Bastiat's Bastions

As anyone who pays attention to the news realizes that in recent months, Julian Assange, the genius behind WikiLeaks , has released thousands of secret documents on the internet, and has been the subject of an international manhunt.  His release of documents is often compared to the release of the Pentagon Papers by Daniel Ellsberg to the New York Times in 1971.

What you may not realize is that Daniel Ellsberg was something of a genius, too.  Ellsberg was a military analyst and used game theory in analyzing diplomatic rhetoric, especially the use of blackmail.  Here is a paper he gave before his Pentagon Papers release, which is really a rehash of a paper he gave in 1959.

I must give a big thanks to Donald A. Coffin, Associate Professor of Economics at Indiana University Northwest, for distributing Ellsberg’s paper to a listserv for teachers of economics.

-MC

In this article from the U.K. newspaper, The Telegraph, Ambrose Evans-Pritchard writes about how increasing food prices and food scarcity, while not causing the tumult in Tunisia and Egypt, may have triggered recent riots and revolution in those countries, the straw that broke the camel’s back, so to speak.

When prices for major necessities, such as food, begin to rise sharply, people become very desperate.  While not taking the sting out of rising prices, it does help to understand what lies at the root of price changes and what social purpose prices serve, how prices both help us to conserve the food we do have and give food producers the incentive to produce more food.  International trade in food also gives merchants the incentive to move food from low scarcity to high scarcity realms, to get food to where it is most wanted and least available.

Bastiat’s compatriots in England, Bright and Cobden, worked furiously to rid the U.K. of is corn laws, which made it difficult to import food, a factor that made the Irish Potato Famine more severe.

Learning about the social role of prices and exchange really is important.

-MC

Here is a “Special Report” from Reuters, titled “Special Report: Is America the sick man of the globe?”  Reuters, a respected news organization, right?  You would expect a little bit of fact checking, wouldn’t you?  The author states, in passing, ”As U.S. manufacturing declined, starting in the 1980s Congress and successive administrations focused instead on the financial sector and relied on debt — its own and that of the U.S. consumer — to foster economic growth.”

Everyone knows that U.S. Manufacturing has been declining since the 1980s.  The problem is, it just is not so.  The facts are easy enough to check out.  You can go to the Federal Reserve’s web page on Industrial Output.  Here is the combined data, from 1972 t0 2010, using the seasonally adjusted values for January of each year in a time-series graph.

While there are noticeable dips in 2001 and again starting in 2008, the long-term trend since the 1980s has clearly been an increase in manufacturing output. 

What has made manufacturing jobs so attractive, their high wages, is the high growth in output possible in manufacturing by the use of equipment to subsitute for people.  Growth in production means for the same amount of labor we can produce more, so manufacturers can cut costs per unit and pay more to their workers as well.   What has declined in the U.S. since the 1980s is the number of jobs in manufacturing, not the amount of manufacturing. 

Perhaps the author, while in Michigan, should have talked to one of the University of Michigan’s economic professors, Mark Perry, who notes here that the decline in manufacturing jobs is the result of the productivity of American workers, not the reduction of manufacturing in America. 

Daniel Ikenson wrote this article  in the Pittsburgh Business Times in November of 2007, reprinted here at the Cato Institute website. 

Output per worker has dramatically increased over the years.  Machines, while replacing some workers, have so increased the productivity of the remaining workers, that those highly productive workers are able to fetch higher pay.  The high pay has also contributed to the incentive for manufacturing innovation, as businesses seek to find ways to do without so many expensive workers.  Technology and the education and training that make that technology usable have increased the output per worker, raising manufacturing wages.

The lesson is that some things become part of general knowledge that may not be so–check out media claims–go to the data.   So much information is publicly available and easy to check out.  Be on the lookout for undocumented, “supposed” facts. 

-MC

In posts as early as July of 2007, I have bemoaned the misallocation of resources as a result of poorly conceived policies by politicians to help special interests line their pockets.  For humorous effect, I have pointed out that the ethanol subsidy increases the use of corn as fuel instead of as food, and that land used for other crops, such as barley, gets transferred into land to produce corn. For instance, read these two posts: “John Barleycorn must die” and “A misallocation of agricultural resources.”

Al Gore, who has had an enormous effect of U.S. energy policy, admits in this article from Reuters http://af.reuters.com/article/energyOilNews/idAFLDE6AL0YT20101122?sp=true

that he was wrong in promoting ethanol subsidies, and that those subsidies have proven disastrous in raising food prices.  He also states that the subsidy created rent-seeking and rent-protecting lobbies that will make it difficult to eliminate the subsidy.

Gore’s excuse for promoting a poorly thought-out policy was his political ambitions for the presidency and seeking the support of Tennessee (his home state) and Iowa farmers.   While the effect  political ambition on poorly conceived policy remains long after it is shown to be bad policy, the short-sighted rush for “change,” AKA, the quick fix, turns into wonder at why we have problems elsewhere in the society.  In the case of ethanol, the wonder is why we have such high food prices.  Inflation from our ineffective quick fixes for our recession are surely playing a huge part in food prices–but only part of the problem.  Let’s hope we give some more thought and more debate to fixing our high food prices.

-MC

Gary Wolfram, an economics professor at Hillsdale College, penned this excellent article on international trade for the Michigan View.

What do you think?

–MC

What was that again, about our hypocrisy?  Recently (10/8/10), I posted an article “Drugs, Money and American Hypocrisy.”  Here are a few updates, some news articles about the currency dispute with China and what we in the US are doing about our own currency. 

First is this article from Reuters on how some Federal Reserve officials are advocating inflation to affect the dollar’s exchange rates.  

Next is this article from Bloomberg on how the expectations of the Federal Reserve expansion of the money supply to increase inflation is already affecting our exchange rates with other currencies. 

With this devaluation of the dollar relative other major currencies as reported here by the Financial Times, there is the possibility that other countries will retaliate with their own devaluations (see this article from Reuters).   With no major currencies holding their value, one would expect gold to get bid up even higher. 

The US continues its fight with China, claiming that the Chinese are manipulating their currency, but ignore that man behind the curtain who seems to be pulling levers and turning knobs, just watch the Chinese currency.  Even if the Chinese are pushing their prices down, why should we in the US really complain?  This just gives us lower prices, particularly at Wal-Mart, helping the poor and the unemployed. 

At least for now, the Obama administration is taking the higher road, and has backed off of labeling the Chinese as currency manipulators.  They seem to be waiting at least until after the midterm elections in the US and after the meeting by the leaders of the “Group of 20″ in Seoul, S. Korea on 11/11/10. 

Update on this update–this just in–(10/25/2010), from Reuters and on the CNBC website: I just read hear that Germany is now accusing the US of currency manipulation, the same claim the US is about to make against China.   

Perhaps our own leaders would do well to follow that New Testament advice, to ”Judge not, lest ye be judged.”

–MC

Now, I am not an America basher.  But, from time to time, we can be a bit hypocritical.  For instance, at the same time that we complain to Mexico about the drug traffic through their country, Californians are considering the decriminalization of marijuana.  The Mexican government has surely noticed (see article here)

But worse, is the hypocrisy of our elected officials in the U.S. House of Representatives, along with the Secretary of Treasury, Timothy Geithner, Senator Olympia Snowe (ME-R), and others for condemning China’s currency policies, in what they claim to be manipulation of the currency value, while the U.S. seems to be devaluing the dollar in the same fashion.  Mark Perry, Professor of Economics, University of Michigan-Flint, and a visiting scholar at the American Enterprise Institute in Washington, D.C., cleverly highlights the hypocrisy of the China currency bashers in this blogpost by editing or marking up an article on China currency manipulation, replacing China and its renminbi (yuan) with the U.S. and the dollar.

Of course, even if China is manipulating the renminbi in order to make Chinese goods less expensive for Americans, low prices happen to be one of the best anti-poverty programs we could have, making each dollar a poor person has go further in the marketplace.  If the Chinese wish to send us their goods at very low prices, subsidizing the American consumer, especially the poorest consumers, should we tell them no?  It is just as if the Chinese were writing all of us a check each month, that is, if they are truly manipulating their currency.

Protectionist policies, such as those endorsed in the recent House of Representatives vote that sacrifice the wellbeing of the poor at the expense of well-healed special interests that especially harm the poor.  Moreover, such trade policy action is likely to bring about countermeasures by China which could lead to a deepening of the recession, the same way that the Smoot-Hawley Tariff of 1930 led the country into the Great Depression (see Wikipedia on this).

We should also be mindful that we depend on the Chinese to keep lending us to fund our huge deficits.  Should the Chinese retaliate against our self-harming protectionist moves by just slowing down in their purchases of our treasury bills at auction, our interest rates could jump dramatically, and our debt will climb at an even greater pace than it is climbing now.

–MC

One of my students raised an interesting point when we discussed international trade and comparative advantage.  It seemed that all he had heard was that the U.S. no longer made much  anymore.  Now his point was more that we consume beyond what we produce, borrowing too much to pay for the trade deficit.  Still, many have the view that since manufacturing employment in the U.S. continues to decline (it peaked in 1979), that the U.S. is no longer making much stuff to sell.  Of course, part of what has been going on is that the U.S. has been increasing its services production.  Below is a link to a CBS news video along with links to a few articles on what has been going on with our production and trade in both manufacturing and in services.

First, is the rather misleading video of the CBS report by John Blackstone that aired 2/16/2010 on manufacturing in the U.S.  Note that the declines mentioned are measured in jobs rather than in output.

Now here is an article by Dan Ikenson of the Cato Institute that appeared in National Review Online in August, 2009 where he busts the myth that “We don’t [make things] any more — at least, not like we used to.” 

Along the same lines is a little longer is another article by Ikenson, “Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade,”  from 2007.

In an email (via a list I am on) from Ikenson I got Feb. 17^th, Ikenson writes:

The manufacturing jobs number (which, by the way, peaked in 1979 and has been on the same downward-sloping trajectory since then) masquerades as a barometer for the health of manufacturing, which has been setting all kinds of records with respect to output, value-added, revenues, profits, return-on-investment year after year (with the exception of the recent recession, which affected all sectors of the economy similarly). 

American manufacturing remains the world’s most prolific manufacturing sector accounting for 20-24 percent of global value-added; China accounts for about half that.  People ask: How can that be when most shelves in retail stores are loaded with products made in China, and ”Made in USA” labels are nowhere to be found?  Part of the explanation is that products labeled made in China are only 35-50%, on average, Chinese value-added.  (Apple iPods, which each register in our trade stats as a $150 import from China, contains about $4 of Chinese value-added–that’s only 3%!)  “Made in China” often means “snapped together in China” from components made in Japan, Taiwan, Singapore, Korea, and the United States.  Another part of the explanation for the dearth of “Made in USA” products on retail shelves is that U.S. manufacturing doesn’t make a lot of products sold on retail shelves.  Pharmaceuticals, chemicals, sophisticated componentry, airplane parts, and technical textiles aren’t sold through retailers, and those are some of the high-value products made in America.

Michael McKee writes this article at Bloomberg.com (Bloomberg News) from November, 2009, also busting the myth of U.S. manufacturing declines.

Finally, take a look at this February 17, 2010 op-ed article from the New York Times by W. Michael Cox , director of the Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business.  Cox writes here on the huge and growing size of U.S. production and exports of services.  I should point out that Dr. Cox is the former chief economist of the Dallas Federal Reserve, and even though I never had a class with Dr. Cox (he arrived my second year of graduate school), I still learned a good bit from him in our twice-a-week seminars at Virginia Tech.

 -MC

(A note to my students looking to get comment points–you will need to show that you looked at the video and have read the articles linked and cited above, or have done other reading on the subject–and link to your sources.)