Timeless wisdom about free trade and protectionism.
. . . Trump, Sanders, and Clinton get this one wrong.
"Given all of the political hysteria and misguided mercantilist thinking recently about international trade (especially from Trump, Hillary Clinton, and Bernie Sanders), I thought it would be a good time to re-post Milton Friedman’s 1978 lecture above at Kansas State University (posted previously on CD back in September of 2012), where he discussed free trade, and explains why trade protection and interference in international trade are so widespread, despite the almost universal condemnation of such measures by the economics profession.
Professor Friedman also addresses the political obsessions with: a) increasing exports (remember President Obama’s goal in 2010 to double exports by 2015, which failed miserably by the way — real exports of goods and services have increased less than 24%) and b) achieving a “favorable balance of trade.”
Here’s a quote from Friedman’s lecture, demonstrating the timeless nature of his economic wisdom, which is as relevant today as it was in 1978 almost 40 years ago (at about 20:40 in the video above):
In the international trade area, the language is almost always about how we must export, and what’s really good is an industry that produces exports. And if we buy from abroad and import, that’s bad. But surely that’s upside-down. What we send abroad we can’t eat, we can’t wear, we can’t use for our houses. The goods and services we send abroad, are goods and services not available to us. On the other hand, the goods and services we import, they provide us with TV sets we can watch, automobiles we can drive, with all sorts of nice things for us to use. The gain from foreign trade is what we import. What we export is the cost of getting those imports. And the proper objective for a nation as Adam Smith put it, is to arrange things, so we get as large a volume of imports as possible, for as small a volume of exports as possible.
This carries over to the terminology we use. When people talk about a favorable balance of trade, what is that term taken to mean? It’s taken to mean that we export more than we import. But from the point of view of our well-being, that’s an unfavorable balance. That means we’re sending out more goods and getting fewer in. Each of you in your private household would know better than that. You don’t regard it as a favorable balance when you have to send out more goods to get less coming in. It’s favorable when you can get more by sending out less.
MP: Here’s a formula summarizing Milton Friedman’s insights:
1. The stuff we importMINUS
2. The stuff we export =
3. Our standard of living
In other words, in economic terms, our standard of living is highest when we maximize imports and minimize exports, which is exactly the opposite of the political thinking, rhetoric and mercantilist policies we about from Trump and Sanders, which generally seek to maximize exports and minimize imports."
The Fed's destructive monetary policy resulted in too much construction of retail, which is driving productivity declines, and rising labor costs . . .
QE Sponsored Stagnation: Productivity Declines Again As Unit Labor Costs Rise 4.1% | MishTalk
. . . first thing we do, we kill all the Central Bankers.
"QE Sponsored Stagnation and Cannibalization
Loosey-goosey monetary policy and low interest rates led to a proliferation of retail businesses, mall construction, fast food places that would not have been built in the absence of over-stimulation.
Those stores are now competing against each other. Frequently stores cannibalize their own sales.
Pick Your Poison
To achieve 2006 productivity, Study Says 20% of Mall Space Should Close.
If 20% of mall space closed, guess what that would do to employment. And if we stay on the same course, guess what happens to profits.
Meanwhile, the push for higher minimum wages is on."
It is not clear this is the worst possible outcome, but it is pretty close. What this means is we need to reduce the total number of the physical stores, which would result in a reduction in total number of jobs, and an increase in productivity. Many of the positive elements in the Obama economy, are fictitious. When this finally goes, and it will likely take a recession to clear out all of this deadwood, it will be bad. This will likely drive another round of workforce participation rate reductions, a significant boost in unemployment, and increasing wage weakness. Apparently, all at the time the progressives will be forcing an increase in the minimum wage, which will just accelerate these outcomes.
Progressives really want to help the poor, but all of their instincts drive them to policies which only hurt the poor more.
Stagnation: ISM and US PMI Converge on 50.8 – Comparing the Reports | MishTalk
. . . if that is possible.
This is a pathetic PMI report. I would hate to live in the country where this is happening. Oh wait!
Read the whole thing it is short and pithy.
The religious compact that constrains Saudi economic reform - FT.com
. . . created upon the linking of a binary. While evil corrupts, absolute evil corrupts absolutely.
Little Arab Lord Fauntleroy wants to reform the dilettante's in Saudi by putting the them to actual work, and reforming, completely, the corrupt system, stem to stern.
"All this rewrites the social contract whereby Saudis forgo political rights and offer fealty to the House of Saud in return for public sector jobs and cradle-to-grave welfare funded by oil. Coming even close to these goals implies radical social change, an upheaval in governance — all without much sign that the absolute monarchy intends its subjects to become fully participatory citizens.
While no one can fault MbS for his boldness, his programme resembles a mobilisation of technocrats to bypass big political obstacles. The biggest of these is the cornerstone of the state: the historic compact between the House of Saud and the House of ibn Abdul Wahhab, the 18th century preacher behind the most extreme version of Sunni Muslim orthodoxy ever attempted as a form of governance. The ruling family has until now relied on the Wahhabi establishment — as reactionary and bigoted as ever — for its legitimacy, in exchange for clerical control over areas such as education and the judiciary, as well as the segregation of women."
This will only work if the House of Saud follows what we know works here at the End of History: republican governance, free market economics, reformed religions, and a state which strictly limits its regulations, including regulations of life and business. This is really simply, good government, good religions, free markets, and liberty. Saudi has none of these.
Good luck with this. If you want to be taken seriously cut loose the religion today. Until you do so, no one will believe you have a chance, and more than anything you need others to believe and support your plan. After that you will need to pair the liberalization of the economy with the liberalization of politics. Sorry, that means the House of Saud will have to give up power to the people through a plural republican mechanism of some kind. Choose the form of your destructor. Not choosing is a choice.
Choose wisely, young Arab Lord Fauntleroy, choose wisely.
Eurozone GDP returns to pre-crisis levels - FT.com
. . . in the EU, it triggers a party!
"After eight painful years of crises and near stagnation, the eurozone’s economy has finally surpassed its pre-crisis high, beginning the year by outpacing growth in the UK and the US.
The eurozone economy grew 0.6 per cent in the first quarter, helped by a surprisingly robust performance by France. The better-than-expected figures took overall gross domestic product past the peak it hit in the opening quarter of 2008."
Mon Dieu, pathétique!
Hoping that Europe will somehow pull America out of its economic doldrums would be like hoping a 3 year old child with 100' of logging chain and a Big Wheel, will be able to pull your wrecked car out of a ravine.
On a more serious note, this shows exactly the problem the Eurozone is in. America has a single bad quarter, but still returns GDP results that the Eurozone fetes. Europe risks being completely left behind by America if it does not begin to modernize its work rules, employment laws, pension rules, welfare laws, and make serious economic reforms. Some countries, like Sweden, and Germany, have begun to do so to great success. But the rest are mired in a neo-feudal/socialist mindset of business as patron, and employee as servant.
It is time for Europe to modernize, and join the rest of the first world, or be left to establish a new second world economy.
Are Robots Job Creators?
. . . as usual.
"Automation, driven by technological progress, has been increasing inexorably for the past several decades. Two schools of economic thinking have for many years been engaged in a debate about the potential effects of automation on jobs, employment and human activity: Will new technology spawn mass unemployment, as the robots take jobs away from humans? Or will the jobs robots take over release or unveil—or even create—demand for new human jobs?
The debate has flared up again recently because of technological achievements such as deep learning, which recently enabled a Google software program called AlphaGo to beat Go world champion Lee Sedol, a task considered even harder than beating the world’s chess champions."
Mass jobs are a relatively new phenomenon. Prior to the industrial period there was little need for employees, and so there were few. Most of these jobs were performed by slaves, or people who would not be confused as an employee. Today, mass jobs are common, plentiful, and essential to the economy. So, people like the author, and the people arguing about this issue seem to fail to understand that if this is a phase shift, it will likely do away with jobs as the mechanism by which the new economic model distributes wealth through society.
I am unsure whether the outcome of the massive shift we are now undergoing will necessitate a phase shift including the elimination of jobs, but if it does it will result in a fairer, wealthier, more prosperous, and more inclusive economy, not an economy which will see more segregation, and wealth inequality. Although just as the shift from the agricultural phase to the industrial phase brought some temporary wealth inequality, so it is likely will any phase shift in the economy. This happens simply because some see the way to the new economy, and this brings great wealth, while other attempt to conserve the old economy, and this destroys wealth. In this divide tech is bringing wealth, while the blue model, unions, and the like are destroying wealth.
"Ultimately the question boils down to this: are today’s modern technological innovations like those of the past, which made obsolete the job of buggy maker, but created the job of automobile manufacturer? Or is there something about today that is markedly different?"
This is the wrong question. The question is will these innovations change jobs to better jobs, or will it eliminate jobs? That I cannot answer.
"It may seem easy to dismiss today’s concerns as unfounded in reality. But economists Jeffrey Sachs of Columbia University and Laurence Kotlikoff of Boston University argue, “What if machines are getting so smart, thanks to their microprocessor brains, that they no longer need unskilled labor to operate?'"
These people are worrywarts fretting about things they do not understand, and likely cannot understand. They need to follow Niebuhr's prayer. "God grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference. Reinhold Niebuhr Quotes at BrainyQuote.com" The do not, and instead they fret, stew and harumph over issues they cannot change.
"As the decoupling data show, the U.S. economy has been performing quite poorly for the bottom 90 percent of Americans for the past 40 years. Technology is driving productivity improvements, which grow the economy. But the rising tide is not lifting all boats, and most people are not seeing any benefit from this growth. While the U.S. economy is still creating jobs, it is not creating enough of them. The labor force participation rate, which measures the active portion of the labor force, has been dropping since the late 1990s."
This is unadulterated bullshit, or evidence that the people saying this have no understanding of what life was like in the 1970s, 1980s, or 1990s. The authors statements demand substantial proofs not mere hot air and blather.
The unemployment rate today is at a national average below 5%.
Labor force participation prior to 1970 averages about 58%, it was only after the equal rights, and the women's movements demanded their inclusion in the workforce in great numbers that we saw the labor force participation rate skyrocket to absurdly high levels. There is no evidence that Americans actually wanted this level of labor force participation. We know they did not historically. Now that we are far wealthier than we were in the 1940s, -1980s it seems likely that the LFP rate shift is due to the desires of fewer family members to work, and participate more deeply with family needs, children's needs, old age adult needs, and the like. Statements like the ones made here need extensive proof. They have none, and the author clearly has no understanding of LPF rate changes over time. Yet another piece of detritus to ignore.
The poor today live all but infinitely better than the middle class of the 1950s, 1960s, and likely even the 1970s.
Air Conditioning, Cable TV, and an Xbox: What is Poverty in the United States Today?
The poor and the average of today have a similar spectrum of amenities, although the poor do have fewer.
How Poor Are America's Poor? Examining the "Plague" of Poverty in America
"The typical American defined as "poor" by the government has a car, air conditioning, a refrigerator, a stove, a clothes washer and dryer, and a microwave. He has two color televisions, cable or satellite TV reception, a VCR or DVD player, and a stereo. He is able to obtain medical care. His home is in good repair and is not overcrowded. By his own report, his family is not hungry and he had sufficient funds in the past year to meet his family's essential needs. While this individual's life is not opulent, it is equally far from the popular images of dire poverty conveyed by the press, liberal activists, and politicians.
But the living conditions of the average poor person should not be taken to mean that all poor Americans live without hardship. There is a wide range of living conditions among the poor. Roughly a third of poor households do face material hardships such as overcrowding, intermittent food shortages, or difficulty obtaining medical care. However, even these households would be judged to have high living standards in comparison to most other people in the world."
If you scroll to the bottom there is an instructive chart on US versus international housing conditions of which only three countries even compare with the US poor's housing conditions, based on Floor Area per Person:
Country (City) Floor Area per Person Persons per Room
US Poor 439 .54
Australia (Melbourne) 545.73 .69
Norway (Oslo) 452.09 .50
Canada (Toronto) 442 .50
After this all of the entries are below the US Poor
Sweden (Stockholm) 430.56 .56
Remember this compares the US POOR with these other nations (cities). If one takes the time to compare the amenities the US poor have to the amenities the average person in Europe has it is shocking how much better the lives of even poor Americans are than the average European. This includes medicine.
CDC - Cancer Survival: The Start of Global Surveillance
The CONCORD-2 study is well worth your read. Remember that the figures for the US include our uninsured. It is impossible to believe that the European countries do not beat the US in every category since pretty much everyone in these countries is covered by a national health care plan. But they commonly do not, and even more surprisingly the US commonly beats many of these countries for the majority of the cancers, especially the more esoteric, even with our uninsured cohort.
Five-Year Survival Rates for Patients Diagnosed with Five Common Cancers in Seven Countries, 2005–2009
Country Female Breast Colon Lung Prostate Childhood Leukemia
Canada* 85.8 62.8 17.3 91.7 90.6
France** 86.9 59.8 13.6 90.5 89.2
Germany 85.3 64.6 16.2 91.2 91.8
Italy 86.2 63.2 14.7 89.7 87.7
Japan 84.7 64.4 30.1 86.8 81.1
Kingdom* 81.1 53.8 9.6 83.2 89.1
States 88.6 64.7 18.7 97.2 87.7
Comparing the amenities the poor have today with the past is eye opening, but I will leave that mostly to you. I don't remember most Americans in 1970 having a cell phone, a computer, internet, air conditioning, a microwave, color television (at all), cable or satellite TV reception, a VCR or DVD player, or a stereo. Food issues were rampant among the poor, as was hunger, and medical care was a problem as well, both in availability and the care available. Medical care today is far advanced from that of 1970.
No, the average poor person today lives better than the average person of 1970, and of everyone living in 1920 or before.
The New Republic should be ashamed of itself for publishing this tripe.
"While manufacturing output is at an all-time high, manufacturing employment is today lower than it was in the later 1940s. Wages for private nonsupervisory employees have stagnated since the late 1960s, and the wages-to-GDP ratio has been declining since 1970. Long-term unemployment is trending upwards, and inequality has become a global discussion topic, following the publication of Thomas Piety’s 2014 book, Capital in the Twenty-First Century."
This is bullshit, and nonsense. It is not the actual wage which matters but what the wage can purchase, and wages today, stagnant or not purchase more than they did in the past, and they purchase higher quality goods. Plus, non-wage benefits have risen, and when accounted for, this answers the wage stagnation "riddle" nicely. Failing to evaluate all the evidence, and misunderstanding that product price deflation, and quality improvement also answer much of the question.
Stagnating Middle-Class? - Cafe Hayek
Dead Wrong with Johan Norberg - Stagnant Middle Class
The New Republic has attempted here to pull off the difficult Triple Lindy of squaring the progressive economic canard. It cannot be done, or if it is, it requires advanced forms of pretzel logic to pull off, because the facts simply do not support the progressive theories.
I've traveled in Europe, I like Europe, I wouldn't mind living in Europe, for a while, mostly because with the Maddog family income we would live like Kings, er, and Queens. And no, I am not bragging here, I am making an observation about how low the median incomes are thought most of Europe. Don't worry, analysis to follow.
One thing I noticed, even early in the 1990s, when traveling through Italy/Europe, was the vastly lower standard of living between Europe and the US. On a trip in 1994, we took the ferry from our Bellagio home base to Menaggio where we rented bikes and made a loop riding the SS340 down to the Funivia station just North of Argegno, riding the Funivia up to Pigra, and then following the SP13, turning right onto the SP14, following it back to the SS340 which we followed back to Menaggio, and the ferry ride home.
Great ride, not too long, and mostly downhill so it was easy to take in the scenery, and watch the people. This is a less touristed part of Italy/Switzerland. I was surprised by how lower middle class everything felt. This feeling never left me during that trip. It has reappeared every subsequent trip. The further from the big city tourist areas, the more everything feels like lower middle class US.
When I first stumbled upon this post by Mark Perry, I was not surprised, but I suspect many will be.
If Sweden Left The EU and Joined the US, It Would Be the Poorest U.S. State, Below Even Mississippi
I remember reading an article stating that if we normed US income so median US income was 100, Swedish median income would equal 67, about the same as the median black income in the US. Sadly, I was not able to find that article on second look.
The Mises Institute elaborates in this article:
If Sweden and Germany Became US States, They Would be Among the Poorest States
That Germany has such a low standard of living always surprises me. After all Germany is the economic powerhouse of Europe, with low unemployment, and a driving economy. But the standard of living for the average German is pretty meager. And when one accounts for Purchase Power Parity, just how meager become indelibly apparent.
So, How does Britain do in this comparison?
Why Britain is poorer than any US state, other than Mississippi | Coffee House
Ouch! Time made the counter argument, er, sorta, and in inimitable Time fashion won the argument against the position Time staked out, dead bang! No, really, these people are wankers of the first order.
Britain Is Not Poorer Than Alabama
Tim Worstall runs the numbers, proving Time and it contributor are wankers. Time must not have had the time to run the numbers, or perhaps did not have the maths acumen. Worstall finds that yes indeed, Britain is poorer than every US State, even Mississippi.
Britain Is Poorer Than Any US State: Yes, Even Mississippi
In 2004, Timbre did an economic analysis of GDP between the US and Europe, and found Europe was lagging far behind the US.
Timbro: EU versus USA
Here are some GDP comparisons from Demographia:
Sweden: GDP Per Capital Compared to US From 1960
Germany: GDP Per Capital Compared to US From 1960
Does that put this issue to rest? The real issue for Europe is that America is pulling away from Europe, and will continue to do so. How long before the US standard of living is 4 times Europe, or more? The Obama Presidency has slowed the American economic train, but it seem unlikely that will last indefinitely, and the European train is slowing even more rapidly, so even if America continues to slow it will continue to pull away from Europe.