More On Poverty

Last year I had a link about the Gini coefficients for wealth. Go to What has happened to the distribution of wealth in recent years?

To see international data on poverty rates click on this site from the OECD

To see international data on the distribution of income click on this other site from the OECD

To see the Census Bureau's poverty and income report press release, go to Income, Poverty and Health Insurance Coverage in the United States: 2011

For more Census Bureau data, go to Poverty Data and Poverty Main

Below is a graph of some poverty rates over time. The source is Table 2. Poverty Status, by Family Relationship, Race from the Census Bureau.

Some Possibly Surprising Facts About Poverty

I have been covering poverty and the distribution of income in micro this week. Here are some interesting links from the blog of economist Mark Perry called Carpe Diem. He actually has moved recently to a new location, so click here to see it.

More on The U.S. Poor Getting Richer, And Being Envy of the World's Poor. Here he shows how the percentage of poor households in America that owns various appliances and conveniences is very high, often about as high as the entire population of Sweden.

5 Problems With Census Poverty and Income Data. This one shows that over time, median household income per household member has been increasing. Part of the problem with household income numbers is that they don't ofteh adjust for declining size of household.

Our Poor Are the Envy of the World's Poor. Here he mentions that: "In 1971, only about 32 percent of all Americans enjoyed air conditioning in their homes. By 2001, 76 percent of poor people had air conditioning." It is true for other appliances as well.

Consumption Equality 7X > Than Income Equality. Here he mentions that:

"The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? Those lower-income families have access to various sources of spending money that doesn’t fall under taxable income. These sources include portions of sales of property like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts."

New Mpls. Federal Reserve Bank Study Shows Significant Earnings Mobility Between 2001-2007. Here he shows that 44% of the people in bottom quintile in 2001 had moved to a higher quintile in 2007.

Pew Research Calls It "Hollowing Out of the Middle Class," But 150 Americans Moved Up for Every 100 Who Moved Down Between 1971 and 2011. He mentions that:

"Between 1971 and 2011, the share of adult Americans in the “middle class” decreased by ten percentage points from 61% to 51%. Of that 10% of American adults who left the middle class, 6% moved up to the “upper-income” category and 4% move down to the “lower-income” category."

Census Data Show Significant Income Mobility. Here says that:

"From 1996 to 2005, we have the income mobility data for income quintiles. Of those filers who were in the lowest 20% in 1996 and who also filed in 2005, 42.4% remained in the bottom 20% but 57.6% had moved up to a higher quintile: 28.6% were in the next highest quintile, 13.9% were in the middle quintile, 9.9% were in the second highest quintile, and 5.3% were in the highest quintile."

The Rich Are Getting Richer and the Poor Are Getting Richer; The Good Old Days Are Now. In 1971, 88.3% of all American households had a refrigerator. Today, 98.5% of poor households do. This is true for many other goods. More poor people have them now than did the average people in 1971. In 1973, the average worker had to work 89 hours to buy a refrigerator. Today it is only 23 hours. This is true for many other goods.

Bad News for 2 Americas Myth: The Poor Got Richer. Here is one thing it says, as of 2007: "The CBO reports that low-wage households with children had earnings after inflation in 2005 that were about 80% higher than in the early 1990s."

Real Per Capita GDP Over Time

I used data from the Commerce Department's Bureau of Economic Analysis. The graph below shows GDP per capita in 2005 dollars since 1929. It has increased 2.06% per year, on average, since 1929 (that is a compound annual rate, as are the others I mention below).

I also wondered how much it was per worker. Starting in 1946, the Bureau of Labor Statistics started counting only workers who were 16 or older. So I start there. Real GDP per worker since then has increased 1.67% a year, on average.

 



Here is GDP per capita in 2005 dollars since 1929. That average annual growth rate is 1.87%.

 

An Essay In Honor Of "Small Business Saturday" And Entrepreneurs Everywhere

Tomorrow is "Small Business Saturday." Here is what an article from the San Antonio Express-News says about it:

"American Express created the day three years ago, it says, to help small businesses struggling during the recession. The credit and charge card company encourages cardholders, who have registered in advance online to make purchases with their cards in exchange for a $25 rebate paid for by American Express, if they buy something at a participating business. American Express won't say how much the promotion costs, but Susan Sobbott, president of American Express OPEN, the company's small business division, says it is a considerable amount."

Click here to read the article. My essay on how entrepreneurs are like heroes from mythology is below. Candace Allen has said that

"Just as the society that doesn't venerate winners of races will produce fewer champion runners than the society that does, the society that does not honor entrepreneurial accomplishment will find fewer people of ability engaged in wealth creation than the society that does."

That is from her essay The Entrepreneur as Hero. Many others have said that entrepreneurs are heroes. I provide more information on this after my essay. So here it is. It was originally published in The New Leaders: The Business Bulletin for Transformative Leadership, November/December 1992. Title: The Calling of the Entrepreneur

Entrepreneurs are heroes. They are not like heroes, they are heroes. Heroes and entrepreneurs are called to and take part in the greatest and most universal adventure that life has to offer: the simultaneous journey of self-discovery, spiritual growth, and the personal creativity they make possible. In fact, the entrepreneur’s journey closely resembles the journey of the “hero” in mythology, as outlined in the book The Hero With a Thousand Faces, by Joseph Campbell. There is an amazing and profound similarity between not only the journey that entrepreneurs take and the adventure of heroes but also in their personality traits. The comparison is profound because the myths are about universal human desires and conflicts that we see played out in the lives of entrepreneurs.

But what is the hero's adventure? Campbell writes "The standard path of the mythological adventure of the hero is a magnification of the formula represented in the rites of passage: separation-initiation-return, which might be named the nuclear unit of the monomyth. A hero ventures forth from the world of common day into a region of supernatural wonder; fabulous forces are there encountered and a decisive victory is won; the hero comes back from this mysterious adventure with the power to bestow boons on his fellow man." How is the hero's adventure similar to the entrepreneur's adventure?

The hero's journey begins with a call to adventure. He or she is awakened by some herald which touches his or her unconscious world and creative destiny. The entrepreneur, too, is "called" to the adventure. By chance, he or she discovers a previously unknown product or way to make a profit. The lucky discovery cannot be planned and is itself the herald of the adventure.

The entrepreneur must step out of the ordinary way of producing and into his or her imagination about the way things could be to discover the previously undreamt of technique or product. The "fabulous forces" might be applying the assembly line technique or interchangeable parts to producing automobiles or building microcomputers in a garage. The mysterious adventure is the time spent tinkering in research and development. But once those techniques are discovered or developed, the entrepreneur now has the power to bestow this boon on the rest of humankind.

Heroes bring change. Campbell refers to the constant change in the universe as "The Cosmogonic Cycle" which "unrolls the great vision of the creation and destruction of the world which is vouchsafed as revelation to the successful hero." This is similar to Joseph Schumpeter's theory of entrepreneurship called “creative destruction.” A successful entrepreneur simultaneously destroys and creates a new world, or at least a new way of life. Henry Ford, for example, destroyed the horse and buggy age while creating the age of the automobile. The hero also finds that the world "suffers from a symbolical deficiency" and "appears on the scene in various forms according to the changing needs of the race." The changing needs and the deficiency correspond to the changing market conditions or the changing desires for products. The entrepreneur is the first person to perceive the changing needs.

Regarding personality traits, the hero and entrepreneur are risk-takers and creators. But what is the source of their creativity? People become creative when in the words of Campbell, they "follow their bliss." This is the message of mythology. It means you should engage in an activity, pursue a career or entrepreneurial venture because it is what you love to do and it gives you a sense of personal importance and fulfillment, not because the social system dictates that you do so. The drive comes from within. It is this courageous action that opens up doors and creative possibilities that did not previously exist. This is the journey of self-discovery and spiritual growth. Although it may be long, painful, and lonely, it is very rewarding.

Both the entrepreneur and hero are aided by mentors, are humble enough to listen to others in order to learn (and thus become creative), and face a road of trials where they must continually slay the demons and dragons of their own unconscious (such as fear, their egos) in order to discover their creative ability which ultimately comes from giving themselves up to a higher power.

Ultimately, they become selfless and can see the creative possibilities that the universe offers. They become masters of two worlds, one of imagination and creativity and the other of material things and business. This mastery makes it possible for them to bestow the boon.

********

To learn about all the other writers and experts who have said that entrepreneurs are heores, see my paper, Who Says Entrepreneurs Are Heroes? (Remarks prepared for the first HERO'S JOURNEY ENTREPRENEURSHIP FESTIVAL, March 31st, 2007 at Pepperdine University). You might need to save it first as an MS Word file and then open it.

Joseph Campbell, the author of the book The Hero With A Thousand Faces (which was one of the inspirations for the Star Wars movies), said in an interview that entrepreneurs were heroes. See Joseph Campbell on Entrepreneurship. If you want to hear that interview, click on this link. It is a video of my Pepperdine presentation. It comes up at about the 15 minute mark.

Click here to learn about Elliot McGucken's "Hero's Journey Entrepreneurship Festival"

To read about how important Schumpeter is and will be, go to A Vision for Innovation, Growth, and Quality Jobs by Lawrence H. Summers, former head of the National Economic Council.

Parkinson's Law: A Book That Should Be Required Reading At All Colleges

It was written by C. Northcote Parkinson. Click here to go to the Amazon listing. Here is there description:

"Parkinson's Law states that 'work expands to fill the time available'. While strenuously denied by management consultants, bureaucrats and efficiency experts, the law is borne out by disinterested observation of any organization. The book goes far beyond its famous theorem, though. The author goes on to explain how to meet the most important people at a social gathering and why, as a matter of mathematical certainty, the time spent debating an issue is inversely proportional to its objective importance. Justly famous for more than forty years, Parkinson's Law is at once a bracingly cynical primer on the reality of human organization, and an innoculation against the wilful optimism to which we as a species are prone."

Where they say "as a matter of mathematical certainty, the time spent debating an issue is inversely proportional to its objective importance" it refers to a section where a committee spends very little time debating a mult-million dollar nuclear power plant but they spend way more time discussing what refreshments to serve in the break room (or something like that). I think if you like the Dilbert comic strip, you will like this book. It humorously describes many of the ways bureaucracies are disfunctional.

By the way, the "C" in C. Northcote Parkinson stands for Cyril. Yes, I was named after him (of course I was, since I was born after he was I was named after he was named).

This site has a good sampling of some of his brilliant insights: C. Northcote Parkinson Quotes. Some deal with economics like "Expenditures rise to meet income."

Are Electric Cars Cost Effective?

See JD Power study: Electric vehicle economics don't pencil out. Excerpt:

"“EV owners report an average monthly increase in their utility bill of just $18 to recharge their vehicle’s battery — which is significantly less than the $147 that they would typically pay for gasoline during the same period of time,” the study said.

The problem, said Neal Oddes, senior director of the green practice at J.D. Power, is that there “still is a disconnect between the reality of the cost of an EV and the cost savings that consumers want to achieve.”

A battery-powered all-electric vehicle will cost about $10,000 more than a similar gasoline-powered vehicle, he said. Based on annual fuel savings, it would take an average of 6.5 years to recoup that money."

Are Pessimistic "Animal Spirits" Still Hurting The Economy?

Ben Bernanke seems to think so. See Bernanke: Banks' tight standards hurting economy.

"Federal Reserve Chairman Ben Bernanke says banks' overly tight lending standards may be holding back the U.S. economy by preventing creditworthy borrowers from buying homes. Bernanke says some tightening of credit standards was needed after the 2008 financial crisis. But he says “the pendulum has swung too far the other way.” He says some qualified borrowers are being prevented from getting home loans. Bernanke comments to an audience in Atlanta came on a day when it was reported that average rate on the 30-year fixed mortgage fell to a record low of 3.34 percent. Rates have been low all year but have fallen further since the Federal Reserve started buying mortgage bonds in September to encourage more borrowing and spending."

Why High Taxes To Pay Back The Debt Might Be A Problem For Economic Efficiency And Future Economic Growth

This is a continuation of Sunday's topic.

Suppose that you buy a new shirt every month for $20. But now there is a high tax on shirts to help pay back the debt so that the price is $35. You might not buy that new shirt. Many other people might not, either. Then some stores go out of business and some t-shirt makers lay off workers. This will slow down economic growth in the future.

Also, if taxes are especially high, businesses will have less incentive to invest (build new factories, stores, restaurants, buy new capital, etc.). Less capital means less economic growth. The problem with taxes is that each incremental tax increase causes more harm to economic efficiency than the previous increase (and probably harms economic growth more). I will explain more of this below.

But also remember that just a small drop in the growth rate hurts us in the long run. For example, in the last 30 years or so, the annual growth rate in the real GDP in the U.S.has been about 2.8%. If per capita GDP goes up 1 percentage point less than that to take population growth into account, we would have a per capita growth rate per year of 1.8%.

If 30 years ago per capita GDP was $27,500 then today it would be about $46,900 (actually close to what it really was last year). But what if we had only grown 1.3% per year? The per capita GDP would be only $40,500. That would be $6,000 less, which is big and that kind of difference just keeps getting bigger over time and that is only a .5% lower growth. This big difference is due to compound interest.

Below is a letter to the editor of the WSJ I wrote a few years ago. It helps explain the exponentially growing damage that taxes cause:

"Stephen Moore did a great job explaining how complicated our tax code is and how high taxes have gotten relative to what was originally promised in 1913. One other way to see the insidiousness of taxes is to realize that they are just as much the "noise" in the economy as prices are the "signals." The income you get paid is the price for your services and therefore signals the value of those services. But taxes reduce the clarity of that signal (hence, they are noise) by reducing how much of your pay you actually get to keep. As taxes increase, the noise-to-signal ratio in the economy increases even more, meaning distortions, and the misallocation of resources they cause increases disproportionately. For example, if the income tax rate is 10%, you keep 90% of your income. The noise-to-signal ratio is .111 (or .1/.9). But if the tax rate goes up by .10, or to 20%, the noise-to-signal ratio goes up even more, by .15 to .25 since you keep 80% of your income. The .25 comes from .20/.80 equaling .25. Another .10 increase in the tax rate increases the noise-to-signal ratio by .179 from .25 to .429. Then going from a 30% tax rate to a 40% tax rate makes it go up by .238, from .429 to .667. Every tax increase causes increasing damage to the economy's ability to efficiently allocate resources."

This is consistent with the fact that deadweight loss also grows exponentially with tax increases. There will be some links to deadweight loss at the end of this post (my students can simply look at the appendix to chapter 3 in their textbooks). But the idea is that a tax on a good causes the problem mentioned above when the price of a shirt increases.

In supply and demand, if an excise tax has to be collected by the seller, the supply line shifts up by the amount of the tax. In the graphs below, the green triangle shows the deadweight loss or the total economic harm from the tax.

In the first graph, the tax on the good is $2 per unit, so the supply curve shifts up by $2 (the red line represents the new supply line). The area of the green deadweight loss triangle is 1 (one-half times the base times the height (I turn it sideways to make a base of 2)).

But in the second graph, the tax is doubled. It is $4 per unit, so the supply curve shifts up by $4. Now the area of the deadweight loss triangle is 4. So we doubled the tax but the damage caused has quadrupled. This shows that tax increases cause exponential damage to economic efficiency, which harms economic growth in the future.

If the supply line gets shifted up by $20 (if taxes were that high), then there would be no market left at all.






Links on deadweight loss:

Deadweight loss

The Deficit Trials 2017 A. D.

I recall a commercial like this back in 1985 or 1986. It paints a bleak picture of America in the future, presumably caused on the growing national debt ($2 trillion then, almost $16 trillion now). I think this thing is way over the top but there may be some real dangers from the debt that I mention below. You might have to watch a brief commercial for some product first. We have been covering the deficit and debt this week in my macro classes. If the embedded video does not appear, use the link below it.


Ridley Scott - W. R. Grace Deficit Trials by angelseyth

Real problems the national debt might cause
1. About 28% of the debt is owed to foreign citizens (that is according to the textbook by Tucker-it is probably closer to 33% now). When they get paid back, they come and buy American goods. That leaves fewer goods for Americans (who can't afford to buy as much due to higher taxes that were needed to pay back the debt). BUT THIS MIGHT NOT BE A CONCERN IF WE ORIGINALLY BORROWED THE MONEY FOR A GOOD PURPOSE.

People borrow money all the time to buy houses and cars. Then they pay it back to a person outside of their family or household. We don’t consider this a burden since the money was put to good use. Right after World War II, the national debt was 120% of the GDP. This was much higher than it is now and we survived. No one complains that we borrowed to win the war.

2. Raising taxes might hurt economic incentives. At higher tax rates, people might want to work and invest less. Fewer businesses might expand and fewer news ones created since you will get to keep less profit. But again, THIS MIGHT NOT BE A CONCERN IF WE ORIGINALLY BORROWED THE MONEY FOR A GOOD PURPOSE. Also, if taxes only go up a little, and the debt is slowly paid off each year (like after WW II), it may not hurt too much.

3. We may have fewer government services in the future if we pay back the debt by lowering government spending. But this means that we are trading more government services today for fewer in the future. THIS IS NOT NECESSARILY A BAD THING IF THE MONEY IS SPENT WISELY (which everyone not might not agree on).

For more info ee Reinhart and Rogoff: Higher Debt May Stunt Economic Growth from the WSJ blog last year.

"To all the reasons to worry about the rapid rise in government debt in the wake of the financial crisis, add another: It’ll stunt our growth.

In a new paper presented Monday at the annual meeting of the American Economic Association, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard study the link between different levels of debt and countries’ economic growth over the last two centuries. One finding: Countries with a gross public debt debt exceeding about 90% of annual economic output tended to grow a lot more slowly. For advanced countries above the 90% threshold, average annual growth was about two percentage points lower than for countries with public debt of less than 30% of GDP.

The results are particularly relevant at a time when debt levels in the U.S. and other countries at the center of the financial crisis are rapidly approaching the 90% threshold. Gross government debt in the U.S., for example, stood at 85% of GDP in 2009 and will reach 108% of GDP by 2014, according to IMF projections. The U.K.’s gross government debt stood at 69% of GDP in 2009 and is expected to reach 98% of GDP by 2013.

“If history is any guide,” the rising government debt “is very troubling for the U.S. and other advanced economies,” says Ms. Reinhart.

The relationship between government debt burdens and growth is even stronger for emerging-market economies, Ms. Reinhart and Mr. Rogoff find. For countries above the 90% threshold, average annual growth was about three percentage points lower than for countries with public debt of less than 30% of GDP. The countries above the threshold also experienced much higher inflation: prices rose more than twice as fast as in countries with small debt burdens."

A College That Costs $61,236 A Year?

It is Sarah Lawrence College. That includes tuition, fees, room, and board. See Sticker Prices Go Up at Public 4-Year Colleges, but at a Slower Pace. I can email that article to anyone who can't get access. It is from the Chronicle of Higher Education (Sarah Lawrence is private). To see the ranking of the highest cost colleges go to Colleges With Highest Tuition.  Excerpts from the article:

"The annual increase in average published tuition and fees for in-state students at four-year public colleges, 4.8 percent, is smaller than it has been in more than a decade. At private nonprofit four-year colleges, the increase was 4.2 percent..."

"Last year tuition at public four-year colleges increased by 8.4 percent over the previous year."

"[President Obama proposed] ... to reward states for holding down tuition, among other goals, but also remove funds from colleges that don't offer a good value at an affordable price."

"For the 2012-13 academic year, according to the College Board, the average list price for in-state students' tuition and fees at public four-year institutions hit $8,655, up from $8,256 the year before. At private, nonprofit four-year colleges, the sticker price for tuition and fees rose to $29,056, compared with $27,883."

"Full-time, in-state undergraduates paid an average of $2,910 after grant aid and tax benefits at public four-year institutions in 2012-13. Students at private, nonprofit four-year institutions paid an average net price of $13,380. In 2011-12 the net price was $2,620 at four-year public colleges and $12,600 at four-year private nonprofit colleges."

"Neither sticker price nor net price captures the complex reality of individual variation, the report notes. Prices can be quite different from college to college."

"...in 2011-12, 49 percent of undergraduate grant aid came from the federal government, up from 37 percent a decade before."

"In the mid-1980s, the states awarded only 9 percent of their undergraduate grant aid without regard for need. But by 2011-12, they were distributing 29 percent that way. More states are focusing their aid programs on keeping top students rather than helping the neediest ones."

"About 60 percent of students who graduated in 2010-11 from the public or private nonprofit four-year institution where they started had taken out loans, the report says. Their average debt was $25,300. A larger proportion of graduates of private nonprofit colleges borrowed, and their average debt was about $6,000 higher."

"The more than $1-trillion in total outstanding education debt, including from graduate and professional school, can sound scary. But that sum is driven up by increases in enrollment."

"Of course, college affordability is affected not only by rising prices but also by family resources. Average family incomes were lower in 2011 than they were a decade ago, after adjusting for inflation, according to census data cited in the report."

"Born Loser" Explains The Free Rider Problem

Is there sufficient evidence to conclude that women experience systematic pay discrimination?

Not according to Harvard economist Claudia Goldin. See The Truth About the Pay Gap: Feminist politics and bad economics by Steve Chapman. Here is an excerpt from that article:

"I [Chapman] asked Harvard economist Claudia Goldin if there is sufficient evidence to conclude that women experience systematic pay discrimination. "No," she replied. There are certainly instances of discrimination, she says, but most of the gap is the result of different choices. Other hard-to-measure factors, Goldin thinks, largely account for the remaining gap -- "probably not all, but most of it."

The divergent career paths of men and women may reflect a basic unfairness in what's expected of them. It could be that a lot of mothers, if they had their way, would rather pursue careers but have to stay home with the kids because their husbands insist. Or it may be that for one reason or another, many mothers prefer to take on the lion's share of child-rearing. In any case, the pay disparity caused by these choices can't be blamed on piggish employers.

June O'Neill, an economist at Baruch College and former director of the Congressional Budget Office, has uncovered something that debunks the discrimination thesis. Take out the effects of marriage and child-rearing, and the difference between the genders suddenly vanishes. "For men and women who never marry and never have children, there is no earnings gap," she said in an interview."

This issue came up recently in the San Antonio Express-News. See Texas wage gap 12th-lowest. The problem with saying women make 77 cents for every dollar that men make is that it does not take things like occupation and years of experience into account. In 2007 the American Association of University Women issued a report. One of the things it says is:

"Ten years after graduation, women fall further behind, earning only 69 percent of what men earn. Even after controlling for hours, occupation, parenthood, and other factors known to affect earnings, the research indicates that one-quarter of the pay gap remains unexplained and is likely due to sex discrimination."

I emailed them the following question but never heard back:

"So the 69 percent means that women earn 69 cents for every dollar that men make ten years after college. That makes the gap 31 cents. But when these other factors are accounted for, one-quarter of the gap remains. Since one-quarter of 31 is 7.75, that means when all other factors are held constant, women earn 92.25 cents for every dollar that men make. Is my interpretation correct? How does this compare to what other studies have found? Is this gap changing over time? Were any other causes for the remaining 7.75 cents examined besides sexual discrimination?"

The Federal Reserve Bank of St. Louis just issued a report that says Gender Wage Gap May Be Smaller Than Many Think. Excerpts:

"...the gap between the median earnings for men and women was 16.5% in the second quarter of 2011, a historical low and down from 30% in 1989. ... the gender wage gap is very likely affected by the disparity of men in higher paying professions. That disparity, while troublesome all on its own, may be skewing the data.

“Research suggests that the actual gender wage gap (when female workers are compared with male workers who have similar characteristics) is much lower than the raw wage gap,” the authors write.

... after having children many women prefer jobs that have lower pay but better benefits — either better health-care coverage or other perks like a more flexible work schedule.

Economists Eric Solberg and Teresa Laughlin applied an index of total compensation, which accounts for both wages and benefits, to analyze how these benefits would affect the gender gap. They found a gender gap in wages of approximately 13%. But when they considered total compensation, the gender gap dropped to 3.6%,” the authors write."

Don't Forget That Tomorrow Is Day Of The Deadweight Loss

On this day, economists mourn all the social welfare that has been lost in the last year. That social welfare is lost and we will never get it back. 

Deadweight loss is the loss of social welfare caused by that dreaded demon, inefficiency. Examples are monopoly and externalities. To learn more, go the following link:

Deadweight_loss

One good way to commemorate this day would be to cut out the deadweight loss triangle from a monopoly graph (like the one shown below) and burn it, to symbolize all of the lost social welfare. Doing so is both a life-changing and life-affirming ritual.

Before You Criticize Free Trade, You Should Read Douglas Irwin's Book Free Trade Under Fire

Here is the the Amazon link:

Free Trade Under Fire: Third Edition

I think it does a good job of debunking and refuting many of the mis-conceptions about trade. Irwin is an economics professor at Darmouth Univiersity who has published many book. Here is the Aamzon description:

"Growing international trade has helped lift living standards around the world, and yet free trade is always under attack. Critics complain that trade forces painful economic adjustments, such as plant closings and layoffs of workers, and charge that the World Trade Organization serves the interests of corporations, undercuts domestic environmental regulations, and erodes America's sovereignty. Why has global trade become so controversial? Does free trade deserve its bad reputation?

In Free Trade under Fire, Douglas Irwin sweeps aside the misconceptions that litter the debate over trade and gives the reader a clear understanding of the issues involved. This third edition has been thoroughly updated to include the latest developments in world trade--including the practice of off-shoring services, the impact of trade on wages, and the implications of trade with China-based on the latest research."

My own review is below after a letter to the editor that I had published in the Wall Street Journal about NAFTA.

A student in my class said something like "free trade works in theory, but not in practice." I think it actually works pretty well in practice, as Irwin shows in his book. The Nobel prize winning economist Paul Krugman wrote a great article explaining how you need theory to understand what happens in practice. See The Accidental Theorist.

Now my letter and review. My letter is about how wages went up and unemployment went down in the years immediately after NAFTA was went into effect.

This was published for the most part as a letter to the editor to The Wall Street Journal on Wed., May 4, 2005, page A19. Links to all of the data sources from the Department of Labor are listed at the end of the article.


In the Sunday April 10 edition of the San Antonio Express-News, both Carlos Guerra and Stefanie Collins warned of the dangers of the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA). Any trade agreement is likely to be complex, with many clauses and stipulations worked out over the negotiating table. Perhaps there are dangers to workers and the environment that should be discussed. But I don’t want to defend DR-CAFTA here, since Henry Cisneros had already explained its good points the previous Sunday.

I want to address the job loss issue that both Mr. Guerra and Ms. Collins mentioned in their critiques of DR-CAFTA. They both mentioned large job losses, especially in manufacturing, that resulted from NAFTA, which went into effect in 1994. Mr. Guerra wrote, “more than 2 million manufacturing jobs vanished, most moving to Mexico…” Ms. Collins was more specific (although she mentioned a smaller figure): “Since NAFTA was signed in 1993, the U.S. trade deficit with Canada and Mexico has risen and led to the loss of 879,280 jobs through 2002. Most were high-paying manufacturing jobs.”

Was this the case? Did NAFTA cause the U.S. to lose so many jobs, especially high-paying manufacturing jobs? Probably not. I say probably, since causality, in any social science (economics included), is difficult to prove since so many factors change so quickly in the real world. But if many high-paying manufacturing jobs were lost, it took many years until after NAFTA went into effect before they were.

Let’s start with jobs in general. The U.S. unemployment rate was 6.9% in 1993, the year NAFTA was agreed to. It was 6.1% in 1994. The rate fell steadily until reaching 4.0% in the year 2000. Even in 2002, the year after we had a recession, the rate was 5.8%, lower than the year NAFTA went into effect.

But what about manufacturing jobs? We had just about 17 million in 1994. It actually rose to 17.56 million in 1998 and was at 17.26 in 2000 (still higher than in 1994 the year NAFTA went into effect). Then we had a recession in 2001 and since then the number of manufacturing jobs has fallen quite a bit, down to 14.3 million. So that is a loss of nearly 3 million since 2000, which might be due to the recession. If it were due to NAFTA, then why did it take so long for the loss to happen?

But what about wages? Ms. Collins mentioned that we had lost many high-paying jobs. But real hourly wages have risen since 1994 for all workers. For all workers, hourly wages rose 38.4% while the Consumer Price Index (CPI) just rose 27.1%, hence the real gain. For manufacturing jobs, hourly wages also rose more than prices, with a 34.1% gain. But a pre-NAFTA comparison is in order. From 1984-1994, hourly wages for all workers rose 33.5%, while the CPI rose 42.2%, indicating a fall in real wages. The same happened for manufacturing jobs with hourly wages rising only 33%, well under the rise in prices. So it looks like workers did better in the years after NAFTA went into effect than before.

Economists generally like trade since it allows each nation to specialize in the goods it can produce most efficiently. The increased output can be traded to other nations for their increased output. In that case, jobs move from one industry to another. For example, although we lost manufacturing jobs, we gained about 2 million construction jobs from 1994-2004, which paid well. In 2004, the average hourly wage for construction workers was $19.23. Construction wages also showed real gains from 1994-2004 while showing losses in the 1984-94 pre-NAFTA period.

So my educated guess is that NAFTA caused no significant job loss or wage loss. We probably should not be against DR-CAFTA based on the job impact of NAFTA. I used data from various U. S. Department of Labor websites. Feel free to email me about these sources.

Book Review


Free Trade Under Fire: Second Edition
By Douglas A. Irwin
Princeton University Press, $19.95

“No nation was ever ruined by trade,” said Ben Franklin. Simply put, but in addition to Franklin, the case for free trade has an impressive intellectual lineage that includes supporters such as Montesquieu, Adam Smith, David Ricardo and John Stuart Mill. Many of their theories and observations about trade have been verified by modern statistical and economic analysis. This is all covered Irwin’s book.

Irwin, who shows that many popular beliefs about trade are wrong, is an economics professor at Dartmouth University. He has published a large number of articles on trade in peer-reviewed journals, including several in the American Economic Review. But he also taps the research of many other noted economists like Paul Krugman and Jagdish Bhagwati.

What is good about trade? It increases specialization in each nation which leads to greater efficiency and productivity which in turn leads to greater incomes. Consumers can buy a greater variety of goods, not just more goods. Nations that opened up to trade have generally taken advantage of these forces.

When nations close themselves to trade, as the U. S. did in 1807, the economy suffers (the embargo was lifted after about a year since everyone knew it was causing serious economic damage in terms of higher prices and lower incomes).

What popular beliefs about trade are wrong? Trade does not necessarily hurt the environment. Pollution often results from non-trade reasons. Sometimes blocking trade hurts the environment, since doing so depresses incomes and in the long run, higher incomes mean more resources to clean the environment.

In some countries that block agricultural imports, farming expands into ecologically sensitive areas while increasing the use of pesticides and fertilizers (which happens less in nations that are better suited to farming).

Developing countries that embraced free trade (like China and India) have generally done better than those who have not. Workers in third world countries are often helped by foreign investment by multi-national companies.

Imports and rising trade deficits don’t necessarily hurt wages (which are greatly affected by productivity growth) or raise unemployment in the United States (and if we try to protect domestic jobs with higher tariffs, foreign countries earn fewer dollars so they buy fewer U.S. goods, which reduces jobs here). Irwin points out, as does Paul Krugman, that if unemployment rates really do rise due to trade agreements, the U.S. government can use the appropriate macroeconomic policies to increase aggregate demand, thus raising employment.

But jobs are not usually lost, since exports and imports generally increase and decrease together (and when the import to export ratio rises it is usually because oil prices have risen, not because we are being flooded with cheap imports). In fact, protectionism is rarely beneficial. Protecting jobs can be expensive. It costs consumers $140,000 a year to preserve each domestic textile job since tariffs raise prices.

The book contains many interesting tidbits. Many fewer American workers are exposed to international competition now than in 1960. The United States runs surpluses in the trade of services, even computer services. The opening of McDonald’s restaurants in Hong Kong in the 1970s forced other restaurants to keep their bathrooms clean (which were filthy before).

Dirty industries don’t migrate to third world countries. Tariffs on textiles and apparel are like a regressive tax, hurting low-income groups the most through higher prices. Most of what the United States imports are intermediate goods that are used to produce other goods (if we raise tariffs we would directly hurt American companies that need these resources).
A very small percentage (like 2-3%) of jobs lost each year are lost due to imports or outsourcing. The share of the GDP made up by manufacturing has changed little since 1970, so that sector is not in decline. Organizations like Oxfam are beginning to see the benefits of trade. Dumping of low price imports into the United States causes little damage.

In some cases he perhaps goes into too much detail. A few theoretical aspects of trade could have been better explained. But there is so much good material in this book reading only part of it is valuable. He also gives a fair presentation of the arguments against free trade.

Irwin’s knowledge and understanding of the legal, political and historical aspects of trade and trade agreements is as impressive as his economic knowledge. But, as he notes, “free trade is not a magic bullet” for prosperity. What is needed is “Stable macroeconomic policies, the rule of law, and the protection of property rights that enable the market mechanism to function properly [which] are preconditions for reaping the full benefits of international trade.” With issues like Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) on the horizon, this book is timely and important.

You Can Make How Much Just For Passing A Drug Test?

See Regulator says pipeline fight raises issues for lawmakers. Excerpt:

"[Barry] Smitherman, whose agency regulates the oil and gas industry in Texas, spoke at a daylong energy conference hosted by the Greater Houston Partnership, offering an unabashed defense of fossil fuels and the shale oil and gas renaissance.

"I've always heard that solar panels are only two years away from parity with fossil fuels," he said. "The problem is, fossil fuels don't stand still either."

Smitherman, a former Harris County prosecutor and former chairman of the Texas Public Utility Commission, said he had never been to Midland before he was appointed to the Railroad Commission in 2011.

Now, he said, it is once again the epicenter of the state's oil boom, with 20 percent of the nation's oil and gas produced in the Permian Basin.

"If you can pass a drug test, you can drive a truck and make $80,000 a year in Midland," he said.

But the Eagle Ford Shale in South Texas is "the hottest play in America," he said, with some experts predicting its reserves may hold more crude oil than any find in U.S. history."

Wow, The World Series Sure Is Expensive-It Costs $140 . . . Just To Park!

See Better bring a lot when parking at World Series. Excerpt:

"The San Francisco Giants have been among the industry leaders in "dynamic pricing" of tickets, basing certain games' ticket values on market forces. Across the street from AT&T Park, a valet parking stand has certainly taken that concept to a higher level for the World Series. At MoMo's, a restaurant at 2nd and King streets near the ballpark's entrance, valet prices reached what season-ticket holders said was a new high -- $90 for a compact car, $100 for a standard size and $130 for a large truck or SUV. "It is gouging," said John Byun of Los Angeles, moments after forking over $140 (a hidden $10 fee not included on the sign) to park his Lexus SUV. "But it's the World Series. Whatever the price is, you have to pay."

A World Series game will probably have the greatest demand of any games a team plays in a year. But if the number of parking spots is fixed, the price will naturally rise alot. Now maybe people could open up their driveways for fans to park in, but I don't know the neighborhood and there may not be any driveways available. And city zoning ordinances could prohihit that kind of thing. So it could be impossible for the quantity supplied of parking slots to increase.

If the city outlawed higher prices than normal for such events, then they would go to whomever shows up first. People would show up several hours ahead of time and then have to find something to do. Maybe the ball park might not even be opened yet. Some people might have to leave work even earlier than they planned. So it could result in some inefficiencies.

A Good Spanish Blog On Economics By Noé Hernández Cortez

Noé Hernández Cortez is a professor at Universidad del Valle de México, Campus Coyoacá. Here is the link to his blog: Noehernandezcortez's Blog.

Philosophy Professor Says We Should Let People Sell Their Vote

No, kidding, really. See The argument for vote buying by James Stacey Taylor, an associate professor of philosophy at the College of New Jersey. I hate it when philosophers work my side of the street. Oh, well, Adam Smith was a philosopher. At least Taylor uses economics jargon like externalities. Excerpts:

"Of course, there are objections to this vote-buying plan — you’re probably thinking of some right now.

One common argument is that, if vote-buying were allowed, elections would always be won by the wealthiest candidate, rather than the person with the best policies.

Another objection is that vote-buying would lead to the disenfranchisement of the poor, because they would be most likely to sell their votes and thus would lose their political voice.

And another objection is that allowing vote-buying would lead to what economists call negative externalities — bad effects that will occur for people who don’t participate in the vote-trading.
They’re all reasonable arguments — but none shows that a market in votes should be outlawed.

For starters, allowing vote-buying would not result in public offices going to the highest bidder. Some people would still refuse to sell their vote, giving it away just as they do now — and not necessarily to the wealthiest candidate who offers them the best deal.

There’s evidence all around us: Consider low-income Republicans who vote for candidates who will shrink entitlement programs; or consider wealthy Democrats who votes for candidates who will raise their taxes.

Political ideologies transcend straight cost-benefit calculations, which is why we can be sure that people with the freedom to sell their votes would not necessarily offer them to the highest bidder.

Allowing a market in votes also would not disenfranchise the poor: Candidates would compete for their votes, just as they do now. Currently, they can legally offer to enrich the poor via government policies.

But why compete only on policies? Since poor voters decide which “bundle” of policies they prefer, why shouldn’t they be allowed to choose from different bundles of policies and prices in a market for votes — especially since this will give them the immediate benefit of the price of their vote with money that hasn’t been plundered from taxpayers?

The last objection — that a politician could buy his way into office and favor some over others — has merit. But it also happens already."

Is College Still A Good Investment?

See Regardless of the Cost, College Still Matters by Michael Greenstone and Adam Looney of the Brookings Institution. Excerpts:

"In most respects, a college degree has never been more valuable. As highlighted in a recent Hamilton Project piece, recent college graduates earn more money and have an easier time finding employment than their peers who only have a high school diploma. What may be less intuitive is that these gaps have been growing in recent years. ..., a young college graduate earned about $4,000 more per year in the 1980s, adjusting for inflation, than someone of the same age who did not attend college (averaged across the entire population, not just those in the workforce). Over the last three decades, that figure has climbed to $12,000 per year.

Differences in employment rates between college graduates and non-graduates have not demonstrated as clear of a trend over this period, with one key exception. In recent years—particularly in the aftermath of the Great Recession—college has become an increasingly important determinant of one’s employment status. Today, a college graduate is almost 20 percentage points more likely to be employed than someone with only a high school diploma. This “employment gap” between college and high school graduates is the largest in our nation’s history."

"While the evidence is clear about the lifelong value of more education, skeptics are increasingly pointing to rising tuition costs to claim that college is not as sound of an investment as it once was. And it is true that tuition has increased significantly over the past few decades. In 1980, it cost an average of about $56,000 (adjusting for inflation) to attend a university for four years. This figure includes tuition, fees, and the “opportunity cost,” or income one foregoes to attend school instead of holding a job. (This figure excludes room and board: one must eat and sleep whether she is in college or not.) In 2010, four years of college cost more than $82,000, a nearly 50 percent increase over that 30-year period.

This increase in tuition is based on calculations from the National Center for Education Statistics but it may overstate the rise in the costs of college. First, this rise in tuition does not account for recent increases in financial aid. Thus, while the sticker price of college may have gone up, it is unclear to what extent the cost to students and their families has increased. Indeed, according to the College Board, the actual cost of a four-year degree has remained relatively constant over the last 15 years.

Regardless of the magnitude of the exact increase in tuition, a sole focus on the cost of college is misleading because it only tells half of the story. Specifically, the monetary benefits of a college degree have increased dramatically over the last few decades. An individual who entered college in 1980 could expect to earn about $260,000 more over the course of her life compared to someone who received only a high school diploma. In contrast, for someone starting college in 2010, the expected lifetime increase in earnings relative to a high school graduate was more than $450,000. These estimates are adjusted both for inflation and the fact that most of this additional income will come much later in a graduate’s life, and the calculations are described in more detail here.

Even if we assume that all students actually pay tuition at the published rates, the bottom line is this: while college may be 50 percent more expensive now than it was 30 years ago, the increase to lifetime earnings that a college degree brings is 75 percent higher. In short, the cost of college is growing, but the benefits of college—and, by extension, the cost of not going to college—are growing even faster."

Is Storytelling Important For The Economy?

"It's the economy, stupid"-James Carville, strategist for Bill Clinton in the 1992 presidential campaign

"The human mind is a story processor, not a logic processor."-from the book The Righteous Mind: Why Good People Are Divided by Politics and Religion by social psychologist Jonathan Haidt.

Wouldn't it be great if there was a blog that looked at the intersection of the economy and storytelling or mythology? Well, there is! See Dollars and Dragons.

Here is one example of how storytelling and economics come together. See Giving Your Brand Primal Power Through Storytelling by Nick Nanton & JW Dicks. Excerpt:

"At our agency, we make what we call “story-selling” an essential component of our branding efforts with our clients. We’ve seen firsthand that, when you create the proper story, you’ve done most of the heavy lifting required to build a successful brand.

The question, though, is why--why do stories have such “primal power” when it comes to influencing an audience?

It turns out there’s a perfectly good scientific explanation: Stories affect us on both on an incredibly deep intellectual and emotional level that we are just beginning to understand.

That quest began when scientists discovered that fictional stories affected the same region of the brain that reacts when we ourselves are engaged in real-life drama. Stories create a bonding empathy which causes us to strongly identify with the made-up protagonist, as if we were, in fact, that person. In other words, stories have such impact because our brains actually get a little mixed up as to what’s real and what’s not."

There is also a great book out there called The Storytelling Animal: How Stories Make Us Human by Jonathan Gottschall. Here is the review I wrote at Amazon:

"If you liked "The Moral Molecule" by Paul Zak, "The Righteous Mind" by Jonathan Haidt or "The Power of Myth" by Joseph Campbell, you will probably like this book, too. It would be worthwhile if only for the anecdotes. The explanation about how a scientist proved that cats dream. Or that going to an opera greatly influenced Hitler. You want to keep reading. You never grow tired of it. How stories are a deeply inherent part of our nature is entertainingly explored. Stories affect business and economics because CEOs and brands need to tell a story. The role that evolution played in making stories important is explained. His theories and conclusions are supported by science. But it is still enjoyable. Gottschall himself is a good story teller. I love the line about stories being the flight simulators for life. The moral and socials role of stories are also explored. But stories are personal, too. We each have a story we tell ourselves. As Jung said, we should all try to discover what myth we are living by. Books like this should help us out on that quest."

A related post is Economists Love Fables And Parables (Or, What Is The Essence Of Economic Analysis?)