Blogging on Globalization

December 24th, 2006
Opinion, Politics

“Free trade” vs. “Protectionism”; for a “Libertarian”, choosing between these ideological labels would seem to require little thought. “Free” market capitalism with minimal government intervention (other than siphoning off only the necessary profits required (?) might suggest that “free trade” is the preferred choice. However, further reflection makes this Libertarian’s choice much less obvious.

The issue of globalization became imprinted on the neurons while reading “Audacity of Hope”, Barack Obama’s presidential aspirant resume. In “Audacity of Hope” there is a story of a Galesburg, IL Maytag worker whose job was outsourced to a more competitive labor market in Mexico. Relying on Obama’s “facts” (and according to the local union leader) Maytag was profitable and doing just fine even though they incurred high United States labor costs. But for Maytag, its CEO and shareholders, bottom line profits could be significantly improved by moving its manufacturing activities to Mexico and taking advantage of the lower wage scale (along with which I suspect, but do not know for a fact, that there are lower costs associated with health, safety, and environmental issues by manufacturing in Mexico). Clearly, this raises “profits”, shareholder “capitalization”, and of course the CEO no doubt suffers significant incentive bonus compensation - imposed by his hand picked Board of Directors - for this magisterial accomplishment.

Increasing profits in a free market economy is a good objective, and one not to be lightly interfered with, such as by “protectionism”. But, it is difficult not to be a bit queasy about the poor saps that lost their jobs here in the United States. Certainly they, and all those like themselves, won’t be buying Maytag products anytime soon, much less a new SUV or BMW.

Surfing the blogsphere, I happened on to the “To the People” blog (also listed here in my “Bloglist”) and their link, with kudos, to William Overholt’s Washington Post article entitled “Globalization’s Unequal Discontents”. William Overholt is a Rand Corporation think tank PhD from Yale and Harvard. These impressive credentials evidently do not impress the numerous who posted comments to his column. Nor after reading it do they impress me.

First, let me address Overholt’s article directly. Forgive my hubris here, for it is fairly audacious to attempt to deprecate anything written by a Harvard grad and Yale PhD.

The most serious critique of globalization is the charge that it promotes inequality, driving down U.S. wages while enriching millionaire corporate executives. This charge is partly true, but mostly false.

Partly true, but mostly false? So it is true, but not really? What exactly does this mean? To Mr. Overholt’s credit, he tells us:

The true part is that within many countries, globalization has enhanced the wealth of business owners and managers while providing proportionately less wage growth for ordinary workers. It has done so by expanding the workforce participating in the modern world economy to include much of the populations of Eastern Europe, China and India. (My emphasis).

The important mumbo jumbo word in this statement is “proportionately”. What this means is that for two workers, one employed at $20 an hour and one unemployed, we have an average wage of $20 hour. We average this proportionately over our two person workforce. Let’s re-apportion this by hiring the unemployed at $10 an hour to do the same job (hence same “productivity”) and turn our formerly employed worker into the now unemployed worker. The “savings” of $10 per hour wage cost goes into “profits”, those of the business owners (stockholders) and managers (CEO’s).

Now to be fair, we can assume Mr. Overholt expects that the newly unemployed worker will retrain (no allocation for costs to retrain on any level) and obtain new employment at … what? $25 an hour? Or maybe after training (remember, there is less wage growth) because the competition for labor is so high, he can now earn $11 an hour! So for our two person work force, we’ve actually increased wages from $20 to $21 an hour and have increased profits by saving $10 an hour! This is voodoo economics.

One caveat is that protectionists enormously exaggerate the negative effects of globalization by attributing virtually all manufacturing job losses to competition with China. We are told by union leaders and some politicians that America is exporting millions of jobs to China. This is absolutely untrue.

Mr. Overholt bolsters his argument with an extremely strong authoritative statement (absolutely untrue)! Except that he cites absolutely no authority what so ever!

Scholarly studies show that most job losses in the United States are attributable to domestic causes such as increased domestic productivity. A few years ago it took 40 hours of labor to produce a car. Now it takes 15. That translates into a need for fewer workers.

What scholarly studies?

And please help us with this Mr. Overholt: if within a few years labor costs have been reduced by whopping 62% (15 hours versus 40 hours) for producing a car, why haven’t car prices dropped significantly (inflation adjusted of course for those few years) or – in lieu of that - our Big Three showing strong profits? And how was this increased labor productivity achieved? By massive capital investments into the automotive manufacturing infrastructure? Wouldn’t similar gains in labor productivity be accomplished by getting 40 hours of labor for the price of 15 hours of labor? The mumbo jumbo word here is productivity.

How can Mr. Overholt accuse protectionists of being intellectually dishonest while failing to support his assertions with something more rigorous than “scholarly studies” and “a few years ago”? And somebody pays this guy?

But sound economics is based on facts grounded in objective analysis, not on emotion.

Point well taken Mr. Overholt, and please excuse my emotion. So where are the FACTS and the OBJECTIVE ANALYSIS?

[One fact that I would really like, with a citation, is for the assertion that the life expectancy in China in 2005 was 72.7 years up from 41 years in the early 50’s. This IS an astounding assertion. First, who is (or where can I find) the authority for this fact and how was it established? Given the rampant problems with air and water pollution, limited access to modern health care, and a high incidence in tobacco usage, (and I apologize here for NOT citing my authorities – sincerely, I recall these facts from my general reading) I find this number to be truly incredible. But yet the World Health Organization in fact reports this to be true! And with a per capita health expenditure of $278 or 5.6% of GDP (per capita GDP of $5,581), compare this to the WHO data for the United States where life expectancy is about 75 years with a per capita health expenditure of 15.2% GDP (per capital GDP of $39,901). What does China know that we seem to have missed here in the US?

This is the greatest reduction of inequality that has happened in human history.

I would say so!]

What truly astounds me is the endorsement given this article by an Ivory Tower PhD economist in Flint, Michigan. Again, no facts, nor authorities and mumbo jumbo galore! Mark Perry applies an Einsteinian “thought experiment” to the issue:

Think about this thought experiment: You wave a magic wand, and sickness and disease vanish tomorrow, and life expectancy is extended by 50 years on average. On a net basis, the world would be a MUCH better place, without sickness and disease, without question. However, certain groups would be displaced and worse off in the short-run: doctors, nurses, hospital administrators, etc. who would lose their jobs.

Wow! A magic wand! Apparently this is what happened in China if we are to believe Mr. Overholt and the WHO.

And of course our PhD economist displays his historical erudition:

In the 1700s, there were probably protectionists in Europe on a populist crusade about the cheap imports from the USA, and a loss of some European jobs due to globalization and outsourcing to the USA, just like the protectionists today on a populist crusade about cheap imports from China, and outsourcing to India?

I like the mumbo jumbo word “probably”; were there, or weren’t there populist protectionists in Europe crusading during the 1700’s? Citations please. And how did the South Sea Bubble experience factor into the protectionist crusade in England?

Well, to be honest, I still cannot form an opinion on “free trade” versus “protectionism”, but I have my doubts. While I realize the Washington Post is not a peer reviewed publication – and thus can forgive the editors for letting Mr. Overholt establish himself as an authority out of thin air – or the Rand Corporation, I give them credit for publishing an opposing point of view: “How Free Trade Hurts” by Dorgan and Brown.

While Dorgan and Brown, two Democratic Senators, are no more able to provide authorities for their assertions than Mr. Overholt, their arguments are supported by common knowledge and a minimal recollection of recent American History.

Surprising though is the deprecating vehemence this opinion article generated in the “economic” blogsphere, Café Hayek and Don Boudreaux:

Today’s Washington Post gives these politicians an entire op-ed column in which they parade their ignorance — ignorance of economics, of facts, and of what constitutes a serious argument.

Don Boudreaux is the chairman of the George Mason University Economics Department, yet he addressed this article without an explanation (or citation) of the facts, the economics, or even the vestiges of a cogent argument – much less one I might take seriously. Here’s how the Chairman of an Economics Department handles this discussion:

Countless falsehoods, half-truths, non sequiturs, and irrelevancies permeate Dorgan’s and Brown’s essay. Were I not loaded down today with lots of law-student exams to grade — and had not Greg Mankiw already tackled some of these worthies’ questionable claims — I might vent my spleen by picking apart many of these flaws. But I’ll content myself here with pointing out that these buffoons’ fretting over the large and growing size of the U.S. trade deficit is inconsistent with their (mistaken) belief that “a global race to the bottom” is underway –

Not much “low lives“ can chew on here except for maybe Don’s spleen! In fairness, though, Don goes on to cite his authorities:

A large and growing U.S. trade deficit is evidence that investment capital is flowing generously into the United States rather than away from the high-wage, high-labor-standards American economy.

Please oh please honorable guru, tells us ignoramuses how it is that a large and growing deficit is EVIDENCE that investment capital is flowing generously (interesting “quantitative” terminology for an economist by the way… we don’t mean with “generosity” do we?) I suspect I will need to invest $150k in tuition before I can hope to understand this mumbo jumbo much less expect Don to explain it to me.

He defers to Greg Mankiw…

Greg Mankiw is a HARVARD economist! Wow! Now we’re getting somewhere. Greg’s blog is clean and well structured. He even has a side bar with “Advice for Students”… including a listing for “Why Aspiring Economists need Math”.

Wow. I would have never guessed that!

Forgive me, when a Harvard economics professor puts on his blog advice to students (Harvard students?) “why aspiring economists need math”, I am beginning to understand what’s going on here. But I digress…

Greg’s analysis starts (and ends) with the last sentence of the Dorgan-Brown editorial:

Worker activism, new laws and court decisions changed all that during the past century.

Greg begins:

That last sentence is striking. There is no doubt that most Americans have seen dramatic improvements in living standards and workplace norms over the past century. But should we really give most of the credit to “worker activism, new laws and court decisions?” I don’t think so.

The good thing about this statement is that Greg makes it clear that this is opinion. He goes on:

I would give most credit to economic growth, which in turn is driven by technological progress, a market system, and a culture of entrepreneurship. As the economy grows, the demand for labor grows, and workers achieve better wages and working conditions.

Sounds good to me. OK, so economic growth (driven by technology, etc) increases the demand for labor. Got it. But wait, Mr.Overholt of the Rand Corporation says that increases in productivity DECREASE the demand for labor – buy as much as a whopping 62% in just a few years (at least for cars…)! The only conclusion I can draw is this: economic growth is NOT increased productivity.

Let’s review:

Mankiw (Harvard): economic growth increases demand for labor – workers achieve better wages and working conditions.

Overholt (Yale & Rand): increased domestic productivity – reduces demand for labor.

Greg Mankiw helps (?) to clarify this seemingly contradictory logic:

Economic studies of unions, for example, find that unionized workers earn about 10 to 20 percent more by virtue of collective bargaining. By contrast, real wages and income per person over the past century have increased several hundred percent, thanks to advances in productivity.

So let’s follow this statement piece by piece: over the past century (by contrast to what?) by contrast to unionized workers only earning about 10 to 20 percent more by collective bargaining … over the past century… whereas increases in productivity (which, as Mr. Overholt points out, actually reduces demand for labor) have increased real wages and income per person several hundred percent. (Ah.. several? Could we put a number on it Greg… those things we use in mathematics like “10” and “20”…) Per person. Ah, the mumbo jumbo paradigm again. And here I would like your authorities (Economic studies…).

Similarly, working conditions are poor in less developed countries today because productivity is low there. The key to improving lives in those nations is economic growth, not “worker activism, new laws and court decisions.”

(with respect to some idea of economic growth issues in China today, link here…)

Given that less developed countries have lower productivity and thus “working conditions are poor” we improve those lives by economic growth. This makes it all perfectly clear: Improve lives by economic growth, which in turn improves productivity, which in turn reduces demand for labor.

You’ll forgive me Greg, but this is pure unadulterated bullshit. And so too William Overholt, Don Boudreaux , and Mark Perry. As a layman attempting to understand the issues behind globalization, free trade or “protectionism”, nothing any of you have written can be easily or succinctly understood. In a matter of this importance, and considering your relative positions and supposed credibility, it would seemingly behoove you to attempt to communicate those positions with some clarity, cogent arguments, and believable facts. None of you have done this and magic wands just don’t do it either.

And while assuredly you will dismiss the ranting of a blogger, I suggest that if you have not already, read Jared Diamond’s Collapse, especially Chapter 12 (China):

China’s achievement of First World standards will approximately double the entire world’s human resource use and environmental impact. But it is doubtful whether even the world’s current human resource use and impact can be sustained. Something has to give way. That is the strongest reason why China’s problems automatically become the world’s problems.

As an aside, Jared Diamond does cite his authorities.

Of particular interest in Diamond’s Collapse is his discussion of “rational behavior” (where some people may reason correctly that they can advance their own interests by behavior harmful to other people. Scientists term such behavior as “rational” precisely because it employs correct reasoning, even though it may be morally reprehensible) and “tragedy of the commons”.

The tragedy of the commons is where “the correct rational behavior is then to harvest before the next consumer can, even though the eventual result may be the destruction of the commons and thus harm for all consumers.” (Diamond, p. 428)

Today, the tragedy of the commons is most directly fossil fuel consumption. Unlike Mark Perry’s assertion relating to Milton Friedman’s “fixed pie fallacy”, fossil fuels are indeed a fixed pie. And if the boys at Harvard, Yale, and the Rand Corporation aren’t aware of it – then God bless us all. Globalization is a “rational decision” that benefits no one.

Gains in productivity, by any measure in any country over the last century, are directly proportional to (a “function” of) fossil fuel consumption; and global “peak oil” (see also) either has or is fast approaching.

Challenge: I will endeavor to prove that hypothesis by analysis of the available information (hint, I will start here) ; please refute the premise – if you can.

- Ethan Shepard

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