Free trade refers to the absence of policy instruments such as tariffs to discourage imports, subsidies to encourage exports and other instruments designed with similar intent. Basically, if a country treats foreign goods the same way it treats domestic ones it is practicing free trade.
The important thing to bear in mind is that the overall balance of trade won't be affected because international cash flows have to balance out. So low pollution or labour standards will effect the kinds of goods China exports you, but the balance is fixed. Polluting industries or industries reliant on a lot of unskilled labour gain, other industries lose.
Now if Chinese production is imposing a negative externality on non-Chinese people (think: global warming), then you're justified in taxing that production like any other polluting activity (it's not a tariff per se, its a Pigouvian tax), so long as you're not treating Chinese production more harshly than your own.
Basically what Plinko said. The only thing I'll add is that if Dollars are going overseas and not coming back then the Fed has effectively become an importer. Mind you, that involves the US getting goods in exchange for pieces of paper, so in the final analysis is a pretty sweet deal.
The goal isn't to maximise GDP, it's to maximise allocative efficiency, which means that the good produced are optimal, given the preferences of consumers. This is pretty much a good thing by definition. And labour productivity tends to lead to higher wages.
So no, stuff made is not the be all and end all of trade theory. And its also true that allocative efficiency isn't everything, but you deal with distributional issues using transfer payments, not messing about with the exchange of goods and services.
It is counter-intuitive, which is probably pretty much everyone who isn't an economist gets it wrong (even the Chinese government).
When China imposes a steel tariff on imports from the US, the following things happen:
1) They capture some revenue from US steel exporters. Note that the revenue gain to the Chinese government is necessarily lower than the losses to the steel exporters due to deadweight loss of taxation.
2) Chinese steel makers raise their domestic prices now that their government has shielded them from foreign competition. This has the same effect as any tax that protects incumbent firms from competition. Chinese Steel makers get richer at the expense of Chinese consumers, but like any imperfectly competitive environment the gains to the producers are smaller than the losses to consumers.
3) A balance of sorts has to be maintained between the exchanges between any two currencies. This means that if fewer people are swapping Yuan for Dollars to buy US steel either A) more people will swap Yuan for Dollars to buy some other US export or B) fewer people will be able to swap Dollars for Yuan to sell exports to the US. So either way some other Chinese industry will lose (as will their counter-party in the US).
Overall the social losses exceed the gains, both worldwide and in China. Note that none of this refers to US trade policy at all, so even if the US is engaged in big tariffs on Chinese goods, China is still better off eliminating its tariffs.
Matty:
There's a system I endorse call Negative Income Taxation whereby everyone pays x% of their income less $y. So let's say everyone paid 33% of their income minus $10,000. If you earn $60,000 you pay $60,000 * 0.33 - 10,000 = $10,000 in tax. If you earn $30,000 you pay $30,000 * 0.33 - 10,000 = no tax. If you earn less than $30,000 you get money back from the government. This is less likely to produce long-term dependency because everyone has an incentive to seek work, even if it's very part time.
Christopher Carr:
If your job only exists because the government interfered in the market to make it happen then you're just a dependant on the governing as if you were getting a welfare check, it just doesn't look like it. This is the basis of the argument Thatcher had with the coal miners.
Negative examples are a little hard to generate Jaybird, but Cabinet Ministers have resigned their ministerial portfolios (though not their parliamentary seats) for relatively minor misuse of their expense accounts.
We have had exactly one case of a Member of Parliament being convicted of corruption - he (legally) helped a Thai tiler immigrate to New Zealand, this tiler then did a couple of cut-price roofing jobs for him.
Every single government contract over NZD100,000 must be publicly and openly tendered, and everything over NZD50,000 must be tendered, but without quite so much openness.
These are but a few examples, but I hope they paint a picture.
Just to add a little capper to your post, I would remind everyone that Krugman was awarded his Nobel for his work on trade theory. This means that you should give his ideas on trade more weight than his ideas on anything else.
Trade economics was one of my specialities at university and I can state with as much confidence as you can ever have in the social sciences that there are no good policy reasons to impose tariffs, quotas or export subsidies. You will not help the poor, the best you can hope to do is help a few narrow groups at the expense of everyone else, and you can do that with transfer payments at a much lower social cost. In fact it doesn't even matter what the trade policies of other countries are, unilateral abolition of all tariffs, quotas and subsidies is the optimal policy to undertake. Just because every other country decided to jump off a bridge that's no reason to follow them.
I agree with this, I'm a government policy analyst in my day job so I'm personally and professionally committed to the notion that how you do policy matters. And the winners-losers thing bugs me too. What I care about is getting the machine running well. If the distribution doesn't look too flash afterward, well there's a pretty simple solution to that.
What gets to me is when people try to make markets do things they cannot do. Markets as a system are basically value neutral, they can't conform to your notions of fairness. So, if people are left in an unacceptable situation once the market has done its work, the thing to do is use welfare, its simpler, cleaner and less likely to cause a horrific cock-up than wading into one of the most complex systems in existence without a clear picture of what one is doing.
I don't think we're in fundamental disagreement here, and I think somewhere in here is a potential point of liberaltarian consensus, at least between your kind of liberal and my kind of libertarian.
Francis, there are some value-neutral errors in economic thinking in your post.
1) This point is true in a trivial sense, the question is how interfering in the mechanisms of a market alters the action of that market. More often than not fooling about with a market's mechanisms impedes its function. The times where this isn't true are called market failures and there's a whole literature on them.
2) I see no reason why markets can't do either of those things. There are some market failures involved in healthcare, but they are manageable and I've never heard of a government system that seriously attempts to address them. And potable water doesn't have any particular market failures associated with it.
3) A fair point, but there are many ways to address other values. When it comes to things like poverty reduction transfer payments (i.e. welfare) are a much better bet than regulating market activity, you can do more for the poor without distorting the underlying operation of the market too much.
4) Again, this is a reasonable point (and I made a few comments on the "Middle Class isn't dying" thread discussing my thoughts on wage stagnation in the US), but if income distribution is a problem then redistribute income, don't go messing about with market mechanism unless you're very sure of how they work.
Alas, all the things I can think of involve you not starting from where you are. New Zealand has some capture-resistance in its institutions (our civil service model and the greater centralisation of power), but a lot of it is cultural. Frankly, few New Zealand politicians would dare behave the way American ones do.
I didn't address retirement specifically, but I think it falls into problem 3, people are having trouble saving for their retirement because their wages are stagnant. If wages were rising at a steady clip, retirement saving would be much easier.
It's true that high end salaries are still rising steadily, but I think healthcare still drives some of that. After all if your income is already high, then your absolute pay rises are more likely to outpace healthcare inflation.
But you're right there's likely more to it. Some of it will be related to the growth of the finance industry. As Tyler Cowen puts it, people in finance have gotten better at playing "heads I win, tails you lose" than they used to be. I'm not sure what to do about this, given how vulnerable your political system is to capture.
The same is true for political inequality. I'm an economist, not a political scientist, so I don't have anything useful to say about it. The only solution I can think of is "have a political system that can't be captured by concentrated interests as easily", but that's not really very helpful.
I think that's a very good idea EC, I believe that university education is overrated at the moment (it's good, just not a good as most people seem to think it is), my sister dropped out of high school in year 13 and trained as a chef and she's doing very well for herself.
As you say, people need skills to command a decent wage, undifferentiated commodities don't get very good prices, and unskilled labour is no different.
Because my Master's dissertation was on the influence of spatial effects on house prices?
And thank you (and your wife) for your concern, but Wellington is far enough away from Christchurch that I haven't been directly affected. I do have a cousin who lives in Christchurch, but she and her boyfriend are fine. Their house has survived this and the previous quakes pretty much unscathed.
But things are going to be pretty hectic at work for a while. I've been on leave this week, but I suspect I'll be pulling a few long days assembling data for the government's response to the earthquake. Not only that, but the Census has been cancelled, Statistics New Zealand has a lot of its staff in Christchurch and they simply can't coordinate an operation of that magnitude at the moment.
Having read through this debate, I've been trying to figure out the key objections to Jason and James Hanley's point, so I can work out a response. The tl,dr summary is that the source of the problem is probably health and education rather than labour relations or wider economic issues.
As I see it, the key objections are (in my words):
1) Even if things aren't getting worse for the middle class, they're not getting much better and that's still a problem.
2) Even if standard of living is improving for most goods, there are a small number of very important goods (housing, medical care and education) that are getting more expensive, and they represent a large enough share of middle-class incomes to represent a problem.
3) Good availability and quality aside, median incomes have stagnated since the 1970s. This matters because better goods are not a substitute for cash in the hand in every situation (like retirement, and security against adverse financial events) and thus the middle class are being adversely affected.
Now number 1 and number 3 are pretty much variations on a common theme, so I'll offer a combined response:
1 & 3) The big unanswered question here is why would wages stagnate? I think for me there are two likely candidates:
A) Most US industries have more competition than they did in the 1970, due to lower trade barriers and some deregulation. This limits the ability of unions to extract high wages from employers because the monopoly rents they are fighting over have shrunk. I suspect a lot of Michigan's economic malaise can be explained by this. But that can't be the whole story or real incomes wouldn't be stagnant for the the middle class as a whole (the net effect of greater competition is to increase social welfare). But it would explain why union workers in manufacturing are finding it tougher.
As I understand it the income metrics being used here doesn't include benefits, just wages and salaries, is that right? Now omitting benefits wouldn't matter much in New Zealand because we don't really get benefits, but for the US this strikes me as problematic. If benefits are excluded then I would suggest that the blame for stagnant wages can probably be placed mostly on healthcare costs. The lion's share of healthcare expenses for the employed are paid by employers. That cost has risen dramatically, so that would be the first place I'd look for the missing pay rises. This means problems 1 and 3 reduce to problem 2.
2) Three goods: housing, health, education. Why are they so expensive? Well, the first thing I'd point out is that one of the leading reasons people are concerned about housing is that you need to have a house in a good neighbourhood because you need it to get into a good school. That to me seems the real issue, the bundling of education and housing services has adversely affected the housing market. Combine that with the fact that houses are getting bigger and there's just been a huge housing bubble and I think that explains housing as a problem.
Which leaves us with 2 problems: health and education. As to how to fix these, I don't really know. Devising a solution would require a team of policy analysts doing some careful research, not just one pontificating in his spare time. I have some thoughts on health (they resemble Singapore's system), but education isn't something I have any good thoughts on except some experimentation is called for to try and find new solutions for K-12.
In any case I think that's where you need to look for solutions, I don't think this is a wider economic problem, but rather one of poor performance in a couple of select markets.
Because there aren't any corporations that can take money out of my wallet and give it to causes I dislike. This is why the "I pay the union, but the company pays me" distinction is important to me.
By that's my point I guess, I don't want to be supplied to an employer by a union, I want to do my own supplying.
Unions have many goals and activities, and the strictly commercial ones are of less concern to me, a lot of them are explicitly political, and given my own ideology their politics run sharply at odds with my own. Hell, the largest non-government union in New Zealand is so closely aligned with out largest left-wing political party that members of the union have voting rights as party members, and the same man is currently president of both organisations.
Now that's an extreme case, but I'm sure you can see why I'd be less than keen to be forced to pay for political advocacy I disagree with. Union, like corporations, are both political and commercial activities, and like corporations, I am much more suspicious of unions as a political entity than as a commercial entity.
The difference is that at bottom work is the act of accepting money to do things you otherwise wouldn't do. My boss gets to tell me to do things because they pay for the privilege, but the union wants to tell me what to do and make me pay them, how is that fair?
What’s to stop corporations from simply outsourcing everything in this scenario?
The foreign exchange markets. Lets say that tomorrow The League of Baby-Eating Capitalists got together in their secret underground lair and decided to offshore all of America's jobs (except the ones producing non-tradeables of course, because those can't be offshored). So now, apart from a few hairdressers and taxi drivers America is unemployed, now what?
Well, all those offshored jobs are making things for American consumption, and the US of A has just one thing to pay for them: US dollars. But the thing is that since the US now has no exports, what are those US dollars good for? Sure some countries use them, but there's a finite demand for that, and at some point people will work out that using the money of a country that doesn't produce anything as a reserve currency is a pretty dumb idea. So everyone's sitting on a big stack of worthless US dollars, everyone wants to sell and no one wants to buy so the exchange rate will fall to zero, or very close.
So what does that do for economic opportunities in the US? Well, if a business were to start up in the US and start exporting (or competing with importers) they could pay their workers with worthless greenbacks, instead of Chinese or Indian workers who demand expensive currencies like the Yuan or Rupee. That would make US workers very cheap to hire, so all those evil capitalists (who love money above all, even above loyalty to The League of Baby-Eating Capitalists) and all those offshored jobs would come flooding back until equilibrium in the financial markets was restored.
On top of that, there's the Law of Comparative Advantage, but I thought I should cover off the 18th Century arguments against the proposition that offshoring causes unemployment before I moved on to the 19th Century.
Now theoretically its possible that through sufficiently aggressive action, US labour could reduce its Marginal Product of Labour down to zero (or even negative) marginal product, at which point no one would hire them at any wage, but that would require something pretty spectacular, and frankly at that point they'd have it coming. But barring ridiculous special cases people will be paid at or about their marginal product of labour. If a market is fairly uncompetitive then unions may be able to secure some of the monopoly rents from the firms benefiting from weak competition (and I sincerely wish them all the best), but if the underlying market is pretty competitive then unions can't do much beyond going after the employers who are acting like assholes for no good reason, and while that's a good reason to have unions, it's a more limited service.
In fact the more I think about it, the more I think that this is the reason US unions have wilted. In the highly uncompetitive environment of 1970s America, there were a lot of monopoly rents lying around so workers had a lot to gain by organising so they could grab their share. Also when it was hard to start up new businesses, it mattered more if exiting firms took a dislike to you so union protections were more important. It's telling that the one sector that is still heavily unionised in the US is the one that is by its nature highly monopolistic - government.
If this theory is true then unions are probably never coming back, but it also suggests that the reason they've declined is because they've become obsolete, so on balance its probably no big deal.
I'm OK with anti-trust laws (perhaps not the ones that currently exist, but some laws to restrain monopoly), so I'm also OK with restraining some union activity.
And I'm really uncomfortable with the notion that a simple majority of workers can force the rest to either join the union or quit, it seems to me to undermine freedom of association, since its forcing you to associate with a group.
It certainly can't continue forever because your government can't keep borrowing at its current rate forever. At some point your government will either cut back (which will move your exchange rate with China to make imports more expensive and exports more profitable), or default (which is just a sudden form of cut back). So you're right, balance must be restored, but it'll do that on its own.
A) Taxing offshoring is impeding trade, and the US has lots of production, its just capital-intensive so it doesn't employ as many people. And the reason the US is running a trade deficit is that your government has to do a lot of offshore borrowing to finance its profligacy (effectively the US is borrowing from the Chinese and paying for the debt by buying their goods). The world of the 1970s is never coming back, and nor should it. Comparative advantage changes over time, and ultimately your country will be stronger for looking forward instead of backward.
B) It's true that I can compose a better policy that the status quo (its not like it's hard or anything), for the US I'd go with the immediate elimination of federal drug laws (expect perhaps laws about importing drugs into a state where they're illegal), and at the state level I'd recommend phased legalisation of all drugs, starting with marijuana, and working up to meth with enough time between each legalisation to determine what (if any) social problems are arising so responses can be devised. If things go seriously pear shaped, then it may be necessary to back up, but the outcomes would have to be pretty nasty to outdo the status quo. But at the end of the day, I'm an analyst not an advocate, persuasion isn't my strong suit.
C) I'm an advocate of Negative Income Taxation, which is basically the idea that everyone pays a fixed % of their income in taxes, but then everyone gets a large universal deduction, large enough to represent a living income, so if you have no job, you live on your deduction. The result is a system that provides a safety net with no gaps, and you can reduce the entire personal tax and welfare systems into a formula that takes 15 seconds to explain. It's pricey, but since you can replace welfare (including Social Security) and all your tax deductions with this one programme it should be feasible. I've seen calculations that show it can work for New Zealand, so it should be possible in the US too, it's just a matter of setting the taxes and deductions right.
On “Why don’t we treat free trade like global warming?”
Yeah, pretty much. You're better off using haruspicy than technical analysis. At least you'll get dinner afterward.
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Free trade refers to the absence of policy instruments such as tariffs to discourage imports, subsidies to encourage exports and other instruments designed with similar intent. Basically, if a country treats foreign goods the same way it treats domestic ones it is practicing free trade.
This is a fairly narrow concept.
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The important thing to bear in mind is that the overall balance of trade won't be affected because international cash flows have to balance out. So low pollution or labour standards will effect the kinds of goods China exports you, but the balance is fixed. Polluting industries or industries reliant on a lot of unskilled labour gain, other industries lose.
Now if Chinese production is imposing a negative externality on non-Chinese people (think: global warming), then you're justified in taxing that production like any other polluting activity (it's not a tariff per se, its a Pigouvian tax), so long as you're not treating Chinese production more harshly than your own.
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Basically what Plinko said. The only thing I'll add is that if Dollars are going overseas and not coming back then the Fed has effectively become an importer. Mind you, that involves the US getting goods in exchange for pieces of paper, so in the final analysis is a pretty sweet deal.
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The goal isn't to maximise GDP, it's to maximise allocative efficiency, which means that the good produced are optimal, given the preferences of consumers. This is pretty much a good thing by definition. And labour productivity tends to lead to higher wages.
So no, stuff made is not the be all and end all of trade theory. And its also true that allocative efficiency isn't everything, but you deal with distributional issues using transfer payments, not messing about with the exchange of goods and services.
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It is counter-intuitive, which is probably pretty much everyone who isn't an economist gets it wrong (even the Chinese government).
When China imposes a steel tariff on imports from the US, the following things happen:
1) They capture some revenue from US steel exporters. Note that the revenue gain to the Chinese government is necessarily lower than the losses to the steel exporters due to deadweight loss of taxation.
2) Chinese steel makers raise their domestic prices now that their government has shielded them from foreign competition. This has the same effect as any tax that protects incumbent firms from competition. Chinese Steel makers get richer at the expense of Chinese consumers, but like any imperfectly competitive environment the gains to the producers are smaller than the losses to consumers.
3) A balance of sorts has to be maintained between the exchanges between any two currencies. This means that if fewer people are swapping Yuan for Dollars to buy US steel either A) more people will swap Yuan for Dollars to buy some other US export or B) fewer people will be able to swap Dollars for Yuan to sell exports to the US. So either way some other Chinese industry will lose (as will their counter-party in the US).
Overall the social losses exceed the gains, both worldwide and in China. Note that none of this refers to US trade policy at all, so even if the US is engaged in big tariffs on Chinese goods, China is still better off eliminating its tariffs.
On “On the language of assumption”
Matty:
There's a system I endorse call Negative Income Taxation whereby everyone pays x% of their income less $y. So let's say everyone paid 33% of their income minus $10,000. If you earn $60,000 you pay $60,000 * 0.33 - 10,000 = $10,000 in tax. If you earn $30,000 you pay $30,000 * 0.33 - 10,000 = no tax. If you earn less than $30,000 you get money back from the government. This is less likely to produce long-term dependency because everyone has an incentive to seek work, even if it's very part time.
Christopher Carr:
If your job only exists because the government interfered in the market to make it happen then you're just a dependant on the governing as if you were getting a welfare check, it just doesn't look like it. This is the basis of the argument Thatcher had with the coal miners.
On “The Middle Class Isn’t Dying”
Negative examples are a little hard to generate Jaybird, but Cabinet Ministers have resigned their ministerial portfolios (though not their parliamentary seats) for relatively minor misuse of their expense accounts.
We have had exactly one case of a Member of Parliament being convicted of corruption - he (legally) helped a Thai tiler immigrate to New Zealand, this tiler then did a couple of cut-price roofing jobs for him.
Every single government contract over NZD100,000 must be publicly and openly tendered, and everything over NZD50,000 must be tendered, but without quite so much openness.
These are but a few examples, but I hope they paint a picture.
On “Why don’t we treat free trade like global warming?”
Just to add a little capper to your post, I would remind everyone that Krugman was awarded his Nobel for his work on trade theory. This means that you should give his ideas on trade more weight than his ideas on anything else.
Trade economics was one of my specialities at university and I can state with as much confidence as you can ever have in the social sciences that there are no good policy reasons to impose tariffs, quotas or export subsidies. You will not help the poor, the best you can hope to do is help a few narrow groups at the expense of everyone else, and you can do that with transfer payments at a much lower social cost. In fact it doesn't even matter what the trade policies of other countries are, unilateral abolition of all tariffs, quotas and subsidies is the optimal policy to undertake. Just because every other country decided to jump off a bridge that's no reason to follow them.
On “On the language of assumption”
I agree with this, I'm a government policy analyst in my day job so I'm personally and professionally committed to the notion that how you do policy matters. And the winners-losers thing bugs me too. What I care about is getting the machine running well. If the distribution doesn't look too flash afterward, well there's a pretty simple solution to that.
What gets to me is when people try to make markets do things they cannot do. Markets as a system are basically value neutral, they can't conform to your notions of fairness. So, if people are left in an unacceptable situation once the market has done its work, the thing to do is use welfare, its simpler, cleaner and less likely to cause a horrific cock-up than wading into one of the most complex systems in existence without a clear picture of what one is doing.
I don't think we're in fundamental disagreement here, and I think somewhere in here is a potential point of liberaltarian consensus, at least between your kind of liberal and my kind of libertarian.
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Francis, there are some value-neutral errors in economic thinking in your post.
1) This point is true in a trivial sense, the question is how interfering in the mechanisms of a market alters the action of that market. More often than not fooling about with a market's mechanisms impedes its function. The times where this isn't true are called market failures and there's a whole literature on them.
2) I see no reason why markets can't do either of those things. There are some market failures involved in healthcare, but they are manageable and I've never heard of a government system that seriously attempts to address them. And potable water doesn't have any particular market failures associated with it.
3) A fair point, but there are many ways to address other values. When it comes to things like poverty reduction transfer payments (i.e. welfare) are a much better bet than regulating market activity, you can do more for the poor without distorting the underlying operation of the market too much.
4) Again, this is a reasonable point (and I made a few comments on the "Middle Class isn't dying" thread discussing my thoughts on wage stagnation in the US), but if income distribution is a problem then redistribute income, don't go messing about with market mechanism unless you're very sure of how they work.
On “The Middle Class Isn’t Dying”
Alas, all the things I can think of involve you not starting from where you are. New Zealand has some capture-resistance in its institutions (our civil service model and the greater centralisation of power), but a lot of it is cultural. Frankly, few New Zealand politicians would dare behave the way American ones do.
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Thanks ED :)
I didn't address retirement specifically, but I think it falls into problem 3, people are having trouble saving for their retirement because their wages are stagnant. If wages were rising at a steady clip, retirement saving would be much easier.
It's true that high end salaries are still rising steadily, but I think healthcare still drives some of that. After all if your income is already high, then your absolute pay rises are more likely to outpace healthcare inflation.
But you're right there's likely more to it. Some of it will be related to the growth of the finance industry. As Tyler Cowen puts it, people in finance have gotten better at playing "heads I win, tails you lose" than they used to be. I'm not sure what to do about this, given how vulnerable your political system is to capture.
The same is true for political inequality. I'm an economist, not a political scientist, so I don't have anything useful to say about it. The only solution I can think of is "have a political system that can't be captured by concentrated interests as easily", but that's not really very helpful.
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Yes quite.
Happily New Zealand's Civil Defence system is considered the best in the world. One area where I'm entirely OK with government having a role.
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I think that's a very good idea EC, I believe that university education is overrated at the moment (it's good, just not a good as most people seem to think it is), my sister dropped out of high school in year 13 and trained as a chef and she's doing very well for herself.
As you say, people need skills to command a decent wage, undifferentiated commodities don't get very good prices, and unskilled labour is no different.
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Because my Master's dissertation was on the influence of spatial effects on house prices?
And thank you (and your wife) for your concern, but Wellington is far enough away from Christchurch that I haven't been directly affected. I do have a cousin who lives in Christchurch, but she and her boyfriend are fine. Their house has survived this and the previous quakes pretty much unscathed.
But things are going to be pretty hectic at work for a while. I've been on leave this week, but I suspect I'll be pulling a few long days assembling data for the government's response to the earthquake. Not only that, but the Census has been cancelled, Statistics New Zealand has a lot of its staff in Christchurch and they simply can't coordinate an operation of that magnitude at the moment.
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Having read through this debate, I've been trying to figure out the key objections to Jason and James Hanley's point, so I can work out a response. The tl,dr summary is that the source of the problem is probably health and education rather than labour relations or wider economic issues.
As I see it, the key objections are (in my words):
1) Even if things aren't getting worse for the middle class, they're not getting much better and that's still a problem.
2) Even if standard of living is improving for most goods, there are a small number of very important goods (housing, medical care and education) that are getting more expensive, and they represent a large enough share of middle-class incomes to represent a problem.
3) Good availability and quality aside, median incomes have stagnated since the 1970s. This matters because better goods are not a substitute for cash in the hand in every situation (like retirement, and security against adverse financial events) and thus the middle class are being adversely affected.
Now number 1 and number 3 are pretty much variations on a common theme, so I'll offer a combined response:
1 & 3) The big unanswered question here is why would wages stagnate? I think for me there are two likely candidates:
A) Most US industries have more competition than they did in the 1970, due to lower trade barriers and some deregulation. This limits the ability of unions to extract high wages from employers because the monopoly rents they are fighting over have shrunk. I suspect a lot of Michigan's economic malaise can be explained by this. But that can't be the whole story or real incomes wouldn't be stagnant for the the middle class as a whole (the net effect of greater competition is to increase social welfare). But it would explain why union workers in manufacturing are finding it tougher.
As I understand it the income metrics being used here doesn't include benefits, just wages and salaries, is that right? Now omitting benefits wouldn't matter much in New Zealand because we don't really get benefits, but for the US this strikes me as problematic. If benefits are excluded then I would suggest that the blame for stagnant wages can probably be placed mostly on healthcare costs. The lion's share of healthcare expenses for the employed are paid by employers. That cost has risen dramatically, so that would be the first place I'd look for the missing pay rises. This means problems 1 and 3 reduce to problem 2.
2) Three goods: housing, health, education. Why are they so expensive? Well, the first thing I'd point out is that one of the leading reasons people are concerned about housing is that you need to have a house in a good neighbourhood because you need it to get into a good school. That to me seems the real issue, the bundling of education and housing services has adversely affected the housing market. Combine that with the fact that houses are getting bigger and there's just been a huge housing bubble and I think that explains housing as a problem.
Which leaves us with 2 problems: health and education. As to how to fix these, I don't really know. Devising a solution would require a team of policy analysts doing some careful research, not just one pontificating in his spare time. I have some thoughts on health (they resemble Singapore's system), but education isn't something I have any good thoughts on except some experimentation is called for to try and find new solutions for K-12.
In any case I think that's where you need to look for solutions, I don't think this is a wider economic problem, but rather one of poor performance in a couple of select markets.
On “The Death and Life of the Great American Middle Class”
Because there aren't any corporations that can take money out of my wallet and give it to causes I dislike. This is why the "I pay the union, but the company pays me" distinction is important to me.
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By that's my point I guess, I don't want to be supplied to an employer by a union, I want to do my own supplying.
Unions have many goals and activities, and the strictly commercial ones are of less concern to me, a lot of them are explicitly political, and given my own ideology their politics run sharply at odds with my own. Hell, the largest non-government union in New Zealand is so closely aligned with out largest left-wing political party that members of the union have voting rights as party members, and the same man is currently president of both organisations.
Now that's an extreme case, but I'm sure you can see why I'd be less than keen to be forced to pay for political advocacy I disagree with. Union, like corporations, are both political and commercial activities, and like corporations, I am much more suspicious of unions as a political entity than as a commercial entity.
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The difference is that at bottom work is the act of accepting money to do things you otherwise wouldn't do. My boss gets to tell me to do things because they pay for the privilege, but the union wants to tell me what to do and make me pay them, how is that fair?
On “Labor Roundtable: Why Market Anarchy Favors Labor”
The foreign exchange markets. Lets say that tomorrow The League of Baby-Eating Capitalists got together in their secret underground lair and decided to offshore all of America's jobs (except the ones producing non-tradeables of course, because those can't be offshored). So now, apart from a few hairdressers and taxi drivers America is unemployed, now what?
Well, all those offshored jobs are making things for American consumption, and the US of A has just one thing to pay for them: US dollars. But the thing is that since the US now has no exports, what are those US dollars good for? Sure some countries use them, but there's a finite demand for that, and at some point people will work out that using the money of a country that doesn't produce anything as a reserve currency is a pretty dumb idea. So everyone's sitting on a big stack of worthless US dollars, everyone wants to sell and no one wants to buy so the exchange rate will fall to zero, or very close.
So what does that do for economic opportunities in the US? Well, if a business were to start up in the US and start exporting (or competing with importers) they could pay their workers with worthless greenbacks, instead of Chinese or Indian workers who demand expensive currencies like the Yuan or Rupee. That would make US workers very cheap to hire, so all those evil capitalists (who love money above all, even above loyalty to The League of Baby-Eating Capitalists) and all those offshored jobs would come flooding back until equilibrium in the financial markets was restored.
On top of that, there's the Law of Comparative Advantage, but I thought I should cover off the 18th Century arguments against the proposition that offshoring causes unemployment before I moved on to the 19th Century.
Now theoretically its possible that through sufficiently aggressive action, US labour could reduce its Marginal Product of Labour down to zero (or even negative) marginal product, at which point no one would hire them at any wage, but that would require something pretty spectacular, and frankly at that point they'd have it coming. But barring ridiculous special cases people will be paid at or about their marginal product of labour. If a market is fairly uncompetitive then unions may be able to secure some of the monopoly rents from the firms benefiting from weak competition (and I sincerely wish them all the best), but if the underlying market is pretty competitive then unions can't do much beyond going after the employers who are acting like assholes for no good reason, and while that's a good reason to have unions, it's a more limited service.
In fact the more I think about it, the more I think that this is the reason US unions have wilted. In the highly uncompetitive environment of 1970s America, there were a lot of monopoly rents lying around so workers had a lot to gain by organising so they could grab their share. Also when it was hard to start up new businesses, it mattered more if exiting firms took a dislike to you so union protections were more important. It's telling that the one sector that is still heavily unionised in the US is the one that is by its nature highly monopolistic - government.
If this theory is true then unions are probably never coming back, but it also suggests that the reason they've declined is because they've become obsolete, so on balance its probably no big deal.
On “The Death and Life of the Great American Middle Class”
I'm OK with anti-trust laws (perhaps not the ones that currently exist, but some laws to restrain monopoly), so I'm also OK with restraining some union activity.
And I'm really uncomfortable with the notion that a simple majority of workers can force the rest to either join the union or quit, it seems to me to undermine freedom of association, since its forcing you to associate with a group.
On “Government Spending and Liberty”
It certainly can't continue forever because your government can't keep borrowing at its current rate forever. At some point your government will either cut back (which will move your exchange rate with China to make imports more expensive and exports more profitable), or default (which is just a sudden form of cut back). So you're right, balance must be restored, but it'll do that on its own.
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A) Taxing offshoring is impeding trade, and the US has lots of production, its just capital-intensive so it doesn't employ as many people. And the reason the US is running a trade deficit is that your government has to do a lot of offshore borrowing to finance its profligacy (effectively the US is borrowing from the Chinese and paying for the debt by buying their goods). The world of the 1970s is never coming back, and nor should it. Comparative advantage changes over time, and ultimately your country will be stronger for looking forward instead of backward.
B) It's true that I can compose a better policy that the status quo (its not like it's hard or anything), for the US I'd go with the immediate elimination of federal drug laws (expect perhaps laws about importing drugs into a state where they're illegal), and at the state level I'd recommend phased legalisation of all drugs, starting with marijuana, and working up to meth with enough time between each legalisation to determine what (if any) social problems are arising so responses can be devised. If things go seriously pear shaped, then it may be necessary to back up, but the outcomes would have to be pretty nasty to outdo the status quo. But at the end of the day, I'm an analyst not an advocate, persuasion isn't my strong suit.
C) I'm an advocate of Negative Income Taxation, which is basically the idea that everyone pays a fixed % of their income in taxes, but then everyone gets a large universal deduction, large enough to represent a living income, so if you have no job, you live on your deduction. The result is a system that provides a safety net with no gaps, and you can reduce the entire personal tax and welfare systems into a formula that takes 15 seconds to explain. It's pricey, but since you can replace welfare (including Social Security) and all your tax deductions with this one programme it should be feasible. I've seen calculations that show it can work for New Zealand, so it should be possible in the US too, it's just a matter of setting the taxes and deductions right.
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I can't speak for Simon, but I haven't met Hadlee.
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