Ecconomists

[Kevin B. O'Brien]

Dan M wrote:
> Kevin wrote:
>
>   
>> I can give a longer explanation, but most normal people
>> seem to display eyes glazing over whenever an economist explains anything.
>>     
>
> I wouldn't be so fast in assuming that here.  We have had a couple of
> economists as contributing members at Brin-L: Brad DeLong and John D.
> Giorgis.  I'd guess you've heard of Brad, and John's at BLS and has won a
> fellowship from the White House IIRC.  And, my Zambian daughter has interned
> with the IMF, will graduate with a MA in econ. from American University, has
> applied for a World Bank fellowship (?) that is intended as a 2-3 year job
> for people between their masters and Phd.  We've talked econ for hours.  So
> I, and probably many others here, would enjoy some detailed economic
> discussions. 
>
> So, please, go on.  In particular, I have a couple of questions on free
> trade and such.
>
> 1) Economists pretty universally see free trade as beneficial.  Do you see
> any exceptions?  In particular, do you see any trade restrictions that help
> our competitors (such as Japan and China) and hurt the US.
>
> 2) Do you have any idea why the job participation % has gone down for the
> last 6-7 years or so?
>   
Full disclosure: While I was professor of economics for about 20 years, 
I have since switched careers, so I may well be slightly out-of-touch 
with the most current thinking.

Economists often think a lot of things are good, but when when you look 
at these assertions, you need to be *very* careful about the assumptions 
they make. Economists even make jokes among themselves about this, but 
it is still a weakness in a lot of analyses. So, for instance, Paul 
Krugman, who is an acknowledged expert on trade (like may others, I used 
his textbook when I taught the subject), was a long-time supporter of 
free trade for all of the usual reasons, but has lately come to question 
whether those arguments make sense in the real world. The assumptions of 
the free trade arguments, like most arguments in favor of unfettered 
markets delivering superior results, almost always begin with an 
assumption that the markets in question are either perfectly (or for the 
more measured, substantially) free markets. Now, this term has a very 
specific meaning in economic analysis, and that makes it a much more 
restrictive assumption than a layman might first think. There is a good 
article on this at Wikipedia 
(http://en.wikipedia.org/wiki/Perfect_competition), but what it all 
boils down to is that no market participant has the power to influence 
the market price. My former prof, Geoff Shepherd, published a paper in 
the 1980s that said this could perhaps describe 10% of the U.S. economy, 
and I doubt the percentage has gone up since.

If you look at the international economy, I think there is some evidence 
each way. Looking at economies that are in the "developing" category, 
there is generally a trend to see more growth among economies that are 
substantially open than among those that are substantially closed. If 
you were to look at Asian economies in the years immediately following 
WWII, it would have been plain that India would be a country that would 
grow rapidly, while So. Korea obviously would stagnate. It did not turn 
out that way, and I think gov't. policy would have to be a large part of 
the difference. So. Korea had a policy of being predominantly open to 
trade, while India pursued something closer to autarchy. And since the 
policy changed in recent years, India's economy has indeed started to 
grow fairly rapidly.

OTOH, it is not immediately obvious that what may be true for a 
developing economy will also be true for a developed economy like the 
U.S. And even if it is true, what are the implications? Trade theory 
often looks at overall GDP growth, and if a policy makes GDP go up, it 
must be good. But it is quite possible to have a policy that promotes a 
short-run increase in GDP, but reduces GDP growth in the long-run. This 
is not just true for trade, but for all aspects of the economy. A 
classic case is increased saving: this will certainly reduce demand in 
the short-run, but equally surely it will increase the supply of 
capital, reduce its cost, and promote investment and growth in the 
long-run. If trade causes wages to be depressed, for instance, that may 
in the short run reduce the price of exports, and lead to increased 
exports. But it also reduces domestic saving and capital formation.

The question that is not addressed as much as it should be is: What 
should the objective of economic policy be? Back in the 1980s, for 
instance, a lot of people were worried about the competitive threat of 
Japan, and drew the conclusion that American wages needed to fall to 
restore competitiveness. This was a flawed analysis in several ways. 
First of all, the wage difference between the U.S. and Japan was only 
one of several differences, and no one ever mentioned the other 
differences: Japanese companies had fewer executives, a flatter 
hierarchy, and paid their executives comparatively less than in the U.S. 
Moreover, the environment was different in other ways, such as different 
government policies (I'm sure we are all aware by now that the U.S. is 
the only developed economy to rely on private firms to provide health 
coverage). And in hindsight, the only major industry to be really 
threatened waas the Automobile industry, and I honestly cannot think of 
an industry that has been managed so reliably badly as the U.S. auto 
industry. Those guys could screw up a free lunch, as my father used to say.

But the most interesting critique I can recall was by Michael Porter, 
who wrote a pretty well-received book called "The Competitive Advantage 
of Nations". He simply pointed out that anyone who advocated reducing 
the standard of living of our citizens as a sound policy was not living 
in a reality-based community.

So the bottom line is that in a world where all markets are perfectly 
competitive, and no one has any market power, it is pretty easy to prove 
that unrestricted trade is going to be a good thing. But in the real 
world, where many markets are controlled by a handful of firms, it is 
not nearly as clear that this result holds, particularly when the firms 
themselves have often become trans-national and owe nothing to the 
country of thier origin.

As to your second question, I admit this is an area where I have not 
kept up. I will observe that the time frame you posit coincides pretty 
neatly with a Republican administration, and one fact that is pretty 
firmly established by now is the economy nearly always does worse when 
the Republicans occupy the White House.

Regards,

-- 
Kevin B. O'Brien         TANSTAAFL
zwilnik at zwilnik.com      Linux User #333216

"Military justice is to justice what military music is to music."-- 
Georges Clemenceau