Joined: 28 Dec 2005
|Posted: Tue Mar 25, 2008 11:12 pm Post subject: Globalization and Free Trade-Adam Smith
|It would be difficult for the E.U. to have greater globalization without more flexible labor markets. However, Europeans may not tolerate massive job destruction and massive job creation, for a net increase in jobs, to lower their unemployment rates. Rapid and massive change cannot take place with their equality philosophy. Greater globalization means greater inequality.
The Europeans can benefit from a surplus of global labor. A large supply of Third World people are willing to work hard for relatively low wages, which can raise European living standards on both the production and consumption sides (e.g. greater profits and lower prices). Moreover, resources can shift into emerging industries more efficiently, adding to upward mobility, etc.
Posted by: Arthur Eckart | Thursday, February 28, 2008 at 08:56 PM
In the 1970s, oil prices often spiked higher from supply shocks. However, in the 2000s, oil prices rose from increased demand (e.g. global production and U.S. consumption) and diminishing returns (since oil is being depleted). However, market forces are reaching more extreme levels to reduce imbalances.
In the U.S. production function, raw materials and energy are relatively small proportions of production costs, while export-led economies, e.g. China, use relatively large proportions of raw materials and energy in their production. The weaker dollar may cause a U.S. shift, e.g. from buying European autos to American autos, etc.
Below is a (partial) list of advantages and disadvantages of a weaker dollar and the latest Beige Book by the Fed.
Posted by: Arthur Eckart | Thursday, March 06, 2008 at 09:15 AM
U.S. real compensation has increased over 70%, since the early 1960s, while the disparity between overpaid union workers and underpaid non-union workers narrowed substantially. Also, U.S. living standards rose even higher on the consumption side, because of low interest rates, low prices, and capturing a disproportionate global share of real assets and real goods through free trade.
Even if U.S. real growth is zero over the next year, the sharp rise in U.S. living standards over the 2000s will at least be maintained, while household debt is paid-down and saving built-up (along with high income and employment), for the inevitable reacceleration of U.S. economic growth.
U.S. GDP was $14 trillion last year, including $5 trillion of manufactured goods, while U.S. exports were about $1.5 trillion (in 2000 dollars). Only 13 million U.S. workers were needed to produce $5 trillion of manufactured goods (see bottom table in link below). The U.S. is both the largest manufacturer and exporter in the world. Yet, the U.S. also leads the rest of the world combined in the Information and Biotech Revolutions (in both revenues and profits).
Currently, 20% of U.S. households earn over $100,000 a year, while millions of Third World immigrants raised their living standards substantially moving to the U.S. Consequently, there has been substantial upward mobility in the U.S.
Posted by: Arthur Eckart | Friday, March 14, 2008 at 12:19 AM
Meaningless jobs are not in the fundamental long-run interest of an economy. Otherwise, most people would still be farmers. U.S. median household income was over $45,000 in 2005 (median is half earn more and half earn less). You may want to see the link below about U.S. living standards, over the past 100 years, to correct other false assumptions. Obviously, the increases in quantity and quality of output exceeded the rises of inflation.
Posted by: Arthur Eckart | Saturday, March 15, 2008 at 12:27 AM
Also, I may add, there are many misperceptions about the U.S. economy. For example, many believe the $2 trillion a year U.S. health care system is inferior or inefficient compared to the E.U. or Canada. In reality, the U.S. has a higher quality system. So, it costs more (e.g. higher skilled medical workers are paid more, more advanced equipment cost more, new treatments require more investment, etc.). I've stated before, the U.S. is a fragmented and diverse society. Poorer Americans typically see MDs, who graduated from less prestigious or foreign schools, while richer Americans often see MDs from top schools, although the U.S. has high minimum standards in medicine. Also, the U.S. education system is fragmented and diverse (U.S. per student investment in education is almost double compared to Britain and 50% more than Canada). Generally, it depends where people live in the U.S. (e.g. neighborhoods). A recent study showed those in the U.S. with some college have a life expectancy of 82, while those without college have a life expectancy of 75 (see link below). Moreover, the U.S. financial and retail (delivery) systems are most efficient, which many countries attempt to copy. U.S. tech firms are most advanced, while U.S. small business start-ups are promoted (most jobs are created by smaller firms). Of course, without productivity and flexibility in older industries, limited resources cannot be freed to shift into newer industries. So, the 13 million U.S. workers who produce $5 trillion a year of manufacturing output is positive, i.e. more output (in both quantity and quality) with fewer inputs is a positive economic goal.
Posted by: Arthur Eckart | Sunday, March 16, 2008 at 05:13 AM
Posted by: Arthur Eckart | Sunday, March 16, 2008 at 05:20 AM
How do you help households and firms, who really need help, without creating and promoting "moral hazards?" Some European countries use big government to give generous welfare benefits that promote immorality and have high "sin taxes" to reduce immorality. Giving on one hand and taking on the other is inefficient.
In the U.S., free trade makes the U.S. economy more dynamic. It destroys obsolete jobs and creates new jobs. However, free trade also creates job displacement. The U.S. has the highest ratio of high skilled/high paying employment in the world. Yet, there remains a shortage of high skilled U.S. workers, because it takes more time and effort to learn new needed skills. Perhaps, one way to help displaced workers is to give greater educational scholorships, grants, and loans based on fields of study (e.g. microbiologist or biochemist) rather than by income, race, sex, etc. Free trade drives down wages in some jobs. However, it also drives down prices and interest rates. The real economy is what's important. Free trade has been a huge net benefit to society.
Posted by: Arthur Eckart | Sunday, March 16, 2008 at 02:49 PM
Sound economic policies is the best safety net. The U.S. already captured the greatest gains of trade, e.g. through prices, interest rates, profits, exchange rates, competition (which increases productivity), etc., while strengthening older U.S. industries and accelerating growth in newer U.S. industries. Also, U.S. actual output has generally been below potential output throughout the 2000s, while high debt and low saving will add to future U.S. growth. The U.S. has built a large safety net reserve of real wealth, along with high living standards. Of course, Americans who don't want to work, or acquire needed skills, will be left further and further behind.
Posted by: Arthur Eckart | Monday, February 04, 2008 at 08:57 AM
There are no contradictions in my statements, which are based on orthodox economics and real data. For example, export-led economies had to lower prices to induce U.S. demand and lower prices even more to maintain their output and employment levels. Also, export-led economies bought U.S. Treasury bonds at high prices and low returns (real returns, adjusted for inflation, are roughly zero). If foreigners exchange dollars for their currencies, they'd receive fewer and fewer units of their currencies per dollar (because of a depreciating dollar and appreciating foreign currencies). Consequently, export-led economies lose on both their terms-of-trade and currency exchange. Export-led economies are trapped by U.S. economic policies. Moreover, high U.S. household debt and low saving increase future U.S. economic growth, because U.S. households must work longer to pay-down debt and build-up saving, etc. I've stated before, the U.S. economy can be viewed as a Black Hole attracting imports and capital. Now, it's attracting the foreigners who own that capital.
Also, I may add, the U.S. doesn't have a permanent welfare system, because it doesn't want an immoral system (full of moral hazards). Consequently, the U.S. attempts to maintain full employment. U.S. real compensation has increased 70% over the past few decades, while lower prices, lower interest rates, higher capital gains, etc. raised U.S. living standards even more. The U.S. remains the world's largest manufacturer and exporter, because older U.S. industries shifted into goods with market power, while U.S. emerging industries created new products also with market power. Consequently, the U.S. made up in value what it lost in volume (while export-led economies had to make up in volume what it lost in value). The U.S. leads the rest of the world combined in the Information and Biotech Revolutions (in both revenues and profits), while U.S. Agricultural and Industrial Revolution firms produce higher quality "core" goods at higher prices. So, U.S. per capita income is over $10,000 a year more than the E.U. The U.S. is the only economy that can expand with huge negative net exports. It's the main engine of global growth. Without the U.S., the world economy would collapse.
Posted by: Arthur Eckart | Monday, February 04, 2008 at 09:01 PM
Furthermore, I may add, the U.S. spends 50% more per student than Canada and 100% more per student than Britain. Also, full employment adds to human capital. Currently, 20% of U.S. households earn over $100,000 a year. The U.S. receives free goods and free money from foreigners. It can't get much better than that
Posted by: Arthur Eckart | Monday, February 04, 2008 at 09:32 PM
Obviously, the increases in the quantity and quality of U.S. output exceeded the rises in U.S. inflation, which helps explain why U.S. living standards rose. Free trade benefited the rich, e.g. through higher profits. However, it also benefited the poor, e.g. through cheaper prices and lower interest rates. Moreover, in the global economy, the U.S. generally benefited from greater competition (e.g. to increase productivity), and offshoring obsolete jobs (for profits rather than discontinuing operations), while shifting resources into emerging industries and strengthening existing industries. Furthermore, U.S. entrepreneurship kept unemployment low, while many small firms became large firms.
Posted by: Arthur Eckart | Thursday, February 14, 2008 at 08:54 AM
Also, I may add, abundant U.S. capital gave many Americans the opportunity to permanently raise their living standards (e.g. through subprime loans, refinancing at lower rates, and building-up credit ratings, for those who made payments on time).
Posted by: Arthur Eckart | Thursday, February 14, 2008 at 09:47 AM
The free trade article states: "Economists are, however, noting that their ideas can't explain the disturbing stagnation in income that much of the middle class is experiencing."
I find that hard to believe. There's a surplus of low-skilled workers (in the global economy), while there's a shortage of high-skilled workers (in the U.S. economy). So, in the open market, a proportion of the U.S. middle class has stagnating or falling real incomes (e.g. when they lose overpaid low-skilled jobs), while another proportion of the U.S. middle class has rising real income (e.g. after obtaining needed skills). Over time, real incomes rise for many U.S. workers (both high and low skilled), because of experience, performance, finding higher-paying jobs, etc.
Also, U.S. job growth slowed, because U.S. negative net exports continued to increase in the 2000s reaching over 6% of U.S. GDP in 2007, which caused slower growth, higher debt, and lower saving. Moreover, technological upgrades slowed (since use of improved technology became sufficient for longer periods of time). U.S. GDP growth would have been even slower, in the 2000s, if it weren't for the U.S. housing boom (and related goods) generally from 1995-06. Furthermore, the U.S. economy became more efficient (after the quick and massive Creative-Destruction process mostly from 2000-02) in producing more output with fewer inputs.
Economic revolutions are inevitable and slowing them down through government disincentives will create moral hazards and retard improvements in living standards. Rather than giving educational scholorships, grants, loans, etc. based on income, race, sex, etc., they should be given for jobs where there are shortages (e.g. microbiologists and biochemists). Also, better job placement, along with more classes in human development, professional development, personal finance, economics, etc. will increase personal responsibility and independence.
Posted by: Arthur Eckart | Sunday, February 17, 2008 at 02:08 PM
Also, I've stated before, the disparity between union and non-union wages has narrowed substantially, since union power peaked around 1960. U.S. real wages has generally been flat, although it rose in the second half of the 1990s, when U.S. actual output exceeded potential output. Currently, U.S. real wages equal real wages in the early 1960s (which were at a high level). However, U.S. real compensation has increased 70%, since the early 1960s.
Posted by: Arthur Eckart | Sunday, February 17, 2008 at 04:28 PM
The Objective Historian, many of Professor Sowell's statements seem politically or emotionally motivated. However, I tend to agree with his statement below, in part, since the U.S. Homeland Security Chief has stated Europe is becoming a breeding ground for terrorists.
"There are people (immigrants) who brought in attitudes which were not the attitudes of citizens. In fact, they were the attitudes of people who were hostile. I’m amazed when they talk about the guest-worker program in Europe. No one even asks, “What has happened with guest-worker programs in Europe?” What has happened is that they’ve brought in people who hate their guts. This is why you have terrorism in London and Madrid and riots in Paris and other French cities by people who have absolutely no desire to assimilate and who in fact hate the very ideas of the country in which they live.
There is the second-generation phenomenon. You have people who move in from some poor country -- the Middle East, Mexico, whatever. Those people may be very glad to be in the United States or Britain or wherever they may be. But then they have children. And their children have never seen those other places; they’ve never lived that poorer life. All they know is that the population around them is a hell of a lot more prosperous than they are. And there are all sorts of ideologues and hustlers ready to tell them that it’s society’s fault that they don’t have what other people have. This then gives you the people who hate the country in which they live.
In the past there were leaders and organizations that were doing their damnedest to get them assimilated to the norms and the society to which they were moving. Today, you have just the direct opposite. You not only have groups within in these societies that are trying to keep them unassimilable and full of resentment. But you also have people from outside the group, including politicians but also ideologues and intellectuals, who say one culture is as good as another and why should we expect them to assimilate to our culture. Well, that’s wonderful. You should try to go to China and live without speaking Chinese."
Posted by: Arthur Eckart | Sunday, February 24, 2008 at 01:03 AM
DOR, I've stated before, the U.S. created 17.6 million jobs from 1993-98 and created 3.7 million jobs from 2001-06. However, U.S. real GDP growth was only slightly higher from 1993-98 than from 2001-06. So, the U.S. become much more productive in the 2000s (using fewer inputs to produce more output). Also, China is basically a U.S. factory, exporting a great deal of output to the U.S., for U.S. multinationals, while basically importing U.S. non-labor inputs, e.g. capital equipment.
Posted by: Arthur Eckart | Friday, February 29, 2008 at 02:11 AM
Ultimately, the real economy is what's important. The U.S. created or accumulated and captured an "oversupply" or disproportionate global share of real assets and real goods, in part, through sound economic policies. Also, the U.S. has a high level of human capital. The U.S. is a fragmented and diverse society that promotes upward mobility. The U.S. also leads the rest of the world combined in the Information and Biotech Revolutions (in both revenues and profits), while U.S. Agricultural and Industrial Revolution firms shifted into higher quality goods with market power. Below is a link about U.S. living standards.
Posted by: Arthur Eckart | Monday, March 10, 2008 at 08:19 AM
John Konop, the U.S. has plenty of money. The Fed can print an endless supply. The Fed is capable of inflating asset prices as high as you want. However, export-led economies bought dollars instead of U.S. goods. So, they have lots of worth less (although, not worthless) dollars (which also means their export-led economies are worth less). Also, subprime loans were needed to clear the market of "excess" assets. It's not accurate to assume a free labor market in equilibrium is a "race to the bottom." The U.S. operation in Iraq is a seperate issue. I suspect, the Bush Administration and its allies were fearful of a revenge attack (e.g. a dirty bomb or worse) in the future by Saddam or his sons (e.g. 10 or 20 years from now). Of course, that's not possible anymore. I suggest, you get real.
Posted by: Arthur Eckart | Monday, March 10, 2008 at 08:41 PM
Why did you avoid the question about Adam Smith?
Posted by: John Konop | Tuesday, March 11, 2008 at 01:50 AM
There are rights and duties for workers and rights and duties for owners, along with common or universal rights. I didn't understand the question. Also, I may add, the U.S. has little or no control over foreign economic policies. So, it's optimal for the U.S. to choose the best responses.
Posted by: Arthur Eckart | Tuesday, March 11, 2008 at 07:17 AM
John Konop, you're making value judgments rather than explaining economic outcomes. Also, your statements above suggest trade agreements cause living standards to fall. Perhaps, you can state a theory why that would happen? I stated above, the U.S. has little or no control over foreign economic policies. A U.S. corporation and a Chinese worker don't have the same legal rights. Unfortunately, many poor foreign countries cannot afford high standards, since they face trade-offs, e.g. employment or worker rights/benefits. Of course, universal standards would be ideal.
Posted by: Arthur Eckart | Tuesday, March 11, 2008 at 10:40 PM
Here's what Adam Smith believed about free trade (in first section of link below):
"In Wealth of Nations Smith argues that everyone benefits from the removal of tariffs and other barriers to trade. Because of supply and demand, production will increase as demand increases. This may lead to new employment opportunities for the workforce and to collateral industries emerging in response to new demands. For example, an increase in France's wine production would also lead to an increased demand for bottles, for barrels, for cork, and an increase in shipping, thus leading to a variety of new employment opportunities. Adam Smith was convinced that the market would stimulate development, improve living conditions, reduce social strife, and create an atmosphere that was conducive to peace and human cooperation."
Also, Smith sums up China's economy well:
"Wealth of Nations represents a highly critical commentary on mercantilism, the prevailing economic system of Smith's day. Mercantilism emphasized the maximizing of exports and the minimizing of imports. In Wealth of Nations, one senses Smith's passion for what is right and his concern that mercantilism benefits the wealthy and the politically powerful while it deprives the common people of the better quality and less expensive goods that would be available if protectionism ended and free trade prevailed."
Posted by: Arthur Eckart | Wednesday, March 12, 2008 at 08:52 PM