Trade Sequence Part 4 – The Race to the Bottom

James K

James is a government policy analyst, and lives in Wellington, New Zealand. His interests including wargaming, computer gaming (especially RPGs and strategy games), Dungeons & Dragons and scepticism. No part of any of his posts or comments should be construed as the position of any part of the New Zealand government, or indeed any agency he may be associated with.

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173 Responses

  1. Roger says:

    Thanks James

    I was starting to worry your series had come to an end. Great explanation.Report

  2. Rod Engelsman says:

    I’m going to echo Roger here. I’ve been wondering lately when you were going to come out with another post in your series. So, thank-you.

    And I’m going to return to my primary worry about the current state of affairs in international trade, vice your obviously firm grasp of the theory. You wrote:

    You might think that sounds damn convenient, how can I blithely assert that perfidious foreigners can’t just out-perform you in everything? The key here is that trade is fundamentally an exchange of goods for goods – money is just an economic lubricant. If one country is exporting a lot of goods to another county, but getting none back then what is the exporting nation getting out of the deal? To put it in monetary terms a lot of people want to buy the exporting nation’s currency (so they can buy its products), and a lot of people want to sell the importing nation’s currency (because they keep being paid in it for exporting to that country). This makes the exporting nation’s currency stronger (making its goods more expensive), and the importing nation’s currency weaker (making anything they produce cheaper). In other words, any advantage the country with low standards racks up gets eroded by international currency flows.

    Granting that the U.S. started from a very strong position, how is it that we’ve run a consistent and growing trade deficit for nearly forty years? More specifically, why haven’t we simply gone broke? After all, if an individual or a household consistently consumes more than it produces, the only way to finance that is with borrowing. And there’s a limit to that sort of thing with the end result being bankruptcy. While I acknowledge that one has to take care in analogizing upward from households to nations, the principle is pretty simple and straightforward; really just basic accounting.

    Here’s what’s been bothering me lately and I apologize for it being a bit of a tangent. There seems to be a dominant school of thought, primarily among conservatives and libertarians, regarding trade deficits on the one hand, and federal budget deficits on the other. This school holds that 1) trade deficits don’t matter (and to claim otherwise is “mercantilism”), 2) budget deficits are a huge, huge, problem (and to claim otherwise is “keynesianism”), and 3) these two imbalances–trade and budget deficits–are unrelated phenomena.

    This all seems terribly backward to me. First of all, it seems clear to me that a large ultimate (as opposed to proximate) cause of our federal budget deficit lies in the trade deficit. Quite simply, since we consume more than we produce, our national income is insufficient to finance our consumption. This has forced the government, regardless of stated policy or ideology, to engage in continual keynesian pump-priming to keep it all from collapsing into deflationary depression. Second, a growing economy requires a growth in the base money supply roughly proportional to the real growth in GDP just to ward of deflation. Our central bank seems to normally be allergic to new money creation, preferring instead to let the banking system do the work through FRB. But that has it’s limits given that risk increases with leverage. Hence, bubble and burst, over and over.

    I have to admit to feeling frustrated with current economic discourse. Am I seeing something others are missing or am I just nuts? I prefer not to countenance the latter.Report

    • Murali in reply to Rod Engelsman says:

      Am I seeing something others are missing or am I just nuts? I prefer not to countenance the latter.

      how do you know you are not nuts? Do mad people know that they are mad? I don’t think I’m mad!!!! You will tell me if I was mad wouldn’t you?? Aaaaaaaaaaaaaaaarrghhhhhhh. The spiders! The spiders!Report

      • Rod Engelsman in reply to Murali says:

        You have spiders? I hate spiders.

        For me it’s the little people. I can only see them out of the corner of my eye. Turn your head and they’re gone. But they whisper to me at night…Report

    • zic in reply to Rod Engelsman says:

      Roger, I don’t think you’re nuts. I often think there’s a similar argument to be made when it comes to wages. For low wages or wages that don’t keep pace with inflation, let alone grow, mean less and less purchasing power for consumers. I think the flat wages for families since the 1970’s (which is actually a decrease, because household income does not include a measure of hours worked, and that 1970’s era income was more likely to have one bread-winner, now, there’s more chance there’s two;) and the decreased purchasing power means less production.

      In the US, that’s been offset by a decrease in prices for many consumer goods — the stuff at WalMart — but not others, including energy, medical care, and education. So our flat wages reflect the comparative advantages of developing nations. Or something like that.Report

    • North in reply to Rod Engelsman says:

      I’d like to try and throw out some responses, especially with regards to your musings on monetary policy and money supply. I’m no expert myself but I try and pay attention to economics a bit so people can feel free to jump in and correct me.

      The trade deficit is, I’m generally inclined to agree, not a serious concern. That is because the US currency serves purposes that don’t necessarily appear in an intuitive way on trade balance calculations. For instance pretty much every country in the world buys dollars from us. Typically countries do this because they want to buy American goods and certainly they do that with us but they also do it with American dollars simply because they wish to store value in American dollars. You also see this with American governmental debt. The thing to keep in mind is that for people globally with a huge amount of money all the way from upstanding corporations to sovereign wealth funds, to African kleptocrats with millions of bucks in skimmed off charity dollars or blood diamond peddlers finding a place to store your money presents significant difficulties. Globally the options for storing money is pretty limited at the moment. Russia and China have big economies and lots of currency but their governments are (in)famously autocratic and their financial systems are notoriously crooked. You can’t put your money there, you’re liable to have it stolen or lost. Smaller countries, your Brasil, your Israel, your Canada, your Nordic Europe and Germany are safe places to store value but they’re small. There’s not a ton of room to put your dough in and everyone else is doing it too. The EU is a big economy and generally transparent and forthright in their financial system but they also have a systemic problem that strongly implies that they might abruptly fly apart. No one wants to buy a billion Euros and abruptly end up with forty billion Greek Drachmas or something.
      Also contrary to imbecilic conservative hyperventilating the US national finances are relatively low risk. Anyone with eyeballs can see a country that runs large deficits, sure, but also a country with a lot of room to cut spending and with a huge capacity to increase taxes. Our genuine default risk (absent towering political idiocy) is miniscule, especially compared to our peers.
      So that’s where a lot of that imbalance goes, everyone and their dog right now is storing value in the American dollar. People are flat out begging us (and are literally paying us with negative real interest rates) to hold onto their money for them.

      Another thing to keep in mind is that the American economy is massive and it’s a highly desirable market to sell in. Oddly enough countries are willing to, as a nation, give us goods as a way of propping their economies up. Look at China, Japan or many of the other huge trade surplus running economies. Beneath those trade surpluses are central banks furiously buying huge stashes of American dollars to allow them to maintain an imbalanced currency exchange. Absent their interventions Asian currencies would rise against the American Dollar and it doesn’t take very much appreciation before the economics that underwrite their low margin, low value added manufacturing invert and they face severe recessions. First world economies are enormously efficient and with distributed high tech manufacturing or, God(ess?) help them new nascent techs (3d printing anyone?) emerging those differences in efficiency are growing. Manufacturing can flow back to the first world very easily. Factor in energy costs and it’s a knife edge indeed. So that’s another place our dollars are going: sitting in an electronic vault under the Central Bank of China to keep the Yuan trading at its peg with the dollar and keep all those young Chinese workers busy making us Nikes and Ipads instead of angrily wondering if they might be better off with a different government.

      In domestic American politics, of course, it’s kind of a reality free zone. The GOP is out of power so if course it’s now time for them to have their come to Jesus moment on budget deficits (a manufactured crisis if ever there was one). I’d expect if they somehow found themselves in the majority again they’d swiftly forget how dire it supposedly is until the next time their political fortunes waned (and in fairness the Dems would mirror the dynamic to a small degree).Report

      • Rod Engelsman in reply to North says:

        I agree with everything you’ve said here, North. And basically that nullifies the dynamics of currency appreciation/depreciation with imbalanced trade that James K. outlined in the paragraph I quoted. Essentially our dollars are being hoarded as goods in and of themselves. The shorthand way of saying this is that the dollar is the world’s reserve currency. It functions in the same way gold used to function in past centuries.

        And it’s nice in a way I guess, sort of a point of national pride and all. But it still leaves us with the problem of maintaining domestic aggregate demand and avoiding deflationary pressures. If our trading partners are happy to hold dollars rather than spending them, the only way to do that is to print more money to make up the difference.

        And my point, wrt to the federal deficit, is that’s essentially what we’ve been doing. Basically we’ve been buying back M2 dollars with M3 dollars and spending them into circulation. I think the Fed sort of gets it, which is why they’ve been doing the quantitative easing (econo-speak for “printing money”), but they’re limited to injecting it into the banking system. All they can do is water the leaves of the tree rather than the roots.Report

        • North in reply to Rod Engelsman says:

          Oh I agree heartily Rod. This is after all a demand recession so it seems to me like a bit of money printing wouldn’t necessarily hurt if it was done judiciously. Politically, of course, this is impossible. The fed is understandably inflation shy (inflation is easy and fun to cause but hard and painful to rein in) and politically of course one wing of the country’s polity has been shrieking “inflation!” like a pack of howler monkeys ever since Obama was elected so politically money printing is pretty dicey. Thus the current stopgap methods.

          Of course instead the Feds are running up deficits which is a kind of money printing of its own.Report

          • zic in reply to North says:

            So instead of money printing, we get something called ‘quantum easing.’Report

          • Plinko in reply to North says:


            Though I think the evidence is clear that in the recent past the U.S. has not been printing nearly enough money.
            Now, it’s a good question if we will continue to print not nearly enough money next year and the year after or if we might swing the opposite way.Report

            • Nob Akimoto in reply to Plinko says:

              The thing is, it does look like the US has been in a bit of deflationary environment, somewhat similar to what Japan’s been going through over the past decade. Now the dollar’s value relative to other currencies hasn’t fluctuated to the wild extremes that the yen has in the same period, so it’s probably not as noticeable, but it’ll take a lot more liquidity in terms of everything from QE to debt repurchasing to swing it the opposite direction.Report

            • Kim in reply to Plinko says:

              Doesn’t matter. we’re enrichening our consumers at Europe’s expense. Get the consumers enrichened enough and our economy will take off.Report

        • Brandon Berg in reply to Rod Engelsman says:

          And it’s nice in a way I guess, sort of a point of national pride and all.

          Who cares about national pride? It’s nice because we’re getting free stuff. The worst thing that can happen is that foreign holders of dollars decide that they don’t want to hold dollars anymore and start using them to buy stuff from US exporters. On the one hand, that means we stop importing free stuff and start exporting free stuff. On the other hand, it’s a boost in aggregate demand. If the inflationary pressure from the inflow of liquidity gets too high, the government can always run contractionary monetary policy to counteract it, and the demand for exports will be sufficient to support it. Also note that the foreign holders of dollars, when they finally decide to spend them on US exports, will have seen a big chunk of their value inflated away.Report

        • Kim in reply to Rod Engelsman says:

          everyone remembers JFK.Report

      • Wardsmith in reply to North says:

        Good analysis North. Another item /massively/ in the US’ favor is petrodollars. When Germany buys oil from Russia the entire transaction in monetized in US dollars. There are about 110million bbls a day sold in the world today at roughly $100/bbl or so. That’s a lot of shekels, er dollars.

        The problem with Canada is they don’t /need/ to borrow any money so all that pent up demand can’t find a place to buy there. Same for Germany, Switzerland and the rest of the “safe havens”.Report

        • North in reply to Wardsmith says:

          Yes Ward, a pertinant point. The outstanding debt that the “safe haven” countries roll over annually is a mere pittance. So you’re quite correct that there’s very little debt to buy.Report

    • James K in reply to Rod Engelsman says:

      Thanks Rod, I’m glad you’ve been enjoying these.

      The position you describe does indeed have a problem, but not the one you think. The two deficits are linked, but the causality is reversed from what you are suggesting. Because the government is borrowing so much (and specifically that it is borrowing so much from overseas), the USA has a capital account surplus – more capital is entering the country than leaving it. As a matter of accounting, a country with a capital account surplus must have a current account deficit (if you’re borrowing on net then capital is flowing in and your payment on that capital is flowing out). Therefore, if the US government balances its Budget (or at least stops borrowing from foreigners) the trade imbalance will disappear.Report

      • Wardsmith in reply to James K says:

        James, (good OP BTW), yes and no on your comment. Currently the major trading partners such as China have scaled back their purchase of our national debt considerably. Once they began to do that we had no choice but to buy it ourselves (the QE rounds). That can’t last forever because we’re just filling up balance sheets at the FED with IOU’s. The problem isn’t the /current/ debt so much as the expected debt. Exponential growth can only end – badly.Report

        • James K in reply to Wardsmith says:

          True, if the US government were to stop borrowing now I’d be totally unconcerned about your national debt.Report

          • Wardsmith in reply to James K says:

            As long as Obama is in office and Democrats use tax dollars to buy votes there is NO WAY the US gov’t will stop borrowing. Ergo anyone with thinking grey matter will be concerned about our national debt (sorry North, that’s just the way it is).Report

            • M.A. in reply to Wardsmith says:

              As long as Obama is in office and Democrats use tax dollars to buy votes

              The talking points of the deranged radio hosts have nothing to do with reality, no matter how often you repeat them.Report

            • Rod Engelsman in reply to Wardsmith says:

              So when Reagan tripled the national debt who’s votes was he buying?

              When Bush the Elder close to doubled it who’s votes was he buying?

              When Bush the Lesser doubled the debt again who’s votes was he buying?


              • Debt to GDP ratio only matters if the money goes toward the wrong people.Report

              • Wardsmith in reply to Nob Akimoto says:

                You’re right, no matter how many years Obama stays in office all debt belongs to Bush, how silly of me. The current caterwauling is all about “cuts” that mean spending doesn’t get to INCREASE as much as everyone wants.

                Both sides are wrong, the Republicans spent like Democrats so they got VOTED OUT OF OFFICE!! The serious debt started piling up the second the Democrats were in charge of Congress – look it up.Report

              • No, Ward.

                The GOP was voted out of office because of the War in Iraq. McCain flubbing economic questions right when the economy blew up made the difference, but you lost the country because of the war, not because of the debt.

                Because the Democrats don’t run on reducing the debt.Report

              • Wardsmith in reply to Patrick Cahalan says:

                Patrick, I’m not a Republican but since you’ve collectively chased every Republican off this site (except for Tod, who is about as Republican as Khomeini was Christian) I get to be the fall guy for them? Not a happy place. If you want me gone just say so and you can have the circle jerk society all to yourselves.

                Correction to history for those who must have been too stoned to observe it properly: The Republicans who for the first time in over 40 years had control of the House and the Senate lost them Bush’s 2nd term! /That/ is what I was talking about, not presidential elections. EVERYONE at the time said it was because of the spending, but if revisionists claim otherwise today so be it.

                /I/ Didn’t lose the country, /I/ never had it, /I/ am not a Republican. Unfortunately while the Republicans at least pretend to care about the financial health of the country the Democrats can’t even bring themselves to go that far.

                Both parties are like professional wrestlers posing and posturing for the dumbstruck audience while pickpockets work their way through the crowd.Report

              • Kim in reply to Patrick Cahalan says:

                What, Obamacare isn’t enough for you? Fixing Medicaid would be a pretty big deal, in my not so humble opinion.

                No, the Democrats don’t SELL based on the budget. It’s not their shtick. But they do care about the budget, and it shows.

                Now, you I and the flipping Queen of France may be skeptical as to whether Obamacare can actually cut Any costs whatsoever.

                But they IS tryin’, in the Democratic Sausage Sorta Way.Report

              • Patrick Cahalan in reply to Patrick Cahalan says:

                Patrick, I’m not a Republican but since you’ve collectively chased every Republican off this site (except for Tod, who is about as Republican as Khomeini was Christian) I get to be the fall guy for them? Not a happy place. If you want me gone just say so and you can have the circle jerk society all to yourselves.

                Tim’s still around, and he’s pretty Republican. Methinks Burt still considers himself a Republican at heart. I have chased off nobody, myself.

                Tom, much as I like the guy, made little to no effort to engage here in the way that the editorial staff wants people to engage. His ejection from the site, such as it was, wasn’t about his political inclinations but about the way he wrote and chose to engage (or not engage) with the community.

                I agreed with Tom about as often as I agree with Tim, but I will say that Tim routinely engages with me in a way Tom did not. While I didn’t have a particular problem with Tom, myself, I can understand the position of the editorial staff, and since I predicted that he would eventually put himself in a position not to stick around, I was neither surprised nor do I find anyone particularly at fault in his case.

                I have to be honest, Ward, in spite of your self-proclaimed libertarianism, when you show up in the comment thread I find the practical implications of what you say to be indistinguishable from what the current GOP leadership claims to be all about. To the extent that your position has nuance that isn’t reflected in what you say (which may be considerable, given that you don’t choose to comment on everything), and to the extent that the current leadership isn’t about what they claim to be about (which I myself find to be considerable), I grant I have no particular grounds to call you a Republican, so consider this an apology for mis-labeling you. However, if you’re going to take the side of argumentation for the GOP in any particular case, rest assured that my use of the pronoun “you” is not intended to lump you in. Fair enough?

                Correction to history for those who must have been too stoned to observe it properly: The Republicans who for the first time in over 40 years had control of the House and the Senate lost them Bush’s 2nd term! /That/ is what I was talking about, not presidential elections.

                The Republicans held the House from 1994 to 2006. With all the off-the-books accounting for the Iraq/Afgan war(s), I don’t see a particularly notable increase in spending between 2004 and 2006 that jumps out at me in the context of 1994-2006. Given the huge popularity of Medicare Part D among the elderly generation, who skew GOP, I can therefore attribute the loss of the House as being much more likely to be linked to the two wars, which polled increasingly horribly from 2005 to election time, 2006.

                EVERYONE at the time said it was because of the spending, but if revisionists claim otherwise today so be it.

                I look at the exit polls from the 2006 election and I see the Democrats taking the Independents, and Iraq showing up as a much bigger factor than the economy, with Katrina coming in second, really. That matches my anecdotal impression of the results.

                So I’m really not sure who you are (or were) reading that convinced you that the GOP lost because of spending, I’m not seeing that, at all.

                Both parties are like professional wrestlers posing and posturing for the dumbstruck audience while pickpockets work their way through the crowd.

                On this we’re generally in agreement, that’s for sure.Report

              • Roger in reply to Patrick Cahalan says:

                The issue I have with Tom’s treatment is that I believe he was held to a substantially different standard than the offenders on the other side of the aisle.

                This was further complicated by the fact that Tom often acted as the sole conservative. When four or five people of the other persuasions (libertarians tore into him frequently too), it was natural IMO for Tom to start responding in an increasingly uncivil manner. I know I do when a mob starts gang snarking me (don’t we all?)

                This site does not have anything remotely close to a representative sample of true, Christian Conservative types, like we would find on the far right. I wish we could get a few active ones. I think we would all gain by learning how to talk and argue with them.Report

              • Michael Drew in reply to Wardsmith says:

                *Serious* debt only happens under Democrats.Report

              • Barry in reply to Wardsmith says:

                “You’re right, no matter how many years Obama stays in office all debt belongs to Bush, how silly of me. ”

                Please read your Krugman; he’s referenced some excellent work on the source of the debt and deficits. Short answer – the GFC and the Bush Wars. All else is spare change.

                “Both sides are wrong, the Republicans spent like Democrats so they got VOTED OUT OF OFFICE!! The serious debt started piling up the second the Democrats were in charge of Congress – look it up.”

                Um, actually no – the Republicans were ‘spending like Democrats’ from the moment that Dick ‘The deficit doesn’t matter’ Cheney assumed office. That’d be 2001.

                As for serious debt piling up, I’ll file that with ‘Bush kept us safe!’.

                Please, we’re aware of recent history.Report

              • Kim in reply to Wardsmith says:

                You mean putting the Iraq and afghanistan wars on the books? That’s called pencilpushing, not debt piling up.Report

              • Wardsmith in reply to Rod Engelsman says:

                Rod I voted for Anderson when Reagan ran against Carter, for Perot when Bush ran and didn’t vote when Bush W. ran against Gore (I was traveling on a business trip at the time – to Tennessee as it turns out). Everywhere I went in Tennessee folks were celebrating that Gore lost (and he lost his own state, no recount needed).

                Clinton is the one who benefited from the prosperity that Reagan created, primarily through tax reform. Reagan doubled down on defense and won the Cold War and bankrupted the Soviet Union. Therefore we could lower our defense spending under Bush and Clinton thereby creating the “peace dividend” that allowed hundreds of billions to make it back into the legitimate economy benefiting everyone, including me.

                Economics is a long game, the disasters looming from this administration will take a while to come home to roost but come home they will.Report

              • Jesse Ewiak in reply to Wardsmith says:

                So, how’d you vote in ’84 when Reagan had just spent 4 years running up the debt, in 2004 after Bush had spent 4 years running up the debt, and in 88 after HW promised to continue to run up the debt. Funny how you don’t mention those elections.

                Also, in other words, your entire argument is that a massive increase in government employees, paid for by deficit spending, is good when those employees have checks stamped, “Defense Department”, but wrong if they have “Department of Labor” or “Department of Energy” stamped on their checks.

                Plus, the idea that the Great Reagan outspent the Soviets and then they collapsed is hogwash. Growth was already declining in the USSR by the 70’s. Did Reagan dropping trillions on defense pork maybe hasten the collapse by a year or two? Maybe. There is the small matter that defense spending over the entirety of Reagan’s administration in the USSR only increased .4%. Not exactly a massive buildup in response to Reagan.

                But, Reagan’s greatest success in the Cold War wasn’t spending trillions on the military. It was realizing after Gorbachev had become General Secretary that it was time to change from a warrior to a peacemaker. There was a reason why the nascent neocon right was pissed at Reagan for much of his last term. He was actually talking to the Commies! He was selling out our boys and actually cutting nukes! How dare he!

                Finally, we have the true right-wing canard that after a recession, the economy remembered, “oh right, Ronaldus Maximus cut taxes on rich people, so time to get moving again and creating jobs.”

                Look, I’ve got respect for Hanley and Jaybird despite their wacky leanings. Roger even has some good days when he doesn’t believe that the world’d be a better place if we had 10 different companies offering different food stamp packages to poor people. But, really, you’ve devolved further into crankery and right-wing nutjobbiness for the past few months. At least Koz didn’t try to hide his stripes.Report

              • Wardsmith in reply to Jesse Ewiak says:

                Reagan spent “trillions” on defense? Got a source for that? US defense spending numbers are legitimate, USSR not so much. They had entire cities dedicated to military, but nothing that showed up on the books. The revisionists just talked about CIA “estimates” at the time showing low USSR military spending. They were universally wrong. Much was opened up after the fall, you should read up on it, but I don’t have the time to spoon feed you.

                The Soviets really really hated Star Wars. They tried to build up a bunch of nukes to compensate for the ones that wouldn’t make it through. That would bankrupt anyone. Gorby had no choice but to negotiate nukes down and he especially wanted Star Wars cancelled. Now you’re going to tell me Star Wars never worked. But the Soviets didn’t believe that, they /expected/ disinformation – that was /their/ stock in trade. They were playing chess but Reagan was playing poker, and they couldn’t call his bluff.

                You’re much younger than me. You don’t even remember those years, I lived through them as an adult. There were SS-20 deployments on the European front and Reagan responded with his own deployment, much to the dismay of all of Europe My father worked for the atomic energy commission ON NUKES! I know real live (and dead) Cold Warriors. This wasn’t fun and games, there were nutcases on both sides of the pond ready to end it all (Kennedy Petrov Stanislav). A computer glitch could have vaporized us all ever hear of Petrov Stanislav?

                We’re already out of Iraq and winding down considerably in Afghanistan. So could you tell me why (in inflation adjusted dollars) Obama is spending $150B a year MORE than Reagan EVER did (in absolute dollars $500B)? There is no Soviet threat and we have the wrong type of military for conventional conflict, I’m all for the “sequestering” of at least $150B out of the defense budget and Obama is the one screaming bloody murder that we’ll be defenseless? Pulease!

                Before Reagan tax rates were insane and it absolutely influenced people earning money at the time, a couple I knew folded their company (dropping hundreds of employees) because they got sick of paying so much in taxes because they were making “too much”. Yes they were making bank, but they were also working their asses off. So they just took early retirement instead. They “unretired” after the new tax laws came into effect and hired more than they had before. Rich people might be assholes to you but they aren’t stupid. They’d like to keep what they can and if they can’t keep enough it isn’t worth playing the game.

                Tax policy absolutely has an impact on business decisions something no lefty has ever figured out. I own several businesses, I’m not going to expand headcount during this administration, period. There are hundreds of thousands of businesses who think the same way. That’s why employment sucks regardless of how the administration cooks the books.

                Meanwhile this discussion is off topic for the OP. The state of the dollar in world trade is important and the moves this administration is taking wrt that are dangerous. Among other things Reagan did was to give Volcker the political backing that Carter wouldn’t so Volcker could fix the inflation/stagflation problem with the “harsh medicine” of high interest rates to sop up the excess money supply. Guess what, that’s going to have to happen again someday because of current economic manipulations. Unfortunately I don’t think there will be time to cure this patient regardless of the medicine.Report

              • James Hanley in reply to Wardsmith says:


                This Council on Foreign Relations article has a nice chart showing U.S. mi,itar spending from 1988 to present in constant 2010 dollars. ’88, of course, was Ronnie Raygun’s last year in office, and while I don’t think that was the peak year of military spending in his presidency, the current amount can be seen to be far above the ’88 number.

                Of course George W. and the current Republicans in Congress share a huge amount of the blame, but Obama has not pushed for any serious cuts, and his defense secretary, Panetta, put a lot of energy into arguing that a 5% cut would be, and I quote, “devastating.”

                Obama has successfully made overspending on defense an issue on which the Dems have lost all credibility. There’s no value gained anymore by talking about Reagan’s defense spending.Report

              • James Hanley in reply to Wardsmith says:

                And as to what Ward might have said in the ’80s, it’s entirely irrelevant. In ’04 I ripped a student for calling John Kerry a flip-flopper because something he said in ’04 contradicted something he said in the early ’70s, 30 years before.

                Coincidentally, ’84 is now almost 30 years ago. So pretending that anyone needs to have taken the same stance back then in order to have credibility now is a wholly illegitimate tactic.Report

            • Brandon Berg in reply to Wardsmith says:

              When the Republicans were in power, they used taxpayer money to buy votes, too. The only thing that’s actually worked in living memory is having a disgraced Democratic president in office, paired with a hostile Republican congress.Report

            • James K in reply to Wardsmith says:

              This statement, while technically true, would be more accurate if you replaced references to Obama and Democrats with references to politicians generally.Report

        • Kim in reply to Wardsmith says:

          QE bought mortgages, yes?Report

      • Nob Akimoto in reply to James K says:

        To build a little on this:

        Is a great primer on Balance of Payments and written mostly without economese.

        That said, I’m not actually convinced 1. that the deficit is actually a problem for the US now or anytime in the future and 2. that a lack of trade imbalance would be a good thing. The hypotheticals seem pretty absurd at this point for it to happen anyway…Report

      • Rod Engelsman in reply to James K says:

        You’re correct in terms of the accounting identity, but I have to disagree about the causality arrow. There are a lot of independent reasons for our trade deficit, such as low wage levels overseas. But the federal deficit has largely been a response to that in order to avoid a punishing deflationary depression.

        So in one sense, you’re correct. Balance the federal budget and the trade deficit disappears, BUT ONLY after we experience heavy domestic deflation so nobody can afford to purchase imported goods and our costs of production fall to third world levels. And no administration of either party has been willing to go there. (Everybody’s a Keynesian once they’re in office.)Report

        • James K in reply to Rod Engelsman says:

          But Rod, the US has had a structural deficit forever. Sure the deficit is higher now, but its been there for ages.

          And private borrowing was contributing to it for a while, but that’s only a problem to the extent that the borrowing was for crappy investments, in which case the problem is the crappy investments, not the foreign borrowing.

          Basically, all the trade deficit tells you is that someone’s borrowing money from overseas, which is not necessarily a problem. The real question is who’s borrowing it, and why.Report

    • James Hanley in reply to Rod Engelsman says:


      Running trade deficits doesn’t require borrowing. It can seem like it to us Americans, because we have borrowed so much from China, with whom we are running huge trade deficits, but the trade deficit–the money we send to China in exchange for Chinese goods–only makes borrowing from them possible, it does not make it inevitable. I’ll clear that up in a moment.

      China sells us more goods than we sell them, so they end up with more of our money than we have of theirs. What are they going to do with that money” (“They” is casual, mostly it’s not “they” as in “the Chinese” government but “they” as in Chinese firms.) They can stuff the $USD under their mattresses, but they’re not that stupid. They can trade the $USD for other currencies, like Euros, so they can buy things from Europe. Or they can invest $USD in the U.S.

      And that’s how the money comes back to us mostly, through Chinese investment of $USD in the U.S. So what do they invest in? Real estate, they invest in financial instruments. Either way, and this is the important thing, while we run a trade (goods) deficit with China, we run a capital accounts surplus with China–they invest more money in the U.S. than we invest in China. The trade deficit and the capital accounts surplus necessarily balance each other out.

      Now back to the borrowing. With their surfeit of U.S. dollars from the trade deficit, the Chinese are always looking for good investments in the U.S. So up pops the U.S. government saying, “we’d like to spend more this year than we take in, so we’re going to sell some Treasury notes,” and the Chinese say, “Ah, ha! That’s a nice sound investment. Doesn’t have a high rate of return, but we know it’s safe and that the U.S. always pays,” so naturally a lot of their investment flows there, just as does a lot of investment from the UK, the Netherlands and indeed from within the U.S. itself.

      If the U.S. stopped running deficits, so that it sold vastly fewer Treasury notes, the Chinese would simply have to look for other ways to invest their $USD. They might still loan it, by buying municipal or corporate bonds, or they might buy companies outright, or they might follow the Japanese and start building their own factories in the U.S. (they already do this a little, but not much).

      So the trade deficit A) always means a capital accounts surplus; B) does not have any necessary or cause/effect relationship with the budget deficit; but C) does provide a ready purchaser of Treasuries when we do decide to run a budget deficit.Report

      • Rod Engelsman in reply to James Hanley says:

        I fear that we’re in a loop whereby the language is impeding communication.

        First of all, I understand everything you’re saying here and I don’t disagree with the technicalities. But it seems to me that, either consciously or not, you’re playing language games.

        Credits and debits, investment and borrowing, assets and liabilities, surplus and deficit. These pairs of words all refer to exactly the same things but from opposite perspectives. Notice how they also all have a certain inherent normative value. Credits, investment, assets, and surpluses are all “good” things, while their counterparts, debits, borrowing, liabilities, and deficit are “bad” things. For example, your bank balance, assuming it’s positive, is a credit (good thing!) to you, but a liability (bad thing, boo!) to the bank. They literally owe you money.

        So I worry about our trade deficit (bad thing); you counter that it results in a capital account surplus which is a “good” thing. “Borrowing from overseas (bad)” is transformed into “foreign investment” (good).

        Also, this business about the “current accounts surplus” obfuscates in a different way. That “account” is purely a function of central bank accounting. It’s how central banks operate given that there isn’t a global central bank to process payments equivalent to the way the Fed settles payments domestically. It’s an accounting identity that doesn’t say anything about where that money actually goes, if anywhere. You see, in the U.S. banking system all the member banks, like your bank and mine, have open accounts at the their regional Fed branch. If I write you a check my bank reduces my balance by that amount and simultaneously reduces the bank’s assets by the same amount. But one of the bank’s assets are actually an account at the Fed. So the Fed notes a drop in assets at my bank and that has to be balanced by an increase in assets at your bank. Then that increase has to be balanced on the books of your bank by an increase in the balance on your account. The Fed acts as a bank for banks. Internationally, there is no bank’s bank for central banks so all (or most, anyway) central banks have open accounts at all the other central banks.

        So while what you say is true, it’s not true quite the way you make it sound. China’s current account surplus can exist solely as accounting entries on the books of the respective central banks and nothing else. The take-away is that it doesn’t necessarily go anywhere or do anything but just pile up.

        The point that both you and James K. seem to be missing is that a trade deficit by definition means that collectively we’re consuming more than we’re producing. And since in a capitalist system you only get paid for what you produce and you have to use those earnings to purchase what you consume… the math doesn’t add up. You (the consumers) simply don’t have enough money to pay for your consumption. And that’s why we have budget deficits to make up the difference. The other way to make up that difference is by personal borrowing, which we’ve been doing like crazy the past 30 years as well. When I was a kid, no one I knew had a credit card. But starting in the ’80s banks starting passing them out like candy at Mardi Gras. Then they started pushing second mortgages and lines of credit. Asset bubbles. Bonds, stocks, housing, stocks, housing again, in a big desperate circle jerk to try to maintain some semblance of consumer demand while real wages stagnated.

        Dude, it’s all pieces of the same puzzle. Trade deficits, wage stagnation, personal debt, government debt, asset bubbles, and riding on top of it all is increasing wealth and income inequality. And I emphasize “increasing” because the first derivative is what’s really important there.Report

        • Kim in reply to Rod Engelsman says:

          We’re selling “safety” when folks buy our debt. No different than the price of gold (which is WAY WAY WAY inflated over what the stuff is worth as an industrial material, or as jewelry).Report

        • James Hanley in reply to Rod Engelsman says:

          The point that both you and James K. seem to be missing is that a trade deficit by definition means that collectively we’re consuming more than we’re producing.

          I think this is absolutely the wrong way to look at it it.

          Consider this, I have one hell of a fricking trade deficit with all the businesses in my town. I have always, and will always, consumer more than I produce. I can’t keep that up, right? But I can, because it’s not just goods that matter–it’s also services and it’s investment. We have a huge services trade surplus. And not all of that FDI is loans–some of it is real-for-sure investment. Remember when everybody was freaking out because the Japanese bought Rockefeller Center and Sony? Collectively they spent over $4 billion (1980s dollars) buying something from the U.S., but none of it showed up in the goods trade balance sheets. And it wasn’t a loan. (Well, in a back-ass-wards kind of way it was–they eventually sold at a loss, so they can be seen as having loaned us money at a negative interest rate. And if anyone ever offers you that deal, you’d be a fool not to take it!)

          The key is that the trade deficit only measures trade in goods, and that’s only part of the economic story. Look at you–you don’t produce any more than I do, you slacker. We’re both part of the service industry…but we sure as hell matter! If you don’t count us, you’re not seeing the whole picture. So if you don’t count these other things, if you only count the trade deficit and over-fixate on that, you’re not getting the whole picture at all.Report

          • Rod Engelsman in reply to James Hanley says:

            First of all, I’m pretty sure the trade balance numbers include services. In any case I don’t distinguish between the two other than to point out that goods, particularly durable goods are “stickier” in terms of wealth and capital creation. Ultimately, the main difference between the two is in how long the created wealth persists. Please don’t assume I’m an idiot; it’s getting tiresome.

            So let’s take your example of foreign investment. I’m not making a normative value judgement here, but it strikes me as being the equivalent of selling furniture to buy groceries. I sell my services every day and will likely continue to do so for a depressingly long time. A factory produces goods for sale on a continuous basis. Selling that office building… well, of course there’s more where that came from, but only a finite number, and you can only sell the same building once (the subsequent sale being from the new owner). It’s really not the equivalent of selling architectural, design, and construction services.

            Every economic or accounting transaction has two sides that go by different names, generally one having a positive connotation and the other a negative one. An “investment” necessarily entails the purchase of an asset. That asset can be either a tangible property or a debt instrument. So an investment by one party necessarily entails selling an asset or borrowing money by the other.

            Look at it this way: By your rhetorical logic we shouldn’t even ever be talking about the federal deficit or debt. Rather we should be focusing on the investment by individuals, firms, and foreign entities in the U.S. Government. And by dingy, since it’s investment, it’s all good, right? And since the more investment the better, then the more federal debt (let’s not call it that!) the better. Run that sucker up to the sky!

            But I suspect you would resist making that rhetorical shift.

            I’m not anti-trade. Personally, like you, I trade 100% of what I personally produce for money and use that to purchase what I really want. The U.S. GDP is about 15 T$ and I wouldn’t care if we bought and sold all of that with our trading partners. But just like you can’t consistently consume more than you personally produce, as measured by your salary and the prices you pay for goods and services, without going into debt, neither can a country.

            Look at it this way. If you purchase more in goods and services (dollar amount) than you produce and sell (dollar amount), then you have to make up the difference in borrowing. It’s simple math. And referring to that credit card balance as an “investment” by the issuing bank doesn’t change your situation.

            Regardless of whether you believe there’s any normative significance to a trade deficit, the truth is that it’s simply unsustainable. Eventually we run out of tradeable assets and the debt load gets unserviceable.

            What’s frustrating the hell out of me here is that you agree that the excess dollars have to come back eventually and you agree that one way they come back is by purchasing assets and that one type of asset is federal debt. But when I say that the federal deficit is partially financing and caused by our trade deficit, you balk. Why? It’s like you aren’t even convinced by your own logic.Report

            • James Hanley in reply to Rod Engelsman says:

              No, the trade deficit numbers–exports minus imports–that are normally reported are just goods.

              And, yes, I would resist the rhetorical shift because it is a misrepresentation of what I said. I repeat, if the U.S. did not run big budget deficits, the Chinese would have to do something different with their $USD. That might include loaning to municipalities and businesses, but it would also include buying stuff–whether real-estate, goods, or services.Report

              • Rod Engelsman in reply to James Hanley says:

                No, the trade deficit numbers–exports minus imports–that are normally reported are just goods.

                Well, if so, then they shouldn’t. Although that begs the question of why they (Dept. of Commerce?) would do so.

                And, yes, I would resist the rhetorical shift because it is a misrepresentation of what I said. I repeat, if the U.S. did not run big budget deficits, the Chinese would have to do something different with their $USD. That might include loaning to municipalities and businesses, but it would also include buying stuff–whether real-estate, goods, or services.

                I know you didn’t say that, and I’m not claiming you did. I’m saying it’s consistent with the hand-waving you’re engaging in when you re-characterize selling debt and tangible assets as foreign investment, like as if it’s the same thing as Toyota building a factory in Kentucky. It’s not.

                And it doesn’t affect my thesis that a trade deficit in goods and services, stuff that’s produced by workers and generates wage and salary income, results in a net outflow of money that has to be replaced to avoid economic stagnation. Eighty percent of our economy is driven by consumer demand and a large chunk of our federal debt has been accrued in order to replace that lost income and maintain consumer demand.

                Seriously, there’s a reason that Ronaldus McReagan declared that “deficits don’t matter.” Just look at graphs of GDP and debt as a percentage of GDP over the last 40, or better for comparison, 50 years.Report

              • James Hanley in reply to Rod Engelsman says:


                You’re not debating now, you’re picking fights. and after being insomniac last night, I’m neither thinking clearly not inclined to respond nicely to your claims of hand waving and recharacterizayion when you’re not even getting the basic contradiction that you’re both worried about “net outflows of money” at the same time you’re worried about the way that money is coming back, and confusing trade deficits with debt (your last paragraph, where you jump straight from Reagan on trade deficits to debt as % of GDP). So I’ll drop it, and just suggest you read this on balance of payments and look at this data on the relationship between trade deficits and the economy.Report

              • Rod Engelsman in reply to James Hanley says:

                I admit to getting frustrated here because you seem to be avoiding the gist of my argument. Perhaps that’s because my argument is Keysnesian in nature and so you don’t accept the premise.

                To be clear; I’m not “worried” about the way the money is repatriated. I’m making the claim that a major way the money is repatriated–foreign investment in the form of purchasing federal debt is what conservatives and libertarians tend to be worried about.

                And your claim that if the Feds didn’t run a deficit then our surplus-running trading partners would have to find something else to do with the money is true, but only trivially so, in that it doesn’t mean the dollars would necessarily be repatriated. There’s a reason the dollar is called a world reserve currency; foreign banks, both central and commercial, are happy to hold dollars as base reserves, at least for the time being.

                And before you jump on me thinking I’m making a mercantilist argument, it’s not the mere presence or absence of the dollars in our economy that I’m worried about, as if the dollars themselves make us more wealthy. This isn’t a wealth argument; it’s about aggregate demand, production, and consumption.

                To consume, I have to purchase, to purchase I have to acquire dollars in trade, and to do that I need to produce goods or services for trade. If, collectively, consumption exceeds production–which is the logical correlate of running a trade deficit–the people producing goods and services can’t earn enough dollars to purchase the consumption. That shortfall has to be made up somehow to avoid recession and increasing unemployment.

                Investment? Sure. But it depends on the investment. If Toyota waltzes across the Pacific and builds a factory in Kentucky that entails purchasing domestic materials and labor; it’s just another kind of consumption, call it “intermediate” consumption. But if that type of investment isn’t sufficient

                Look, James, despite the fact that I’m not one of your students and so I don’t particularly appreciate being given a reading assignment, and also despite the fact that your sources are the American Enterprise Institute and the Econ Dept . of George Mason U.–guaranteeing a stilted, right-wing/libertarian slant–I read both “assignments.” What strikes me in both cases isn’t what they said, since I expected them to bolster your argument. No, what strikes me is what wasn’t said. So, for example, the trade deficit hasn’t affected the number of jobs, but that isn’t the big problem. The problem is that the jobs that remain don’t pay as well.

                You can pick and choose what you want to look at and declare that is well and sunny in Pasadena. But if you ignore other aspects of the situation you aren’t getting the full picture.Report

              • Balance of payments is a pretty crappy metric for determining the trade balance between countries anyway.

                For reasons why see:

              • …and yes, I’m plugging my own post. Sue me.Report

              • Brandon Berg in reply to Nob Akimoto says:

                I don’t have standing 🙁Report

              • James Hanley in reply to Nob Akimoto says:

                Good Addition, Nob. The Court tosses all challenges.Report

              • James K in reply to Nob Akimoto says:

                This is a very good point. A lot of our official statistics are more than 50 years old now, and some of them are showing their age.Report

    • Kim in reply to Rod Engelsman says:

      We don’t have a terribly large deficit. Unless you count the consumer deficit, which is running at around 1x GDP.

      Iceland had a 50x GDP deficit. Dat’s what we call trouble.Report

  3. zic says:

    I very much like the distinction between absolute advantage and comparative advantage.

    One thing I’ve seen with global markets is a shift in this, particularly on products that are natural resource dependent (paper, for example). Regions where resources are located used to have an absolute advantage simply due to proximity to the resource. But with global shipping, that’s often changed, and low wages or significant expertise have now turned production to comparative advantage.Report

  4. Khadija says:

    While I won’t bother to quite dispute your analysis in economic terms, I have to say I wouldn’t trust any government, anywhere, at any time, to do anything. The only people who were right to think they could trust the government have been criminals. The government is a racket.

    Between mass unemployment, inflation, mobility restrictions, taxation and the social annihilationism of welfarist policies there is no greater foe to your ‘ordinary gentleman’ than the State, in any shape or form. It is at best an unnecessary evil, and at worst a psychological disorder.Report

    • zic in reply to Khadija says:

      What does social annihilationism of welfarist policies mean?

      You’ve stuffed your next-to-last sentence so full of ists and isms that it squeals and buzzes but fails to illuminate.Report

    • Kim in reply to Khadija says:

      The aristocracy is always the enemy. Whether or not they control the government.
      (and, no, to all ye libertarians out there, aristocracy != rich. it’s a subset, with a unique psych profile)Report

  5. zic says:

    James K, this is not trade-related, but:

    I will do my best to get to them some time before the heat death of the universe.

    Why do you think it will be heat death? Why not the big chill? Or a universe blown apart as fodder for the singularity big-bang-birth of another universe, or two or three?

    I’m patient, you may take your time answering. We have forever, or at least the space-time allowed for this universe before its end-of-time heats up, chills out, or moves on.Report

    • North in reply to zic says:

      Heat death, if my sad grasp of the theory is adequate, is a mathematical certainty whereas the alternative ends are more hypothetical.Report

    • Murali in reply to zic says:

      heat death just means the big chill

      The universe seems to be expanding too quickly for it to contract again and spawn off another singularity.Report

    • Mike Schilling in reply to zic says:

      It’s a term of art in physics. Entropy (randomness, particularly the randomness of the distribution of energy in the entire universe) always increases as time passes, because everything we do moves energy from a higher-energy state to a lower-energy state. Eventually, all energy levels will even out, and it will no longer be possible to do anything, including perform any of the chemical reactions that sustain life, and the universe will be a random soup os useless energy and particles. This is referred to as “the heat death of the universe”.

      There’s a story by Isaac Asimov in which figuring out how to reverse entropy becomes an obsession with the universe’s intelligent life as the heat death approaches. No one can solve it, and eventually all that’s left is one computer, working away with what little free energy is left. At the last minute, it realizes the answer:

      It says “Let there be light!” And there was light.Report

      • North in reply to Mike Schilling says:

        Mike, that story, The Last Question, was one of the ones that made me mentally fall to my knees before the work of Asimov, that grand old King of Science Fiction. I’m so chuffed that you mentioned it.

        For anyone who hasn’t read it there’s a copy here: “”

        “Man considered with himself, for in a way, Man, mentally, was one. He consisted of a trillion, trillion, trillion ageless bodies, each in its place, each resting quiet and incorruptible, each cared for by perfect automatons, equally incorruptible, while the minds of all the bodies freely melted one into the other, indistinguishable.
        Man said, “The Universe is dying.”
        Man looked about at the dimming Galaxies. The giant stars, spendthrifts, were gone long ago, back in the dimmest of the dim far past. Almost all stars were white dwarfs, fading to the end.
        New stars had been built of the dust between the stars, some by natural processes, some by Man himself, and those were going, too. White dwarfs might yet be crashed together and of the mighty forces so released, new stars built, but only one star for every thousand white dwarfs destroyed, and those would come to an end, too.
        Man said, “Carefully husbanded, as directed by the Cosmic AC, the energy that is even yet left in all the Universe will last for billions of years.”
        “But even so,” said Man, “eventually it will all come to an end. However it may be husbanded, however stretched out, the energy once expended is gone and cannot be restored. Entropy must increase forever to the maximum.”
        Man said, “Can entropy not be reversed? Let us ask the Cosmic AC.”
        The Cosmic AC surrounded them but not in space. Not a fragment of it was in space. It was in hyperspace and made of something that was neither matter nor energy. The question of its size and nature no longer had meaning in any terms that Man could comprehend.
        “Cosmic AC,” said Man, “how may entropy be reversed?”
        Man said, “Collect additional data.”
        “Will there come a time,” said Man, ‘when data will be sufficient or is the problem insoluble in all conceivable circumstances?”
        Man said, “When will you have enough data to answer the question?”
        “Will you keep working on it?” asked Man.
        The Cosmic AC said, “I WILL.”
        Man said, “We shall wait.”
        The stars and Galaxies died and snuffed out, and space grew black after ten trillion years of running down.
        One by one Man fused with AC, each physical body losing its mental identity in a manner that was somehow not a loss but a gain.
        Man’s last mind paused before fusion, looking over a space that included nothing but the dregs of one last dark star and nothing besides but incredibly thin matter, agitated randomly by the tag ends of heat wearing out, asymptotically, to the absolute zero.
        Man said, “AC, is this the end? Can this chaos not be reversed into the Universe once more? Can that not be done?”
        Man’s last mind fused and only AC existed — and that in hyperspace.
        Matter and energy had ended and with it space and time. Even AC existed only for the sake of the one last question that it had never answered from the time a half-drunken computer [technician] ten trillion years before had asked the question of a computer that was to AC far less than was a man to Man.
        All other questions had been answered, and until this last question was answered also, AC might not release his consciousness.
        All collected data had come to a final end. Nothing was left to be collected.
        But all collected data had yet to be completely correlated and put together in all possible relationships.
        A timeless interval was spent in doing that.
        And it came to pass that AC learned how to reverse the direction of entropy.
        But there was now no man to whom AC might give the answer of the last question. No matter. The answer — by demonstration — would take care of that, too.
        For another timeless interval, AC thought how best to do this. Carefully, AC organized the program.
        The consciousness of AC encompassed all of what had once been a Universe and brooded over what was now Chaos. Step by step, it must be done.
        And AC said, “LET THERE BE LIGHT!”
        And there was light –“Report

    • Nob Akimoto in reply to zic says:

      The Higgs might have some implications for what’ll happen at the end…

      I should see if I can get my ATLAS friend to explain it.Report

      • zic in reply to Nob Akimoto says:

        Death by heat
        Contracting smashing burning crunching
        Death of heat
        Smearing spreading thinning cooling.

        Prepositions aid my feeble mind.

        Still, I prefer Door Number 3.
        Let there be light.
        Because nobody can eat
        just one.

        So too, with trade
        advantages absolute cold, comparative heat
        might the warmth of shared advantage
        be behind door number 3?Report

  6. greginak says:

    Good stuff. I think you hit an important point in the last paragraph that leads to most of often pointless jawing that goes on. Whether enviro regs or labour restrictions or any other reg/laws are a “price worth paying” and who benefits and loses are the key issue. However people argue them is if they had the One True Answer about whether they are worthwhile. But it seems more like they are value judgements we need to make with as clear an understanding of winners and losers, then who has the one Right judgement. To much poli philosophy is just a rationalization for our value judgements.Report

  7. Citizen says:

    In Comparative advantage are we considering every location has a hightest quality product that is in demand. The outcome I see is that demand changes and that the manufacture of highest quality products move around creating “become a traveling agent to survive” society. The outcomes are often not democracy, capitalism or anything stable. Any notion of economy or society is greatly impaired by instability.

    I’m not saying the concept is right or wrong, just “where is this leading?”, and “is this where we want to go?”Report

    • James K in reply to Citizen says:

      While comparative advantage will shift over time, it isn’t as ephemeral as what you are describing. Industries rise and fall fairly slowly, they don’t suddenly disappear overnight.Report

      • Citizen in reply to James K says:

        Demand can change very abruptly over a broad range of products.
        Resource depletion or demand destruction also happens in very abrupt fashion.

        If we had a chart of industrial life cycles plotted against time it would be telling.Report

        • James K in reply to Citizen says:

          No resource depletion is not abrupt, it takes a long time to deplete a resource. And while demand can change rapidly in theory, it hardly ever does. People are pretty consistent from day to day, and even from year to year. Now decade to decade, that’s a different story.Report

          • Kim in reply to James K says:

            I find forest fires to nicely deplete woodstock in a fairly rapid fashion.Report

            • Citizen in reply to Kim says:

              I would suppose we are talking past each other on scale of industry. I see alot of change and movement in industries below 1000 employees and more specific in those under 200.

              If one were to only look at industries above 1000 employees it would most likely appear very stable, and change would be negligable in decade increments.

              Although there are occasions where the big industries have to change quick: asbestos or conversion from vacuum tube to transistor.Report

              • James K in reply to Citizen says:

                I guess my point is, leaving to one side how fast industries rise and fall, these changes are a necessary part of a functioning economy. The alternative is for the economy to become moribund, its capital being wasted by “zombie industries”.Report

  8. Citizen says:

    I still am having a time trying to invisioning comparative advantage.
    Typically there is a 3 point balance struck between what the customer needs/wants versus what production can deliver. This is my simplified version and it can be unpacked to considerable detail:

    1. Precision, Quality, best possible Material, Function, Asthetics
    2. Lowest Cost
    3. Fastest delivery of infinitely variable quantity

    How does comparative advantage strike balances?

    3. some vendors will set up is near as possible to the customer to provide the quickest possible delivery, as that is one of the customers requirements in the balance.

    2. is the part of a race to the bottom that I assume we are addressing when we talk of labor?Report

    • James Hanley in reply to Citizen says:

      The idea behind comparative advantage actually comes from a different direction than where you’re coming from, which probably explains why it’s not jiving for you.

      It’s normally explained by simplifying down to a stylized example of two countries (A & B), each of which can make two goods, call them widgets and wozzles. Say A is so much more productive than B that it can produce both widgets and wozzles at higher quality and lower costs. It seems like there’s no room for B to produce anything. But here’s the important catch; A makes more money off widgets than wozzles, so making wozzles isn’t in A’s best interests–they’ll make money off them, but not as much money, so they specialize in making widgets, to maximize their gains.

      That leaves the wozzle market open to B. They may not make them for quite as high a quality or low a price (or they may achieve one or the other), so consumers in some ways aren’t as well off in regards to that particular product.

      And that seems wrong, but to the extent that consumers’ gains in the consumption of widgets offsets their diminished utility in consumption of woozles, the consumers still come out ahead as well.Report

  9. Citizen says:

    Thanks James that clears it up somewhat. There is probably a catch in this that A will not surrender its manufacture of wozzles due to the fact that there is a possibility of the widget market drying up, or country C finds a way to tip the balance of widget production in its favor.

    How do we propose measures of survival/fairness to A, B, and C?Report

    • James Hanley in reply to Citizen says:


      Well, when you add in more countries and types of products, as well as the fact that it’s not really countries that produce, but profit-seeking firms, the worry about A not surrendering manufacturing of wozzles really kind of goes away.

      As to your last question, I’m not sure what you mean, but I’m not sure I’d propose measures of fairness beyond not invading another country to eliminate their competition, or similar violent measures.Report

      • Roger in reply to James Hanley says:

        I understand comparative advantage, but was wondering how best to explain it. Attached is a trial balloon “elevator speech” that I just drafted. Input, critique, suggestions are appreciated…


        “Buying local is something that makes intuitive sense. However, about 200 years ago, David Ricardo proved mathematically that it is a logical error.  Because of his law of comparative advantage, it actually makes more sense for everyone to specialize in the area where they have comparative (not absolute) advantage and trade with others. This is true locally and across any and all arbitrary borders assuming reasonable costs of transportation and trade.”Report

        • Rod in reply to Roger says:

          With all due respect, that’s terrible. Just a naked assertion backed up with an appeal to authority. Besides, if your interlocutor knows who Ricardo is well enough to accept his authority she surely is familiar with his signature contribution to economic theory.

          Better to just analogize to specialization of labor.Report

          • Roger in reply to Rod says:

            Thanks for the feedback, like I said, I was intentionally spitballing here…

            That said, it is actually an appeal to math, not authority. Ricardo was just the guy that discovered the math. It does lead for one to look into the law, which I cannot explain pithily.Report

            • Citizen in reply to Roger says:

              So if I read this correctly, if there is no depth to the specialization of labor in a specific location there will be less advantages in that location?

              I know many people locally that have specialized skill sets. Lets take a person who can make a loaf of home made bread.

              The quality is great and the delivery is fast and can vary as seen up in my #1. and #3. but because of #2.Lowest Cost she will lose out to the grocery store.

              I doubt the specialization can become so significant that #1. will out balance #2.

              #2. Always appears to trump specialization.Report

            • James Hanley in reply to Roger says:


              Sorry, but that elevator speech is going to leave people just as confused getting off on the 20th floor as they were getting in on the 1st floor. You use the phrase comparative advantage in defining comparative advantage, and it’s all too abstract to be intuitive and persuasive.

              It’s not an easy concept to explain, unfortunately.Report

              • Roger in reply to James Hanley says:

                Thanks. After reading Rod’s comment, I realize that I didn’t even set the question up right. What I am attempting (poorly) to address is the intuitive rejection of trade, or said the other way, the rationalization of buying American.

                Does that help at all, or is this just another scrap for the wastebasket? I guess what I would hope to accomplish is to get people to entertain the possibility that there is a deeper answer, without trying to walk them through it, which would take 20 floors.Report

        • James K in reply to Roger says:

          I have to agree with Rod and James H, this doesn’t really work for comparative advantage.

          This might work better:
          “Think about how much worse your life would be if you tried to make everything yourself. Would it even be possible to make most of use use very day? And even the things you could make with the right skills, like food and clothes would take a massive amount of time and effort to produce something even half as good as what you can get in stores. This is because in our society everyone specialises in a few things they do well, and uses the money they earn to buy everything else.

          This works for countries too. A country can focus on a few industries it can do well in and buy everywhere else from other countries. The source of prosperity is specialisation and trade, not self-sufficiency.”Report

  10. Citizen says:

    James thanks again for helping me along here.
    Just a few more details on the nuts and bolts. Given that A has no problem surrendering wozzles, it still has to play profit against my #2. Lowest Cost in production of widgets.

    How does Comparative Advantage factor that in as a force that produces a race to the bottom?Report

    • Plinko in reply to Citizen says:

      I don’t get why comparative advantage is so hard – I think it’s that the fact that in real life, everything is traded for money so they can’t stop thinking of money money money and have a hard time remembering that money is just a substitute for trading goods.

      The simple version of comparative advantage is that in order for us to trade, we each have to get something in exchange. In the widgets/wozzles – even though I am better than you at making both widgets and wozzles – in order for me to gain, I HAVE to give you some of my excess production in exchange for some of yours, otherwise we don’t trade and all I have are either excess widgets and/or wozzles lying around or I stop working when I’ve done as much as I feel like – We’re probably both worse off.

      The details of how good each of us individually at widgets and wozzles will matter in determining how the trade will play out – maybe I make widgets and trade my excess for your excess wozzles or maybe vice versa. But, as long as both of us can make more than we need of at least one AND neither of us can make as much of BOTH as we want, we can find a way to be better off with trading regardless of how much better either of us is at any one than the other.Report

      • Plinko in reply to Plinko says:

        This is to say, there is no such thing as a race to the bottom.Report

        • Citizen in reply to Plinko says:

          #2. doesn’t have to be money, just the lowest resource allocation per exchange unit. Still a race to the bottom.Report

          • Plinko in reply to Citizen says:

            Your first sentence needs to substitute ‘lower’ for ‘lowest’ and your second one doesn’t mean what you seem to think it means.
            Seriously, think about it a minute. Why would you do anything but cheer doing more with less? There are a million things to be concerned about in the world and increasing productivity is not one of them.
            There are two ways to increase aggregate world material prosperity. One is increasing productivity (doing more with less), the other is a positive resource shock (ie we discover previously unknown material resources). The former is a strategy, the other is awesome but out of our control.Report

            • Citizen in reply to Plinko says:

              What does race to the bottom mean?
              Maybe we need a specific definition.

              I will cheer when I see a path that leads to lower production costs without most of the other stuff that vectors in that direction.Report

              • James K in reply to Citizen says:

                What do you mean by “most of the other stuff”? What are you expecting to happen?Report

              • Citizen in reply to James K says:

                I don’t think we can talk on common ground about “other stuff” until we have a definition of race to the bottom. Until we have some defined parameters there, we will probably be talking past each other.

                “Instead each country accepts whatever trade-off its comfortable with on labour standards and the environment, and the patterns of trade emerge accordingly.”

                This to me is the dismissive element. The moment the blind eye is engaged. Without defined parameters we will be talking in circles here.Report

              • Stillwater in reply to Citizen says:

                This to me is the dismissive element.

                Me too. And not because Plinko is being dismissive, but because the his theory of these things seems to be dismissive.

                As an example, the word “accepts” in this sentence

                “Instead each country accepts whatever trade-off its comfortable with on labour standards and the environment, and the patterns of trade emerge accordingly.”

                seems to be doing a lot of work. If a nation were to have a closed economy, they could determine labor and environmental standards via policy, so accepting various trade-offs is built right into the decision calculus. Accepting means determining.

                If a nation has an open economy, then it cannot determine the trade-offs it will confront in decision-making, only how it will respond to them.

                An example of the ambiguity: Country A’s domestic policy might accept higher costs to limit pollution caused by domestic manufactures, but given that other countries have no pollution restrictions that country A might be forced to accept that they’ve priced themselves out of the market.Report

              • James K in reply to Stillwater says:

                This gets to the heart of my argument. You can price yourself out of a particular industry, but that won’t cause any long-term harm to your economy. By losing comparative advantage in one industry, you will end up gaining comparative advantage in another industry, since comparative advantage is what you do best relative to other things you could do.

                The only permanent harm to your economy of higher environment or labour standards is that your productivity may be lower, since you’ve added costs to the production of goods and services. But that would be true even in a closed economy.Report

              • Citizen in reply to Stillwater says:

                What if the comparative advantage goes away in many industries and doesn’t arise in other industry? What does the result look like?
                As degrees of freedom diminish in your ability to shuffle between “special” industry at some point won’t you just price yourself out of most industry?

                Take Nobs bake sale, how can that operation become special enough to draw considerable profit?Report

              • Stillwater in reply to Stillwater says:

                The only permanent harm to your economy of higher environment or labour standards is that your productivity may be lower, since you’ve added costs to the production of goods and services. But that would be true even in a closed economy.

                Hmmm. I think I need clarification. Here’s how it seems to me, so tell me where I’m wrong.

                Given that national economies are increasingly open, the acceptance of a domestic policy requiring manufacturers to limit pollution leads to one of two outcomes: the effected firms will either move to locations without those restrictions or have to shut their doors. Either outcome, tho, is inconsistent with the domestic goal of limiting environmental pollution. So it seems to me there’s no sense (consistent with the theory, of course) under which a country could accept1 (rationally determine) certain types of environmental trade-offs, tho that country could certainly accept2 (accede to the realities in play) certain other trade-offs (eg., weakening domestic regulations).Report

              • James K in reply to Stillwater says:


                What if the comparative advantage goes away in many industries and doesn’t arise in other industry? What does the result look like?

                That can’t happen. Comparative advantage is what you do best. There will always be something you do best.

                If you’re trying to stop your environment from being polluted then either of the scenarios you described will achieve that. What you can’t do is control the environmental quality of other countries, but that’s fundamental to the idea of sovereign nations anyway. This is only really a problem if their pollution is affecting you, in which case there is an externality that can be dealt with by using the standard tools (pigouvian taxation primarily).

                IF you care deeply about the environment in foreign nation, then I’ll be discussing the issue more in the next part.Report

              • Stillwater in reply to Stillwater says:

                James, I understand that part of the argument. But it seems to me what you’re saying here is not only consistent with a race to the bottom in practice, but is pretty much the definition of both that terms as well as “all the other stuff” that we’ve been discussing in this subthread.

                I don’t know if I’m missing something or if we’re talking past each other or if we’re just viewing the same phenomenon from differing perspectives…Report

              • Roger in reply to Stillwater says:

                Just wanted to add that this is a FANTASTIC discussion. Enjoy just listening in.

                Thanks to James and all involved.Report

              • James K in reply to Stillwater says:

                The normal context in which I hear “race to the bottom” used is to describe countries have to lower their environmental or labour standards to remain competitive, leading to a downward spiral where every country has to have rock-bottom standards to keep their economy together. Or at least, that international trade puts downward pressure on environmental or labour standards.

                That is the proposition I am trying to rebut here.Report

              • Stillwater in reply to Stillwater says:

                Or at least, that international trade puts downward pressure on environmental or labour standards.

                That is the proposition I am trying to rebut here.

                And I’m eagerly awaiting that rebuttal 🙂

                Again, maybe I’m missing something, but it seems to me you’ve conceded that competition in open economies excludes (or at leas severely limits) the ability of domestic government’s to pass legislation preventing certain types of pollution. That means the total global pollution standard has gone down, yes?

                Same thing could be argued wrt domestic wages, too. If global competition prices out domestic production, those jobs leave or shut their doors. That drives down domestic wages all other things equal, yes?

                Now, in response to a related phenomenon you said “Comparative advantage is what you do best. There will always be something you do best.” Sure, there is some new (or even existing) industry or service that could employ those people in a relatively more efficient way, but not at the wage rates they were receiving. So again, race to the bottom, no?Report

              • James K in reply to Stillwater says:

                Again, maybe I’m missing something, but it seems to me you’ve conceded that competition in open economies excludes (or at leas severely limits) the ability of domestic government’s to pass legislation preventing certain types of pollution. That means the total global pollution standard has gone down, yes?

                No. A government never has the power to control pollution in other countries. International trade doesn’t change that. The government still has the ability to control domestic pollution, it’s just that control may be in the form of pushing the industry overseas. Either way, the pollution won’t be bothering you any more. And if the pollutant is so global in its effect that it does affect you, than action like pigouvian taxes are the proper solution, as they would be for any externality.

                Your confusion seems to be the product of the idea that a single country can or should be able to control global pollution levels unilaterally. The nature of the Westphalian nation-state makes this impossible, and that’s true whether economies are open or closed.

                Sure, there is some new (or even existing) industry or service that could employ those people in a relatively more efficient way, but not at the wage rates they were receiving. So again, race to the bottom, no?

                That’s the result of productivity loss caused by the new regulations. That would happen even in a closed economy. The price you pay for higher standards is lower productivity, because you’ve increased the cost of production.Report

              • Stillwater in reply to Stillwater says:

                I’m not being very clear. Let me try again.

                On environmental regulations: My argument isn’t that a single country ought to be able to determine global environmental standards, it’s that opening up the economy in the way you’re suggesting in fact does increase global pollution: if global competition prices out domestic firms whose pollution is being regulated to firms or locations where it isn’t being regulated, then there’s a net increase in pollution. I mean, that’s not only a theoretical concept, it’s just observation.

                On wages: the argument I made was independent of environmental issues or concerns. And it was this: if domestic wages are so high that competition drives those firms or sectors out of a domestic economy the only jobs available for those newly unemployed workers will pay lower wages in addition to increased unemployment driving down wages all other things equal.Report

              • James K in reply to Citizen says:

                I see.

                In that case, I agree on the first point, but I don’t think its a problem, since the pollution will move to places that put a lower marginal value on environmental quality. Plus, blocking trade is a horrendously inefficient way to reduce pollution. I agree on the second point, but the outcome will occur whether there is trade or not.Report

              • Citizen in reply to James K says:

                Ok, so at least we arrived at the same place on “in toxic waste up to our armpits.” is an outcome in X region that we don’t really care about. Thats a vector I don’t much care to adopt but ok.

                The wages condition I still see some ground to cover.Report

              • James K in reply to James K says:

                Ok, so at least we arrived at the same place on “in toxic waste up to our armpits.” is an outcome in X region that we don’t really care about. Thats a vector I don’t much care to adopt but ok.

                Because safer working conditions impose costs on employers, they reduce wages. Whether losing X cents per hour off your wage is worth Y units of safety or comfort in your job is not a question with an objectively correct answer. In particular the poorer you are, the more it hurts to lose X cents can hour. A risk of cancer in the future, might be preferable to your family starving for certain.

                I will elaborate in the next part.

                As for wages, my argument is that trade won’t drive wages down across the board, since there’s no reason to drive down wages just to compete with foreign countries, the exchange rate would undo your efforts so why bother?Report

              • BlaiseP in reply to James K says:

                Are you seriously implying workplace safety reduces wages? The cost of goods sold is passed along, workplace safety costs are, too. They’re negligible in the overall cost of production. They save lives. Insurers demand them. Too many missing steps in your logic.Report

              • Citizen in reply to James K says:

                Not sure who your addressing and what assumptions we are making. Do all factories have safety programs? Do you find insurers demanding them everywhere?

                James K,
                Again I have real issues with scale, I tend to look at the lowest possible denominator of a produceable good. Being the most good, or being “special” falls apart when you look at a single individual person producing widgets. Many individuals have lost tangible utility in the economy via trade.

                The end result is alot of under employed or unemployeds who have a justified sense that “this economy isn’t working for me anymore, there’s nowhere to engage that hasn’t been captured somehow”.

                Thats an ongoing problem, how do we provide jobs that are tangible and less “special” to ordinary folks and have them engage in the economy again?

                I look at Nobs situation (along with many others) and wonder why so little utility still exists to put walking around money in some of the local pockets. How do we increase profit margins for those closest to poverty and with the fewest resources? Maximum profit doesn’t give a damn about that. I do.Report

              • James K in reply to James K says:


                Are you seriously implying workplace safety reduces wages? The cost of goods sold is passed along, workplace safety costs are, too.

                Any increase in costs (no matter the source) will be split between lower profits (though not very much), lower wages and higher prices. Price elasticities of supply and demand will determine how that split happens.Report

              • James K in reply to James K says:


                Again I have real issues with scale, I tend to look at the lowest possible denominator of a produceable good. Being the most good, or being “special” falls apart when you look at a single individual person producing widgets. Many individuals have lost tangible utility in the economy via trade.

                No, you’re thinking of absolute advantage. You don’t have to be the best at what you do, you have to find the thing you do best.

                As to what there’s so much unemployment – you do realise there’s a recession on, right? People tend to think the way things are is the way they’ll always be, but things will get better.Report

              • BlaiseP in reply to James K says:

                Any increase in costs (no matter the source) will be split between lower profits (though not very much), lower wages and higher prices. Price elasticities of supply and demand will determine how that split happens.

                In the real world, workplace safety costs are tax deductible. I itemised my Oakley sunglasses as safety glasses: they qualify.Report

              • James K in reply to James K says:

                In your part of the real world perhaps.

                In any case tax deductibility only reduces the cost, it doesn’t eliminate it. The remainder must be divided up. Now if the government covers 100% of safety upgrades, then what I said wouldn’t apply.Report

              • Citizen in reply to James K says:

                Yes recession, we’ve been hearing that on and off for a couple decades now. Even when status is advertised as “doing good” it still looks pretty damn dismal at the bottom.

                Absolute advantage, Comparitive advantage, they both operate under maximum profit one more so than another. In the end it looks so much more like business as usual. Business as usual per on the balance #2. outweighing #1. and #3.

                There are three problems I see in “best”:
                –The things you do best may have un-tenable profit margins.

                –The thing you do best may require more capital or resource than are within your current means.

                –How does anyone really know what they do best? Try everything until something stands out?

                The bigger risk in maximum profit is when the economy loses its utility for the vast majority of the population. Unfortunately the practice to regain utility at the base level looks like race to the bottom wage doubled down.

                So we end up at opposite ends of the spectrum. “Why are you people practicing that primitive production/trade”.”because this economy lost its utility, we had to find something else.”Report

              • James K in reply to James K says:

                All I can tell you Citizen is that it really doesn’t seem to work that way. The causes of unemployment are entirely unrelated to trade.Report

              • Citizen in reply to James K says:

                Thanks at least for discussing it at this level. Is there a particular model your looking at that price level decouples from the factors of trade and unemployment? I appreciate your candidness and patience.Report

              • James K in reply to James K says:

                The model I’m using is the Hecksher-Ohlin trade model, including the extensions to account for imperfectly substitutable capital and labour. See parts 2and 3 of the sequence to see how I expect trade to effect wages and employment.Report

              • Michael Drew in reply to James K says:

                Ugh. I remember my instructor in an International Econ class saying “Hecksher-Ohlin model” over and over in class and always thinking to myself, “I get the feeling I’m supposed to know something about what that is.”Report

              • Citizen in reply to James K says:

                I found plenty information on the main model. The imperfectly substitutable capital and labour had very little coverage. Any help in better defining that part?Report

              • James K in reply to Citizen says:

                I can’t find any ready online resources either unfortunately. But much of my part 3 uses this extension. The key insight from it is that how you are affected by opening trade depends on how easily your skills (or your capital) can be used in other industries. The less specific (more adaptable) you r skills or capital are, the less likely you are to lose income when the industry you work in is opened to trade.Report

              • Citizen in reply to James K says:

                I agree with the concept that adaptable skills and capital are important. There are a few problems with looking at this near the bottom of scale and over the long run.

                This is probably why I make the hardest stand here in the Race to the Bottom section.

                First as the trade develops and progresses over the long run the big Industry will quickly accumulate advantages in production, resource or location that captures the majority of products via pricing. Advances in production typically lead to shedding labor costs in areas where labor is significantly expensive.

                So, the labor that is shedded has to retrain and find a different niche market to engage in. Eventually that niche market is developed further and the labor cost creates shedding there also. So this trend continues, but be keenly aware that the niche markets are accumulating niche skill sets! Thats not very handy when your told you need adaptable skills.

                Niche markets can typically be fleeting also, only lasting a year or two. So what we see is alot of first line workers moving from town to town retraining to niche skills or just become disengaged, underemployed, unemployed or retired.

                We could quickly say niche markets are less productive and disallow them, then the initial shedding would have caused direct unemployment.

                I would say this is one of the big problems with applying the Hecksher-Ohlin model to race to the bottom. Its not that it is unrelated, its that it blatantly ignores unemployment.Report

              • Roger in reply to James K says:

                Adding on to Citizen’s comment…

                Capitalism’s benefits to future generations comes from this creative destruction as better products and services produced more efficiently tend to replace what came before. But change is painful, especially for those that are less adaptable.

                Thus the process that allowed us to become twenty times as rich as those that lived pre capitalism is itself a threat. It always has been and always will be. Everyone rationally wants to reap the benefits of the lack of security experienced by past generations, while not paying the cost themselves. I say rationally, and mean it. None of us wants to lose our job to a lower cost producer with a little better mousetrap.

                Thus the truce of capitalists with comprehensive safety nets. The balance between open competition and nets to catch the inevitable stream of temporary losers.Report

              • James Hanley in reply to James K says:

                Roger, your last paragraph is your best elevator speech yet. It’s a point I’ve tried to make many times, but never so pithily and clearly. So obviously I’m going to shamelessly steal it.Report

              • Roger in reply to James K says:

                Thanks. I figure if I take enough swings I’m bound to hit something sooner or later.Report

              • Citizen in reply to James K says:

                I present a much tougher task than a net. Create a theory that gives utility back to the bottom/base of the economy without violating the basic concepts of maximum profit.

                Do this and you give a larger section of the population its utility in the economy.Report

              • Roger in reply to James K says:

                What number is larger than “all of them.”?

                Everyone gains in future generations by standing upon the shoulders of those that came before us. The poor benefit the most in utility, because the biggest jumps are at the bottom, with the alternative being death from malnutrition before ones fifth birthday.Report

              • Citizen in reply to James K says:

                Business as usual then? We’re going to need a bigger net.Report

              • Roger in reply to James K says:

                Why? Unemployment is temporary if markets are relatively free. Indeed if we make them too big they become attractors for unemployment.Report

              • Citizen in reply to James K says:

                Maybe we could expand on free and big market?
                How does “attractors for unemployment” work in that last sentence?

                You provided alternative to be “death from malnutrition before ones fifth birthday”. I ask how many times maximum profit has been present in that scenario? Its not like there’s any lucid decision to save this one and not that one. People continue to suffer under so many vague numbers on a ledger, reassured that “all of them” are in the tally.

                My take from all this is can’t we learn to utilize maximum profit a little better than what we do now?Report

              • Roger in reply to James K says:

                I meant to say if the nets are too big, they will attract systemic unemployment. I was referencing the obvious balancing between temporary safeguards and benefit levels which reduce incentives to find work or offer jobs.

                In reasonably advanced, relatively free markets there is no reaon for any child to die from malnutrition. The reason is that these markets produce wealth which can be used directly by those involved in its creation or via transfer/charity to buy food. In more advanced market economies, obesity is more of a threat than malnutrition.

                What do you mean by “utilize maximum profit a little better”?

                I see profit as a feedback mechanism in a reasonably free market. The freer the market the better the feedback works. It is feedback on how to optimize prosperity for those within the defined market. This of course leads me to be suspicious of anything which attempts to interfere or reduce the effectiveness of the feedback. It will make us on net less prosperous, at least in general.Report

              • Kim in reply to James K says:

                Part of the reason I’m so gung ho about inheritance taxes, Roger. We ought to let the chaotic system work, not let it get stuck in stable equilibria.Report

              • Citizen in reply to James K says:

                Yes stable equilibria, but also stratified.
                I have no easy answers.
                Is there anything salient about one order of magnitude of decentralization? How far apart are the shoulders we are standing on?

                I wonder if we should push minimum wage up to $50 an hour and make our labor worth something again.

                Some days I think we should drop minimum wage down to $1 an hour and break the bottom end strata. Hell, if we can’t go through maximum profit, around it, or over it, we should be able to go under it. But again, that would look like a race to the very bottom, no?Report

    • James Hanley in reply to Citizen says:


      #2 doesn’t matter, because the party that can make wozzles for lowest cost isn’t interested in making them because it will have to forgo even greater gains elsewhere.

      Let’s use an example (which, as are textbook economic examples, very simplified). Say I have an absolute advantage in wozzle-making, so that I can make wozzles for $2 each and it costs you $2.50 each. Let’s say you need to make $.05 per wozzle to keep your company from going under, so your wozzles have to sell for at least $2.55. Even if I need $.10 per wozzle to stay in business, I can sell them for anywhere between $2.10 and $2.54, and you can’t compete. But my maximum profit per wozzle is $.54 (the maximum selling price that keeps you from competing minus my production cost).

      Then I realize I can make widgets for $1.50 and sell them for $2.50, allowing me $1.00 in profit per widget. You also aren’t as efficient at making widgets as me, and I can bankrupt you in widget competition as easy as I can in wozzle competition. So you won’t go into widget production, but I will because I make more in widgets than wozzles. Each wozzle I produce instead of a widget costs me up to $.46 in lost profit (my $1.00 widget profit minus my $.54 maximum wozzle profit).

      Another way to say this is that the cost that really matters is not the production cost but the opportunity cost.Report

    • James Hanley in reply to Citizen says:

      Another way I find it useful to think about comparative advantage is to think of a lawyer who worked his way through college as a house painter. His house is in need of painting, and he could tells his son he’ll pay him to do it. In fact the lawyer could do a better job more quickly, while his son will do a poorer job more slowly.

      Should the lawyer take time off work to paint his house, or should he pay his son? The lawyer has an absolute advantage over his son in house-painting, but it will actually cost him more to do it himself than to pay his son to do it.Report

      • Plinko in reply to James Hanley says:

        This is a much better example. I was trying to think of one where we’re trying to form a football team and have more people good at one position than we have spots, but this is way better.Report

        • James Hanley in reply to Plinko says:

          I cadged it from somewhere else. I’ve also seen examples like you suggest, using baseball and comparing players at 2nd base and Shortstop, but since the team has to play both of them, it never seems to make things clear for folks.Report

      • Citizen in reply to James Hanley says:

        Hmm. I’ll take some time to digest this.

        Remember that three point balance?
        #1. If the son happens to paint the car purple pokka dot in the process? Leaves 3″ missed spots between brush strokes.

        #2. If the son use 3 times the paint to cover the same square feet?

        #3. If the son only has 1/2 the house painted 5 years later?Report

        • Rod Engelsman in reply to Citizen says:

          The theory of Comparative Advantage is a mathematical model that begins with certain assumptions. In the real world it’s only as true as far as the assumptions actually hold. One assumption is that the widgets produced in country A are exactly equivalent to the widgets produced in country B. Or in J.H.’s example, the end result of the son painting the house vice the father doing it are exactly the same.

          Perhaps his example would have been better if he had postulated paying a professional house painter $50/hr to do the job while he, as a lawyer, bills his clients $100/hr. By reducing his lawyering workload to paint his house he would actually be losing $50/hr more than the $50/hr he has to pay someone else to do it.Report

          • Murali in reply to Rod Engelsman says:

            Rod, Roger and both Jameses

            Elevator pitch for comparative advantage:

            You have a comparative advantage in producing A relative to B if for an equivalent amount of resources, the ratio of A/B is greater than the ongoing exchange rate (however said rate is set). This means that you can always shift all your productive resources to producing A and exchange A’s for B’s and still end up (without having to give up anything) with either extra A’s, extra B’s, extra money or some combination of the above. The absolute amount other people spend is irrelevant.Report

            • Roger in reply to Murali says:

              Nice, Murali.

              Question… Does “exchange rate” in this paragraph include all costs of transportation and exchange? It seems like it should.Report

              • Murali in reply to Roger says:

                no, you should put transportation costs under production rather than exchange. Producing something doesn’t really count if you have no way of getting it out of he factory and to the market. i.e. if its stucj on the production floor it hasn’t really been produced yet. therefore transportation is just one part of production costs.

                The implication is that your productivity for domestic markets is going to be slightly higher for local markets than for export. But we expected that. transport cost is a friction.Report

              • Roger in reply to Murali says:


          • Brandon Berg in reply to Rod Engelsman says:

            In the real world it’s only as true as far as the assumptions actually hold. One assumption is that the widgets produced in country A are exactly equivalent to the widgets produced in country B.

            This isn’t actually relevant to trade policy. If widgets made in country B are inferior, then the residents of country A will pay less for them. Or they’ll buy domestically manufactured widgets. Either way, no government intervention is needed.Report

        • Citizen in reply to Citizen says:

          Thanks again for the walk through. This occurs already and is typically a facet of maximum profit.
          My first days on the job in a facility I track down the production manager and ask the most important question: “what business are we in?”

          Mind you this isn’t always the one with the title, its the most important person in the communication change when you have to add 10 more widgets into that days production.

          Typically there is wozzle production to backfill any gaps around the widgets. This keeps the facility online and profitable else the production would fall to zero for the facility. Its when you produce wozzles, wingles and wangits to backfill, that the answer from your production manager tends to become abstract or unclear.Report