international trade

States and Secession: Lamenting the Failure of the Euro Zone

Brandon Christensen Current Events, Politics , , , , , , , , ,

The Guardian has a so-so map on secessionist movements in Africa that’s worth checking out. I say it’s only so-so because it doesn’t really cover all the secessionist movements in the region, just the violent ones or the ones favored by Western diplomats.

I’m interested in secessionist movements because of the effects that they have on nationalism, one of the most dangerous ideologies to haunt mankind since the industrial revolution. Nationalism is probably worse than racism, or at least on par with it, when it comes to ideas gone horribly wrong.

That’s why I support free trade between states, and the deeper the better. The true tragedy of the EuroZone crisis is not the inevitable and predictable collapse of the euro but the fact that anti-liberal policies like the central bank and more political integration between states (and away from the people) are being misconstrued as liberal, in the classical sense.

The smaller the states the better, and the freer the trade the better. Mexicans should be able to travel and live in the US and Canada the same way that Nevadans are able to travel and live in California. The EuroZone could have been beautiful, but the pressure for a central bank and more control from a center, in Brussels, has probably ended it. It’s a good primer on how beautiful ideas often don’t pan out the way people would like them to.

Here’s how to fix the EuroZone crisis:

  1. Eliminate the monopoly of the central bank on creating money and credit.
  2. Open up the EuroZone market to more goods from the rest of the world (especially agricultural products from developing states).

I also think it’d be a good idea to keep Brussels as limited as it is. Doing so will not only allow more room for local policies to be experimented with and tested against other policies, but it will continue to erode the nation-state as well. What we were seeing prior to the crisis in the EuroZone is more calls for autonomy from state capitals throughout the EuroZone,  and a powerlessness on the part of states to do anything about it.

So instead of France and Spain, two states, the world may have seen up to five or six states in their stead, all interacting with each other economically while retaining nominal political independence from each other.

What a shame.

More on China and Irrational Fears in Conservative Circles

Brandon Christensen Current Events , ,

Writes Minxin Pei:

The latest news from Beijing is indicative of Chinese weakness: a persistent slowdown of economic growth, a glut of unsold goods, rising bad bank loans, a bursting real estate bubble, and a vicious power struggle at the top, coupled with unending political scandals. Many factors that have powered China’s rise, such as the demographic dividend, disregard for the environment, supercheap labor, and virtually unlimited access to external markets, are either receding or disappearing.

Yet China’s declining fortunes have not registered with U.S. elites, let alone the American public.

Do read the rest of the article. I’ve said as much on this blog before, and there is certainly no reason to fear a rising Beijing. Nor is there a good reason to spend more money on East Asian “defense” projects or stifle growth at home by throwing up isolationist tariffs. (h/t Daniel Larison)

Italy and National Debt and Everyone Else

Jacques Delacroix Current Events, Economics, Politics , , , , ,

I have been inactive. Some catching up to do. I will go straight to the Italian situation because I don’t see it addressed in the media with anything resembling insight based on good information. I am it by default.

It’s human nature I suppose to want simple solutions to complex problems and easy solutions to hard problems. Italy is out of the swamp and therefore, the Euro is saved and therefore, the sterco is not going to hit the fan on this side of the Atlantic. Reason: Old bad boy Silvio Berlusconi resigned. Not much analysis, not much going below the surface by the American press. I have to do their elementary work for them.

First, I suspect there is a monstrous confusion in the minds of many in the media between the accounts of Italy, the state, the Italian republic on the one hand, and the figures pertaining to the Italian economy, on the other hand. The Italian economy comprises a few highly visible major corporations such as Fiat and myriads of small businesses.

The Italian Republic is in debt. The Italian economy is doing well. It’s on the healthy side of economies of developed countries. It’s a lot better than Japan’s for instance. It’s also true that, as elsewhere in Europe, the budget of the state is large relative to the national economy. My bet is that it is smaller than say, in France, or in Sweden, or even in Germany, because the black economy in Italy is so large. The Italian government is just not able to get its grubby little hands on much of what’s generated within Italy. Nevertheless, it’s true that the government budget and the private sector economy influence each other in Italy, as they do elsewhere. That’s not excuse to confuse the one with the other. My wife and I influence each other. It does no mean that we are one and the same. (For one thing, she is both attractive and intelligent.)

Berlusconi did not accumulate the large sovereign debt of the Italian Republic. The debt goes back a long way, some say to the aftermath of WWII. Successive governments just left it alone or they contributed to it. Continue reading →

The De-Industrialization of the US: A String of Enlightening Fallacies. Essay on International Economics, in Plain English

Jacques Delacroix Liberty , , , , , ,

About ten days ago, I began I lively exchange with a stranger, G., on the Facebook wall of the President of the Independent Institute, of all places. The I.I. is my favorite think-tank. It’s located in Oakland, California. It’s my favorite because it regularly performs, intelligently and usefully, the function of bringing libertarian thought (broadly defined) to all who are interested. It has been doing this for years and on a shoe-string budget. (Full disclosure: I have had two co-authored articles [here and here; both pdfs – BC] in The Independent Review, one of the journals associated with the Independent Institute.)

You can easily Google the Independent Institute’s website.

My interchange with G. begun when I noticed one of the most common fallacies on one of his Facebook messages: He expressed himself in a way that led me to believe that he thought the US had been de-industrializing for years, chiefly to the benefit of China. We were both referring only to manufacturing industries.

G.’s impression is correct only in the most trivial way. It’s wrong on the whole, very wrong.

What is true is that American manufacturing employment has declined steadily for the past forty years. That’s true in an absolute sense. Fewer Americans work in manufacturing than used to.

This would have happened if there had not been any China, Red or otherwise. I gave G. the following historical precedent to which he did not respond:

Around 1860, about 60% of the American workforce was in agriculture. Today, it’s around 3%. (Note: Don’t go on a television game show with those figures. They are close enough for my purpose; that’s all.)

Nevertheless, American agriculture produces more than it ever has, in every sense of the word, whatever measure you want to use.

American agriculture used so much of the country’s labor power because it had low productivity then. (That’s value of production per worker.) As productivity improves, farmers can produce as much with fewer workers. What happened in the American case (and in Canada, and in Australia, and in Western Europe) is that farmers produced more with fewer workers. This virtuous trend has not stopped. It’s going on as I write. Some reforms may slow it or even reverse it; so-called “organic agriculture” may be one.

What happened early in agriculture happened later in manufacturing. Here are the simple, hard to believe, but nevertheless real facts:

Productivity in American manufacturing had never stopped growing, except for lags of a year or two. So has total American manufacturing production.

The simplest, most general rule-of-thumb is:

The year in which American manufacturing output was the largest in value, was last year, or the year before.

This is true although American manufacturing employment is declining and declining fast. Remember the 1860, 60% precedent.

I suspect G. did not get this point, in part because I did not explain it so well on Facebook. In part it’s because he appears transfixed by his own experience. G. is an experienced executive with manufacturing responsibilities. He says he is in China often. G. argued with me that the evidence of his own eyes was that a lot of manufacturing that used to take place in the US is now done in China.

I have no doubt that he is right, well, sort of right. Thirty years ago, when I bought an ordinary gardening tool, it was invariably made in the US. Nowadays, it’s invariably made in China, or at least, not in America.

My garden tool is also cheaper, much cheaper than it used to be. I mean in constant dollars, I mean relative to everything, including the minimum wage and including the median wage. It’s true practically in any measure you want to use. My money goes a longer way. That’s what it means to be richer: Whatever money you have buys more. As a consumer, I have only gained by the fact that the production of garden tools is now very largely done in China.

That’s speaking as a consumer. If I had been employed in the American garden tool manufacturing industry say, twenty years ago, I might easily have lost my job. That would in fact have been a consequence of outsourcing.

This is not the whole story. The reality is more complicated. In brief, for every job lost to outsourcing, one or more are created by the after-effects of outsourcing. This is a factual but counter-intuitive observation I don’t want to discuss in this essay. Here is a brief way to deal with it: If you lost your job to outsourcing, nothing I will say will console you. I can only hope that the American economy is growing and flexible enough to provide another job soon. I hope it will be as a good as the one your lost. Looking at the past thirty years, there is a very good chance it will be a better job.

If the American economy does not offer an abundance of good new jobs, ask yourself why.

If you did not lose your job to outsourcing: see above; you are now richer than you were twenty or even ten years ago, the current crisis (circa 2009) notwithstanding. If you want to know the net effect on American employment, a crude but legitimate approach is simply to look at evolving unemployment figures: In spite of massive outsourcing, American employment was very high except from 2009-2014. (Note: Net effect = jobs added-jobs subtracted.) As long as unemployment is low or going down, it’s not likely that limiting outsourcing would do you any good.

Training exercise: The 60% of the work force who were in agriculture and who lost their jobs since 1860 evidently found something to do. The many manufacturing workers who lost their jobs in the past forty or fifty years ______ (Complete the sentence in your mind.)

G. seems to refuse to consider any of this because he thinks his own experience an appropriate substitute for the kind of stuff I am writing now.

His experience is called “anecdotal evidence.” It’s usually worse than no evidence at all to demonstrate anything. (It’s often useful to formulate hypotheses though.) Here is why it’s worse:

My wife beats me frequently. I deduce from this personal experience that wives originate much of or most conjugal violence. Furthermore, I know for a fact that my wife does not drink alcohol. So, I am pretty sure drunkenness does not play much of a role in domestic violence. (Ok. I am messing with your minds; my wife does not beat me, ever. She would like too though, and often.)

What happened with the transfer to China of American garden tool production is complex and factually well-supported, both. Fortunately, if you are busy, or impatient, or simply if you have a life, there are valid short-cuts to help you get a grip.

China, now India, and many other countries that could barely keep alive in the fifties are now producing. They are now finally contributing. This is good for me, for two reasons: One, the more goods there are worldwide, the cheaper they are, in real terms. Second, rich neighbors may sometimes be rivals politically, and even militarily, economically, they are all potential customers. The richer they are, the more I can sell them and, the richer I become.

As compared to 1955 today, the world produces all the garden tools it used to produce, many garden tools it did not produce then, more food than it did, more of everything than ever plus, it produces things that no one had ever heard of in 1955. That would include the low-end but amazingly sophisticated computer I am using to type and to disseminate this essay. Incidentally, there were television sets in 1955. Everything about them was awful and they were more expensive than the sets we have now. (That’s by any measure you want to use.)

There remains the genuinely important question of what industries are going to be in what countries. That’s an important issue because acts of production are not born equal: Making concrete, or steel, generates less in earnings, including wages, than producing software.

The short-cuts to this important issue are these:

  1. Government seldom does anything right economically;
  2. The issue of production allocation among countries is well explained by the Doctrine of Comparative advantage. It’s almost 150 years old. It’s well tested. It’s not unfashionable just because it’s old. Old explanations should only be buried when they have been demonstrated dead.

My correspondent, G., is obviously worried about America’s place in the world and he seems impressed by solar technology. In support, I suppose, of what he would like our government to do, he sends me an article about China’s policies in this respect. It’s at:

(http://cleantechnica.com/2009/07/24/what-we-can-learn-from-chinas-heavy-investment-in-solar-energy/)

A sentence in the article caught my eye both because of its bad grammar and because it’s such a shining example of bad policy:

“China is telling their [sic] banks to support [solar energy industries] with strong loans…”

Two comments: 1) What reason is there to expect any national government, Chinese Communist or otherwise, to make good choices regarding what industries should be developed? The Communist Chinese are the same gang responsible for keeping China an underdeveloped country for forty years. We now know it did not have to be that way. Yes, they are reformed but we don’t know how thoroughly nor for how long. Thoroughly democratic Western European governments have a long record of failures in deciding national industrial priorities.

“How about the Airbus?” Two responses: To this day, the invoice for this multinational government venture has never been presented in a transparent fashion. Airbus looks like an economically viable venture but we don’t know for sure. If you invest $10,000 to earn ten dollars ten times and you have to spend eleven dollars each time, your venture may sell a lot but it’s not successful.

Second: The Airbus project benefited by the Concord experience, an extraordinarily costly apprenticeship and a rank economic failure from its first to its last day.

To my knowledge, the only large instance of a commercially successful government-prompted industrial venture is the Internet. It was done strictly on a cost-plus basis, as a defense project (another story), with hands-off by the federal government. (I would appreciate being corrected if there are other instances. Details and verifiable sources required.)

Examples in the negative abound. I will refer to what I know best. French governments have been sticking their noses into nearly all sectors of French industry since 1945. They had wide latitude to do so, because there were no intellectual defense of real, free-market capitalism in France until about ten years ago. French governments even intervene vigorously in the motion picture industry. French governments however never reached much into several industries, because they were too fragmented, or because industrial actors opposed a spirited defense against government intervention. Notable among those are the food transformation industry and the wine and spirits industry. Guess which French industries are more than holding their own, on the national market and internationally? (To begin, think Danon and think Gray Goose Vodka.)

G. also calls Chinese solar industry policies in a Facebook message developing “comparative advantage.”

It’s not comparative advantage. Like most college graduates and most MBAs (and deplorably, most university professors, I suspect), G. misunderstands the concept. His mistake is not small, it’s huge. I think you don’t understand the logic of international trade and investment if you don’t get comparative advantage. Let me try because my readers are, by definition, an elite group.

My comparative advantage is what I do best. Period. It’s not what I do better then the other guy. If I suck at everything I do, I still have a comparative advantage because I don’t do everything equally badly. That’s always true in the real world.

The doctrine of Comparative Advantage is the single most important rational underpinning of international trade, and indirectly of international investment.

It says clearly and absolutely that if every actor focuses his effort in what he does least badly, all the actors jointly produce more than would otherwise be the case. Period!

Logic test: Is there a difference between: “What I do least badly, “ and, “What I do best”?

Instant reminder: Once you know what I do least badly, in itself does this tell you anything about what I do better, or worse, than my neighbor Tom? This is a “yes” or “no” question. Don’t wimp out!

Below is a different approach to the same concept of Comparative Advantage. Select the approach that suits best your particular genius and stick with it.

My buddy John is an excellent, Mercedes-trained car mechanic. He is also an indifferent floor sweeper. Every time I catch him broom in hands, sweeping his shop floor, I bitch at him, “Stop, man; every time you sweep, you are impoverishing me.”

I am right? I insist you already have all the information you need to answer this question. Again, don’t wimp out on me.

Facts matter but thinking things through slowly is also important.

There is a Muslim saying attributed to the Prophet Muhammad:

“Ignorance is a sin.”

From the Comments

Brandon Christensen Comments, Current Events, Economics, Liberty , , , , , ,

Co-editor and Economics professor (who happened to predict the economic crisis of 2008 in a book a year before it happened) Fred Foldvary makes a very important point regarding some of the common fallacies associated with trade deficits and tariffs:

The reason the US has a big trade deficit is that US taxes make exports more expensive. Most other countries have big value added taxes, which get subtracted from export prices. WTO rules allow for the deduction of VAT but not of income taxes from exports. If the US shifted from income taxes to either VAT or LVT (land value taxation), the trade deficit would largely disappear.

But given current taxes and WTO rules and the trade deficit, high tariffs on imports would destroy US comparative advantages, artificially boosting high-cost industries. The US would have to abandon the WTO, and other countries would retaliate with tariffs against the US.

If California has a big trade deficit with New York, would a tariff against imports from NY help? If not, then a tariff against China is likewise counterproductive. The law of comparative advantage works regardless of borders. I have a big trade deficit with my local grocery store; I import their food and they get no products from me, only a money asset. Would a tariff on the food store’s exports help me? Sure I would buy less of their food, but I want their food, and I want it cheap!

Two things I would like to draw attention to in this great piece of insight: 1) income taxes are horrendous and 2) the avowed internationalism of the freedom message.  I would like to repeat a basic insight that Dr. Foldvary provides to readers: “If California has a big trade deficit with New York, would a tariff against imports from NY help? If not, then a tariff against China is likewise counterproductive. The law of comparative advantage works regardless of borders.”

One of the best ways to tell a “real” libertarian from a “fake” libertarian is the defense of internationalism that is given for any argument.  Nationalism is a vulgar and often extremely harmful way of thinking and has destroyed countless lives and restricted countless others from attaining affluence and dignity.  It feeds the growth of the State at the expense of the individual and contributes to malice in foreign affairs.  The concept of international trade as it is spelled out by Dr. Foldvary is especially important.  Also remember, if you have any questions regarding subjects, don’t hesitate to ask.  This is a blog run (mostly) by intellectuals, and one of the goals of this consortium is to help educate the intelligent layman on sophisticated subjects.

My prompt regarding democracy also produced a number of great insights, and so far I have found subconch‘s input to be the most thought-provoking:

“The individual is core in a democracy, and the process should not be beyond his reach, or overwhelm him so, that he may not select his representative by reason, or further recognize intrusion on his or his neighbor’s liberty. The people are the ultimate check and balance on the system, but if they be separated from it, the scales will continually tip toward tyranny.”

I highly recommend reading the whole ‘comments’ section.