquitous that it is its own exchange rate.

Also: fast food restaurants maybe don't make you fat. How do you say "supersize me" en français?

How Soccer Illustrates Globalization

One of William Easterly's students guest-posts on globalization and soccer:

Some “soccer economists” argue that nations that are worse at soccer have benefited from exporting their players to world-class foreign clubs, where they gain valuable skills and experience before returning to play for their home country This is similar to recent literature that questions the traditional Brain Drain fear, with the Brain Circulation alternative – skilled emigrants bring home skills and connections that could be as valuable to their home country as the skills brought back by exported soccer players.

But there is also a homegrown story. As Dani Rodrik points out, the Egyptian team that beat Italy had a majority of players with experience playing in domestic, rather than foreign clubs. The USA team that similarly surpassed expectations has key players from both domestic and foreign clubs. So taking advantage of globalization perhaps requires BOTH strong domestic capabilities and international links.

One nation’s strategy for developing a strong domestic soccer league will be very different from the next. American kids who play under the supervision of soccer moms are different from the street kids in a Brazilian favela. Perhaps the venerable theory of comparative advantage needs to become more complex as each country learns to play to its strengths and use more of whatever are its most abundant resources to compete globally.

If I had known that there was such a job as "soccer economist" I would have stopped worrying about international financial regulatory policies a long time ago. Alas and alack, it's too late for me.

More seriously, the last paragraph is true and under-discussed. In introductory courses and textbooks we often talk about "comparative advantage" as if it were a general, exogenously-given thing. In truth, comparative advantages can be quite specific, change over time, and can sometimes be engineered through public investment. We don't often think about this in terms of sports, but the U.S.S.R. certainly spent a lot of money training Olympic athletes, especially in high-profile sports like gymnastics, basketball, hockey, swimming, and weight-lifting. I recall reading somewhere (can't find the link right now) that China invested a lot of money in "soft" Olympic events in which they were not typically competitive in order to pick up a higher metal count.

But back to soccer and whether it really does explain the world: social scientists don't have only to look at the implications of soccer on trade, brain drain, or immigration; several political scientists recently studied [pdf] national cultures of violence by looking at the behavior of soccer players. And nationalist forces have instituted the new "6+5" rule for UEFA club matches, mandating a certain percentage of "native" players on professional teams. These quotas serve the same political function in soccer as they do in other types of trade: local workers who face new international competition seek some protection from that competition in the form of regulatory rents.

Can the FA take UEFA to the WTO Dispute Settlement Court?

And what are the geopolitical implications of one nation's central bank sponsoring another nation's championship team?

More of the Same, Please

Dani Rodrik wants to see some sand thrown in the gears of globalization:

The conundrum of global reform is that the proposals that go far enough, such as establishing a global financial regulator, are wildly unrealistic, while those that are realistic, such as reform of the IMF, fall far short of what is needed.

What we need is a vision of globalization that is fully cognizant of its limits. We can start with a simple principle: We should strive not for maximum openness in trade and finance, but for levels of openness that leave ample room for the pursuit of domestic social and economic objectives in rich and poor countries alike. In effect, the best way to save globalization is to not push it too far.

From this essay, it is not clear what Rodrik specific changes has in mind. But given Rodrik's recent talk at LSE, there appear to be four main thrusts:

1. Markets need to be embedded in systems of governance
2. Political communities will remain predominantly in nation states
3. No "one way" institutional design
4. Countries have the right to protect social institutions, but not impose them on others

Rodrik calls this "Capitalism 3.0" (1.0 was the laissez-faire system that ended after WWI; 2.0 was the rise of the Keynesian welfare state). The hallmarks seem to be a system in which institutions vary by country, reflecting national priorities and interests, varying demographics, and the endowments of each state. In other words, no more "Washington Consensus", nor one-size-fits-all capitalism. Markets are international but governance must be national. We should give states a lot of slack to govern as they see fit rather than forcing a specific agenda on them

Obviously I wasn't at the LSE talk, and Rodrik hasn't posted any slides/video/audio/transcript, so I can't be sure that the talk was as described above (although Rodrik endorses the account here), but it strikes me that that was a feature of Capitalism 2.0. While it is true that in the past IMF loans and World Bank development assistance have come with strings attached that reflect the dominant neoliberal paradigm, overall there is plenty of institutional divergence across capitalist countries. Indian capitalism looks little like Brazilian capitalism. Danish capitalism looks nothing like Estonian capitalism. Singaporean capitalism has little in common with French capitalism.

Indeed, as Rodrik notes, the pervasiveness of actual governance on the international level is often overstated, and achieving more of it is exceedingly difficult. Rodrik goes so far as to assume that it is impossible to get a truly global system of governance. Rodrik's argument is that a global governance system is not only infeasible, but also undesirable. He wants to see globalization scaled back; he wants more sand in the wheels. In fact, what he is proposing is less a new creation, but a return to a modified version of the original Bretton Woods arrangement.

The world I see is less uniform than the world he sees. I see plenty of institutional divergence, and plenty of flexibility for countries to set their own policy. I see countries responding to changes in their macroeconomies on an ad hoc basis rather than accepting top-down institutional demands from the United States or international institutions. In other words, I see a world that largely conforms to Rodrik's standard already. What few specific changes he would like to see are on the margins, unlikely to be implemented (e.g. the WTO may not succeed in a further lowering of tariffs in Doha, but they are even less likely to give more rope for countries to pursue protectionist policies), and represent a movement back to the old Bretton Woods system rather than the creation of a new system.

In short, I see the New Economic Order as the same as the Old Economic Order. And, on balance, that is a good thing.

[UPDATE: Marc Dotson posted a link to video and slides from Rodrik's presentation in the comments. They are here. After reviewing the slides my substantive thoughts haven't changed.]

In Which French Winemakers Act, Well, French

My previous post was about how large agri-business conglomerates capture much of the E.U.'s (and U.S.'s) farm subsidies. But common farmers and vintners get some too. And when you've been capturing rents for generations, being forced to give them up is a bitter pill.

Mr. Jeune, along with most French winemakers, opposes European Union plans to relax strict rules governing the making of rosé, or blush, wines just as they are starting to gain respect — and sales. Currently, red grapes are usually crushed and left to ferment briefly with the skins, the two being separated before the juice colors fully. The E.U. proposal would allow Europeans to simply blend red and white wine to create a pink blend — giving them the freedom to adopt the same, less complex, methods as New World producers.

“If you do this, why not allow people to make wine without any grapes at all?” Mr. Jeune asks, growing steadily more voluble over a glass of his own — “real” — rosé, from grapes grown in Provence. “You could do it in a laboratory, with alcohol, water, artificial flavors.”...

Though the French government seemed to go along with the blending proposal in January, it has since sought to block the measure after a backlash in the countryside. Because of its resistance, a final E.U. vote has just been deferred until June.

In France, a land reliant on agricultural subsidies, tiny producers with distinctive wines have a special place in national affections. Makers of the most exclusive French wines are prospering but, with competition from the New World growing, rosé is a rare midmarket success story — quite something for a product long considered inferior by wine snobs.

Yeah, yeah, I know: this all sounds very quaint. We in America often chuckle at these little squabbles. But these people are serious:

In March, La Baume winery in Languedoc suffered a bomb attack — the second in five years — and a shadowy group opposed to the “industrialization” of winemaking is blamed.

La Baume, a large winery once owned by an Australian company, Hardys, but since bought by a big French producer, Les Grands Chais de France, is seen as a symbolic target.

I suppose the message is clear: "If you don't use redistribution and government supports to protect our noble way of life from competition, then we'll blow you up, Weather Underground-style." Sounds like something Hollywood could work with, but I'd bet the noble French farmer wouldn't care much for that, either.

Speaking of films, Mondovino is a recent (last few years) documentary on the wine industries in Italy and France -- and the pressures they face from burgeoning winemakers in the Americas and elsewhere -- covers these issues very nicely. It focuses on the culture, but gets into some of the politics and economics as well. It is recommended viewing for those interested in agricultural policy, the differences between Americans and Europeans, IPE, and wine. Needless to say, I enjoyed it quite a bit.

Anyway, at least some are willing to put things into perspective:

But Anne Sutra de Germa, who runs a small winery, Domaine Monplézy, and also opposes change, is more optimistic.

“In some ways it’s good to have stupid laws,” she said, “because the consumer who wants good wine will, eventually, find us.”

Touché.

Videos for the Weekend: Recent TED Talks

Two recent TED talks of interest to IPE folks. First, Bruce Bueno de Mesquita explains how he can predict the world using game theory. Second, Alex Tabarrok shows why he is known as one of the most optimistic believers in global capitalism still standing. I often think that both of these guys are excessively exuberant, and I suspect that there is some showmanship going on under the guise of social science, yet they are both fairly influential and should be taken seriously.