Wednesday, January 26, 2011


A couple of thoughts on the "State of the Union" -

As an economist, I don't find the rhetoric of "competitiveness" very appealing (see Paul Krugman's classic on this).  International trade is mutually beneficial* - not a zero sum struggle to beat other countries to the "good jobs."  From an economist's point of view, the rapid growth in China is a great story about an dramatic increase in human welfare.  However, while competitiveness rhetoric can be used to justify bad policies like subsidies and tariffs, Obama is employing it to promote policies like investment in infrastructure, basic research and education that are beneficial regardless of what is going on in other countries.  Though it is a mistake to feel threatened by the success of other countries, Obama seems to be exploiting this sentiment to embarrass us into getting our act together, which isn't entirely a bad thing.  He's like our national "Tiger mother."

Unfortunately, President Obama appears to have conceded the rhetorical war on two important fronts: global warming and the budget deficit.

On global warming, which is the most important policy issue we face, the President chose not to even mention it directly.  So much for having "adult conversations" in our politics...  Even if the towel has been thrown in on cap-and-trade, the administration does appear to be trying to confront the problem, sotto voce, in other, less efficient ways.  At least, that is how I interpret the call that 80% of energy should come from "clean sources" by 2035.

As for the deficit, the idea that the government is like a family that needs to "tighten its belt" seems to have won out.  That's simple, intuitive and wrong.  The basic principle of countercyclical fiscal policy - that when households are cutting back, government needs to step in and make up for it with offsetting spending increases or tax cuts - also seems simple and intuitive.  But apparently not enough so.  President Obama is a very good speech-maker, but has proven not to be enough of a great communicator to get the public thinking correctly about this.

It looks like we'll get some "cuts" and "freezes."  These may manage to be a drag on the recovery and damage some important government functions without making much of a dent in the real long run problem because domestic discretionary spending is a fairly small part of the overall budget (as Howard Gleckman says: "that makes Obama the anti-Willie Sutton. He is going whether the money isn’t").  It seems that we're done with counter-cyclical fiscal policy and its all up to the Fed now.  With 14.5 million still unemployed, that is a mistake, and a real shame.  While I hope (and believe) the President is correct in presuming the recovery will continue, it still could benefit from a fiscal push.

See also: Paul Krugman, Mark Thoma and Ezra Klein.

*There are number of possible caveats on that, including that while a country as a whole benefits, some within it are hurt (Stolper-Samuelson theorem) and that a trade deficit can reduce aggregate demand which is bad for employment in the short-run.


Andy Harless said...

Another caveat about international trade: the fact that it's mutually beneficial (when it happens) does not imply that competitiveness doesn't matter. Or more precisely, it does not imply that productivity only matters in absolute, rather than relative, terms.

Consider a 2-country 2-good model where the US and China grow apples and produce widgets. Both are equally productive at growing apples, but the US is, initially, much more productive at making widgets. There will be a mutually beneficial trade in which China exploits its comparative advantage in apple growing. And the US can produce all the widgets it needs and get a bunch of extra apples from China by selling its surplus widgets. So far, so good.

Now suppose China gets much more productive at making widgets, to the point where it rivals (i.e. "competes" successfully with) the US. At that point China no longer has a comparative advantage and will stop selling its apples to the US to buy widgets. Now Americans will have to shut down some of their widget factories to alleviate the apple shortage.

Now, granted, there's nothing we can do to prevent China's widget-makers from becoming more productive. We can only improve our own productivity, which would be a good idea even if international trade were not an issue. But international trade conditions do impart a greater urgency to the need to become more productive. If our productivity stagnates while others' advances, we not only miss out on improvements in our consumption possibilities, we actually risk reducing them.

Bill C said...

Thanks. You're right - the comparative advantage gains occur due to countries being different in their relative productivity, so if China experiences technological progress in a way that makes it more similar to the US, the benefits of trade to the US will decrease (its terms of trade will deteriorate).

There's a nice worked-out example, which you probably have in mind, by Paul Samuelson in his 2004 Journal of Econ. Perspectives Article, "Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization."

Jazzie Casas said...

In last year's State of the Union, Obama declared job creation his "No. 1 focus," then spent much of 2010 on other priorities like overhauling healthcare and Wall Street rules.

With the elevated unemployment rate still ranking as Americans' top concern, there is little doubt jobs will again be the centerpiece of Obama's speech.

But more than ever before, Obama is also expected to use the annual address to cast himself as more of a fiscal hawk, possibly a tough sell for a leader presiding over trillion-dollar-plus annual budget deficits.

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save_the_rustbelt said...

Craighead in a nutshell:

"US workers don't need good jobs, they get to buy cheap stuff at Wal-Mart."

Spend some time in Ohio and Michigan and see how well this free trade at all costs deal is working out in the real world.

beezer said...

International commerce more resembles a mixed martial arts fight than anything else.

And what's with the kneejerk statement about tariffs and subsidies? We subsidize corn to the tune of $8 billion per year and we have corn coming out of our 'ears.'

Similarly with petroleum. I call these two subsidies the 'cornoil' complex.

What if, instead, we subsidized organic farming and sustainable energy?

Bill C said...

That's NOT what I said. The caveat about the distribution of benefits is an important one; unskilled labor is a "scarce factor" in relative terms in the US, so trade theory predicts it would be made worse off. That said, I think the main reason for the long run declining trend in manufacturing employment is technological progress. They still make things in Michigan (where, incidentally, I used to live), but with fewer workers.

Totally agree with you about subsidies. I didn't mention it in the post, but one of my favorite parts of the speech was when Obama talked about ending oil subsidies. I'd love to see him also go after agricultural subsidies.

ezra abrams said...

I work at a small biotech in boston. One of our guys told me the following story: He needs a set of "guage blocks" which are precision piece of metal widely used in shops (you use a 1 inch guage block when you *really* need to know that it is an inch, exactly).
So the guy goes to his boss, who says, sure, get some quotes.
Guy comes back, I got 2 grand from Starret, a famous company in western mass - part of the american industrial saga. I also got 200 bucks from China.
His boss says, 1800 bucks, thats a lot of money - any reason to go starrett ?
no it may, in some imaginary world inhabited by economists, work out that the guys at Starrett, who get laid off, and suffer heart disease and foreclosures and divorces from the stress, and loose seniority based vacations, understand about retooling, and they go and get better jobs in some new industry...and if you believe that is true, I got ocean front property in Florida for you, 200 bucks an acre.
I think one day someone with the stature of Keynes will write an incomprehensible tome on how free trade is bad, and the econ profession will sort of look at itself and wonder how it swalloled the free trade koolaid for so long.
other then that, I really like you post; I thought the SOTU sucked; how on earth can you take seriously someone who says "clean coal" and renewable energy, or thinks biofuel is a good idea ?
I also wonder why the econ profession doesn't understand the role of class and Obama. O is , compared to most americans, wealthy, and his allegiance is, above all, to class, which explains why saving Goldman Sachs bonuses is more important to him then jobs for poor people