The Role of Work

Andrew Sullivan pointed out this fascinating article on the psychological impacts of employment (and unemployment). I take issue with many of the conclusions the author, Arthur C. Brooks, draws from the data he presents, but the data is worth taking a look at. In particular I'm drawn to the studies on the devastating impact of unemployment, as in the case of the Marienthal villagers or the University of Chicago survey that found that even a brief bout of unemployment drastically increased the tendency of respondents to feel hopeless or worthless.

Brooks concludes his survey of the data by stating that the only thing we need to do is "protect the free market so that people can find and choose the types of employment that suit each of us best." I find this conclusion difficult to reconcile with the data on unemployment. The implications of that data suggest to me that employers have a devastating non-economic advantage to wield over employees, and that normal market churn can have significant psychological externalities that aren't generally considered in economic models.

One need not be a bleeding-heart sympathizer with the poor or the unemployed to be concerned with such issues. Witness the current political dialogue on topics such as economic globalization, outsourcing, and immigration. I would suggest that the rising populist positions on all of these issues share two traits: they are motivated by fear of unemployment and all its consequent harms, and they are deleterious to the overall health of our economy. Note also that these issues tend to span across the usual political divides. You can find vehement opposition to immigration on the right, fierce opponents of globalization on the left, and distaste for outsourcing on every side. People have a tremendous fear of losing their jobs, a fear that viewed in purely economic terms may seem irrational, but taking into account the additional psychological effects perhaps it is not so irrational after all (although I guess you could conclude that the psychological impact is itself irrational).

Brooks points out that remedies such as welfare do little to address the psychological harm of unemployment. He also notes that making jobs more secure comes at a price. Brooks argues that more secure jobs tend to be less meaningful. I don't see the data for that, and I'm not sure it's right although I can see where he's coming from. In any case, certainly there is an economic price to be paid for making it more difficult for employers to adjust their workforce (European economies demonstrate this).

These considerations about welfare and job security seem to drive Brooks's conclusion that nothing should be done other than to support the market. And certainly, the market may provide enough of a remedy for some of the unemployed, particularly the highly skilled and well-educated. However, that does not address the whole of the topic. Particularly where globalization and outsourcing are concerned and where we see massive shifts in the market, people may find that skillsets in which they had invested a great deal of time, effort, and money are no longer needed, not just by their previous employer, but by any domestic employer. There is room here for the government to be involved in retraining and job placement for displaced workers. If we know that job churn is necessary and healthy for the economy, but that the impact on individuals of this churn can be severe, that seems the most sensible route to pursue. Not only can this have direct impacts on the social welfare of those affected, but the existence of such a safety net may also help reduce the fear that drives the dialogue on economic policy in the wrong direction. There is an obvious connection between this suggestion and our past discussions of Rawlsian fairness and political compromise (as seen here), but I'll leave that as an exercise for readers...

Liberalism, the State, and Free Markets

I promised last week to eventually to get to the discussion of Rorty and Rawls. For various reasons, I've decided I'd rather not. But if anyone wants to read the discussion on their own, it goes something like this: Yglesias, Linker, Yglesias, Linker, Sullivan, Douthat.

Also, before getting to my main topic, and because it tangentially relates to that topic, I'd like to throw this in. Christopher Hayes has a column on the merits of bureaucracy and the fine people who inhabit our federal bureaucracy. If you look into the details of the DoJ scandal, it's hard to be as dismissive as Hayes about the lasting impact of the Bush administration on the bureaucracy, but he makes good points nonetheless. An excerpt:

It's slander with a long pedigree--Cicero called the bureaucrat "the most despicable" of men, "petty, dull, almost witless...a holder of little authority in which he delights, as a boy delights in possessing a vicious dog"--but in the last forty years, conservatives have converted this casual contempt into an ideological fixture. Since as far back as the Goldwater campaign, the American right has generally found that "the government" is too abstract an entity for most people to actively loathe. It's far more effective to demonize the people who execute its daily functions. Bureaucrats are to conservatives what the bourgeoisie was to Marx: an oppressive class of joyless knaves. Milton Friedman quipped that "hell hath no fury like a bureaucrat scorned"; Ronald Reagan said in 1966 that "the best minds are not in government" because if any were, "business would hire them away"; and George Wallace expressed his desire to "take those bearded bureaucrats" in Washington who were in the process of desegregating the South, "and throw them in the Potomac."

But a funny thing has happened over the past six years. At a time when the press failed to check a reactionary Administration, when the opposition party all too often chose timidity, it was the lowly and anonymous bureaucrats, clad in rumpled suits, ID badges dangling from their necks, who, in their own quiet, behind-the-scenes way, took to the ramparts to defend the integrity of the American system of government.

...

But the moral of the Comey story specifically, and of the failures of the Bush Administration more broadly, is the sublime value of bureaucracy. Not only is governance of any kind impossible without it; so too are the checks and balances of a constitutional republic. Red tape is what binds those in power to the mast of the law, what stands in the way of government by whim. That's why an Administration hostile to any checks and balances has sought to reconstitute the federal civil service as just another lever in its machine.

So, anyway, on to the main course. Harvard economist Dani Rodrik has a blog post excerpting from a lengthy article by Stephen Holmes in the American Prospect (from a few years back) on the views of classic liberals on the role of government. The basic gist of the excerpts is that the liberal ideals of individual rights and free markets are tied inextricably to the existence of a strong state to protect them. It very much reminds me of my previous discussion with Henry on libertarian paternalism and Rawls where I wrote:

This, in fact, has always been my biggest objection to libertarian theory. I simply cannot see how a libertarian state could ever remain so for any appreciable length of time. The initial structure of the government will not bind it in libertarian form, even if you had a constitution without amendment procedures. It was not a constitutional amendment that allowed the development of the administrative state in the US, but judicial interpretation. And it wasn't just uppity judges responsible for that (although I'm not sure it would be significant to my argument even if it were), but intense political pressure placed on them by political branches motivated by quite serious concerns about social stability and unrest (and rising socialist sentiment). Whether it's a Great Depression and populist outrage or rent-seeking businesses and other economically powerful interests, a state will always be subject to pressures (of varying intensities) to do non-libertarian things. The state will always have the power to do those things; it is inherent in being a state. That power cannot be ignored, and there is no structural way to make it go away. It just sits there begging to be used.

I have a strong suspicion that some of the policies necessary to keep those pressures at bay (to the greatest degree possible) are themselves non-libertarian (e.g. some level of redistributive tax policy and regulation of finances and political speech, etc.). In the end, I tend to believe that our rights (which may or may not be limited only to life, liberty, and property) are likely best protected by a state that overtly recognizes the threat of instability and subversion of state power and is structured to best address that threat, even if that structure is not a strictly libertarian one. The state may need to be more powerful and far reaching than a night watchman state in order to be a stable, free-standing system. What good is the night watchman if it ends up being overthrown by communists or turning into a plutocracy?

Tying in to the Hayes column: a robust state can be less prone to abuse and authoritarianism than a more easily captured minimal state.

One of the fundamental premises of Rawls's political liberalism is that the point of a liberal state is to create a platform for social cooperation that is the prerequisite for everyone to share in the benefits of, among other things, free markets. Libertarians suppose that you can rip away the institutions that result from this political compromise while still gaining the benefits they are meant to provide. This seems to miss something fundamental about human nature and social interaction.

Political compromise is necessary to create stable institutions, and stable institutions are necessary to enforce the rules of the market (e.g. to protect property rights, enforce contracts, settle disputes, and police fraud). Institutions that are not broadly considered legitimate will, as Rawls argues, be subject to instability, as each faction that even briefly manages to achieve power will attempt to tear down illegitimate institutions and replace them with institutions of their own preference.

So it becomes important to try to determine how people assess legitimacy. Rawls suggests fairness as a crucial benchmark. That seems to have a lot of merit. We've had Boys Weekend discussions on the topic before, noting psychological studies to the effect that people are willing to sacrifice their own benefit in order to enforce a system of fairness, even when there will be no opportunity for direct reciprocity. (I thought it interesting to see recently that humans are not alone in this behavior.) This suggests that even if a libertarian institution is quantitatively superior to some non-libertarian institution it might still be regarded as less legitimate if it produces outcomes that are perceived to be unfair.

Returning then to Dani Rodrik. Rodrik's main specialty is economic globalization. He argues that globalization promoters have been shooting themselves in the foot by ignoring populist complaints about trade unfairness, countering these arguments only with statements of the quantifiable benefits of more trade. Economists too often ignore procedural fairness in favor of simple economic gain. Regular people tend towards the opposite. Rodrik argues that domestic political perceptions of the globalization process are the key to further progress on trade. In other words, to create the social platform for cooperation necessary for global markets to expand we will require a more robust social safety net to remedy distributional unfairness and create perceived legitimacy for the whole endeavor. Otherwise the social compromise on which economic globalism is built collapses into a morass of protectionism. The market can only go as far as the state can carry it.

UPDATE (6/25): Rodrik posted again today with further evidence for his thesis on globalization. He cites a recent academic paper studying a survey of people from 18 countries that found an inverse relationship between the size of the state (measured by percentage of GDP) and preferences for protectionism. Rodrik quotes from the paper:

Our results provide microeconomic evidence consistent with the long-standing argument that the state and the market are in fact complementary. Openness and globalization can introduce uncertainty into peoples’ lives, and this additional risk can lead some people to oppose trade. Government expenditure can help to reduce this risk, and thus shore up support for open markets. It would seem that the ‘grand bargain’ that was embedded liberalism is politically effective.

Winning the Oil End Game

I just watched this lecture at MIT about using existing technology to end our dependence on oil. My expectations weren't that high going into it, but it turned out to be really interesting. If you're interested in the topic I think that it is well worth taking the time to listen to this.

The Economist

Was just reading this series of articles on The Economist and thought, naturally enough about TBWJ. Though for a bunch of young tech savvy gentlemen such as yourselves the contents may not be shocking, it is a good bit of writing about the new media.

As long as I am linking to The Economist I think I will advertise a couple of other bits of their content there. Not all of their articles are freely available but enough are to make it well worth a weekly visit in my opinion (and they occasionally give you the option of watching an add in exchange for a day pass).

I thought this one was fairly good with regard to the current position of the Democratic Party. Though I have been intending to post a piece with my opinion as to why both of the parties suck so much and why the American people have become so polarized.

Another sweet Economist link is here. It's the original edition of The Economist from 1843 and an excellent argument in favor of liberal trade policies.

One final link. A quote in the media related Economist article linked above referring to Blogs as "the toilet walls of the internet" reminded me of a site I discovered this week. Ancient Roman graffiti.

Fiat Currency, Dollar Dominance, and the War on Terror

Texas congressman Ron Paul attempts to tie all the pieces together (and I do mean ALL the pieces). It's bit on the sketchy side, but there could be something to it... If nothing else, there's probably a top-selling novel in it.

Sidenote: I love this blog (the source of this link).

The Decline of Dollar Hegemony

Just came across a link to this speech about Dollar Hegemony (http://www.house.gov/paul/congrec/congrec2006/cr021506.htm). It lacks some of the more nuanced and subtle points, but the fact that it was delivered before the house of representatives pleases me. I do recall having read another speech on the same topic by Ron Paul in the past. You may also have seen it.

It is a shame that addressing the halls of congress is now merely a way of having one's sentiment officially entered into the record. If the house of representatives were actually a place of argument and debate something like this might spark a meaningful discussion about a pressing issue facing our nation. As things are, it will only serve as a testament to Mr. Paul's prescience after more serious problems arise.

A 21st Century Rivalry

There's a good story on CSM about China's growing military capacity. In particular it describes a rapidly growing modern core group within the military. It predictably focuses on China's improved ability to challenge the U.S. in Taiwan, but I think the more interesting issues lie further in the future and on a much broader scope.

It's a pretty common meme at this point that China is poised to emerge as a top global rival to the U.S. Assuming that China's economy continues to grow at a rapid rate (and there are some potential problems there, particularly in the banking system) this seems almost inevitable. But I think suppositions that this would somehow mirror the Cold War are dead wrong. I'm not sure how this rivalry would unfold, but I highly doubt that it would resemble the Cold War. The contours of the Cold War were defined by the all-encompassing differences in the economic systems of the two sides that made the complete severing of ties between them possible and desirable.

The key to China's growth has been the modernizing of its economy and its embrace of free trade. The U.S. and China a crucial trade partners, and I don't see that changing. While China will undoubtedly become more assertive in its foreign policy and more apt to challenge the U.S. as its military and economic power grows, there will be a huge economic incentive for China and U.S. not to let things get out of hand. Of course, both sides will need to be wary, as nationalism can lead people to do stupid things, and no doubt there will be domestic political points to be scored by railing against the other side (indeed this is already the case in the U.S.). Flashpoints will emerge and tensions will flare. But money speaks loudly, and I think will hold things together in this case. The dynamic between the U.S. and China will likely be something we haven't seen before.

A Backdoor Entrance For Legal Marijuana

Slate has an article by Tim Wu (the guy I had hoped to work for this summer) on the possibility that the WTO could find U.S. drug policy to be an illegal barrier to free trade. He builds a fairly strong legal case for WTO intervention, but for political reasons I can't imagine it happening until Canada and other like nations go from mere nonenforcement of anti-drug laws to outright legalization.

R.J. Samuelson: Still My Hero

I don't know of another columnist who selects more relevant and important topics or so effectively analyzes the core issues of those topics without ever revealing partisanship. This week he takes on the state of global trade.

re: Spending Addicts

By the way, Ryan, nice to have you back! Robert Samuelson has a Washington Post column discussing the possibility of precipitous drop in the dollar. He absurdly dismisses the impact of budget deficits, and focuses purely on the $665b trade deficit (he still ends up with a scenario not so different from those theorized on at Boys' Weekends). When you consider that somewhere around half the $500b budget deficit is being financed by foreign investors (not to mention commercial and private debts), we're dumping nearly a trillion dollars (10% of GDP) onto the global markets each year. That is just unbelievable. Meanwhile, Bush claims he is going to fight for a strong dollar, not surprisingly the currency markets think he's full of shit.

Experts to Investors: Dump Your Dollars

It has been a while since we've heard anything on this front, but The Christian Science Monitor has an article advising investors to buy up foreign currency, citing higher interest rates and declining dollar values. Here I was worried about foreigners not wanting dollars any more. We may beat them to it.

Movement On Farm Subsidies

This LA Times article is woefully short on details, but it seems the Oxfam-led protest by developing nations in Cancun has yielded results. I'll be curious to see a) the actual terms of the agreement and b) how this will play in US domestic politics (the presidential election in particular) where farm subsidies are next to untouchable.

Update: The Washington Post's coverage adds a few more details. Apparently the "first installment" includes a 20% reduction in subsidies by developed nations, but a couple of loopholes exist that would allow this concession to be substantially reduced.

Score One For the Propagandists

The Washington Post has an editorial on recent trade agreement legislation that demonstrates that the Post has swallowed the standard line of the pro-trade lobbies hook, line, and sinker. Since the beginning of the popular movement against the WTO, proponents of the current trade system have tarred all opposition as being against trade in all forms and situations. I'll grant that there is a radical fringe that would support that position, and further that indeed, mobs of protesters don't do nuance well. But the position of trade reformers has always been more nuanced than the Post suggests. Their claim that "Oxfam, and more broadly the coalition of organizations that campaigned for Third World debt relief under the banner of the Jubilee movement, have largely abandoned their old skepticism about trade in favor of campaigns against egregious rich-world protectionism" demonstrates their ignorance of what Oxfam has been preaching on this subject for some time. They have always been asking for "fair trade", not "no trade". Oxfam first launched its Fair Trade program some 40 years ago. It should be noted that protests are generally focused at the IMF and the WTO, organizations which Oxfam persuasively argues have consistently promoted unfair trading systems. The clear misinterpretation on the part of the Post, a respected mainstream observer, of what this debate has been about signals a victory on the part of anti-reform lobby in their campaign to smear their opposition.

Another Take on the Outsourcing Debate

Robert Kuttner, the editor of The American Prospect, has this to say about outsourcing [Boston Globe].

Elevating Trade Discussions

There's a very nice article in Foreign Policy Mag about How to Be a Free Trade Democrat. The author, former Clinton advisor Gene Sperling, critcizes the pandering vilification of trade by Democratic politcians and proposes some new approaches. I think he's pretty much on the money. The discussion should not be pro-trade vs anti-trade, but more a recognition of the impacts and ramifications of trade on the economy, and how to better deal with it. There is little to be gained by abandoning free trade, but we clearly could be doing a better job of reshaping our economy to take advantage of the opportunities of trade while not inflicting harsh penalties on those who bear the impact of the changing economy. Sperling's suggestions follow three main directives: 1) demonstrate the values of trade and how the US can use them to our advantage, 2) identify at-risk workers and industries, make efforts to shore them up against global competition, and where necessary provide a safety net to aid in the transition of workers to new jobs in new industries, and 3) recognize and promote the potential of trade to improve the economies of third world nations and reduce global poverty. These are all very good suggestions.

Paying the Price for the Dollar

CSM is running a column that dismisses the frequently cited causes for rising oil prices (conflict in the Middle East, swelling demand, etc), and pins the blame on the falling dollar values. The authors point out that while the price of oil in dollars has risen 51% in the past two years, the price has only risen 4% in euros. They further tie the fall in the dollar to ruinous government budget deficits. While the popular political ploy is to blame rising prices on the greed of OPEC nations, it clearly would be worthwhile to consider the impact of our own budget decisions.

Money Still Fleeing US

It's been what, a month or two since I last posted a record trade deficit story? Well, it's still getting worse. Even the plumetting dollar has done little to curb the trade imbalance...

Thanking OPEC

This is a pretty random topic, but I was browsing through a Newsweek and thought this was an interesting take on a global trade topic rarely dealt with. Washington Post regular, RJ Samuelson (who I've been coming to like more and more) wrote a short piece on the stabilizing influence of OPEC on the oil trade.

Outsourcing Surgeons

Even some of the supposedly secure industries may not be as secure as we thought they were. Slashdot has a discussion of this topic. As for anecdotal evidence, Ceci has been relying on our trips to China to have her dental work done due to the cost savings (our insurance claims they are pre-existing conditions and won't pay for it)...

Re: Comparative Advantage

Barry, I agree with you assessments. Using the proper definition of comparative advantage does rather shoot down Roberts's particular contentions. However, I think there is still some hay to be made here. First off, as Barry noted, excess labor supply is not well handled in Ricardo's model. And there are a number of additional factors that exacerbate this problem.

Ricardo's theory seems to me to be simply a matter of showing that a country has differing degrees of efficiency in production, and will naturally focus on those industries where their efficiencies are highest, which means that in the areas where they are not specializing they may rely on trade with other countries to fill their needs even though those other countries may not be as efficient. The labor problem is obvious and serious. Looking at the classic (wine and wheat) example, if Portugal was able to produce enough wine to satisfy the demands of all both England and the domestic market and still had labor capacity left over, Portugal would then also produce its own wheat as well. England would be frozen out of the market and would simply bleed money and jobs. So, for one, labor surpluses break the model.

An amplifying effect is lent to this problem by the developing nature of the market. In Ricardo's day, while the factors of production may have been mobile, I don't believe that the factors of efficiency (if there is a such thing) were terribly mobile. This is sort of what Roberts is getting at, I think. In the classic example, the efficiency of Portugal is probably, at least in part, determined by climate and soil type and other agricultural factors. These could not pick up stakes and move. Historically, much of the value in goods was strongly related to natural resources that were either used to produce the goods, or were refined into the goods themselves. This has changed. Natural resources have largely been commoditized and are traded on very low margins. Profit margin is generated in the processing of the resources. Increasingly, with services and intellectual property there are no natural resources involved to speak of. This eliminates one of the major factors of efficiency. Education and skill levels of the labor pool have also traditionally been a factor of efficiency. This, as Barry mentioned, is also becoming increasingly commoditized. Essentially the market is progressively eliminating all factors of efficiency but one: the cost of labor.

What follows from that is that if a) you have excess labor supply and b) a market where the factors of production can flow quickly and easily, and c) the sole factor of efficiency is labor cost, the result is going to be a rapid flow of work from the locations with the highest labor costs to those with the lowest. Which is exactly what we're seeing.

Furthermore, if we assume that labor costs are relative to a general labor cost index (ie if a doctor in the US makes 5x the US mean income, then a doctor in China probably makes 5x the Chinese mean income), it would be the case that the higher the income level of a job, the greater the savings of moving it to a country with a lower cost index. That would imply that the greatest efficiency advantages for countries with a low cost index would be those industries with the highest wages. So even if we eliminated the labor surplus and had an exact balance of labor supply to labor demand, it would be the case that all of the highest paying jobs would move from wealthy countries to poor ones, leaving menial jobs for the wealthy countries. I would assume that the existence of a labor surplus only serves to accelerate this process.

Let me add one more aggravating factor to the mix. One cap on the impact of trade is that (obviously) it only affects those industries whose products can be traded. This set of industries, however, is also rapidly expanding due to ubiquitous high speed data networks, and an ever greater portion of the economy is becoming subject to these pressures. This particularly impacts service industries, on which our economy has become increasingly dependent.

In the end, I guess I don't have any great insightful revelation here. But I feel like we're further refining our discussion and our understanding of the relevant terms and theories. It again comes back to deep structural problems that will confound any of the efforts I have thus far heard proposed to stop the bleeding of jobs out of the US.