This is all good stuff:
I would suggest six misconceptions that purveyed a great deal of the current
economic debate.First, it is supposed that the idea of economic policy is to maximize the
creation of jobs rather than to maximize the availability of goods at low
cost to consumers and firms. Both the officials responsible for competition
policy and those responsible for international trade have explicitly rejected
economic efficiency as a central guide for economic policy. This, I would
suggest, is a costly and consequential error. . . .
The second misconception is that these have not been good decades. For
the American economy in international perspective. I first got to know my
friend Ted Truman well when he was long into his career as the head of
the Federal Reserve’s International Economic Section. and I was a new
undersecretary of the Treasury for international Affairs. We were involved
in making various long term economic projections for the world.None of them would have believed that US GDP as a share of global GDP
would have remained robust for the entirety of the next generation. And if
we had been told how spectacularly China was going to do over the next
30 years, we would have been that much more pessimistic. We could not
have imagined that the share of US wealth reflected heavily in the stock
market would have been far higher a generation later than it was at that
time. . . .Third, the world has fared very well. Relative to the time when I was chief
economist of the World Bank at the beginning of the 1990s, child
mortality rates are less than half of what they were then. Literacy rates are
more than twice what they were then. Poverty rates, terms of extreme
poverty are less than 40% of what they were then.And in some ways most fundamental and important, this month, we
celebrate the 78th anniversary of a situation where there has been no direct
war between major powers. You cannot find a period of 78 years since
Christ was born when that was the case. So, the idea that we’ve been doing
it all wrong is, I would suggest, a substantial misconception.Fourth, the problems that we have are not due to trade liberalization. The
single most misleading idea that has moved from academic economic
research into the popular domain is the concept of the China shock
associated with China’s accession to the WTO. To start with, that
agreement did not change one iota of US policy permitting Chinese goods
to be sold in US markets.The principle that China would be the beneficiary of most favored nation
treatment and get the same benefits that other countries did had been well
established years before. It was ritually reaffirmed annually by the
Congress. Yes, China’s tremendous economic progress did lead to far
more sale of goods in the United States. But it is hard to imagine a less
credible approach to the problem. The adding up all the losers from the
imports without taking any account of the jobs created and the economic
impacts of the goods we sold to China.Of the lower cost inputs we received because of imports from China. Of
the enhanced real wages and associated with greater spending caused by
those lower prices. And the lower capital costs associated with the inflows
of capital that we received from China. When those calculations have been
done, as they’ve now been done by Rob Feenstra and several other teams
of economists, they show that, in fact, as with NAFTA, the net benefit to
the US economy has been substantial.The fifth misconception is that domestic industrialization and some kind
of renaissance of manufacturing is somehow the central issue for US
prosperity going forward. This is simply not a realistic idea. In 1970,
about 20% of US workers were engaged in production work in
manufacturing. Today, that number is about 6%.That number has trended downwards in countries like the United States
that have tended to run trade deficits. It has also trended downwards
rapidly in countries like Germany that have run manufacturing, export,
mercantilist oriented economic strategies and not at very different rates. It
is a consequence of the same set of phenomena that led to declining shares
of workers in agriculture over time.Rapid productivity growth, relatively inelastic demand, rapidly declining
relative prices created abundance without substantial and with declining
levels of employment. And there is nothing in the coming robotic
revolution to suggest that these trends are likely to do anything other than
accelerate going forward. I would note that the president of Ford has
judged that it requires about 40% less labor input in a Ford factory to
make an electric car as to make a traditional car. . . .Finally, I would suggest that substantial and accumulating deficits and
debts are a substantial threat to national security and national power
contrary to what is often believed in what sometimes seems like a post
budget constraint era of economic thinking. . . . [Our] budget prospects are vastly worse than they were at the time of the Clinton administration’s successful budget actions and substantially worse than they were at the time of the Simpson-Bowles efforts. The budget deficits a decade out comfortably in double digits now seems as a share of GDP now seem a reasonable projection with primary deficits quite likely in the 5% of GDP range.This is without the assumption of the need for vast mobilization for
meeting contingencies, military or non-military. And I think it is
reasonable to ask the question. How long can or will the world’s greatest
debtor be able to maintain its position as the world’s greatest power.
The Q&A has more good stuff. Here he discusses recent anti-China hysteria:
I think we need to proceed with very considerable care. I’m also very alarmed anytime you have a dynamic where on any issue, it’s only safe to be on half the spectrum of views for an individual. You are at risk of the outcome, moving a very, very long distance. The reason why the grade point average at Harvard University is now above 3.7. Think about it. . . .
No one with ambition wants to be in the dovish half of those talking about policy directed towards China. And that creates a potentially very, very dangerous dynamic. So, I don’t think we can ignore the national security issues posed by China at all, but roughly speaking, whenever somebody talks about jobs in Ohio, at the same time they’re talking about the national security threat from China, and as an important benefit of the national security policy, I get pretty nervous.
I don’t mind being on the dovish half on China.
And this is also excellent:
I’m inclined to think that if climate change is a central problem, we should
want climate change technologies produced as inexpensively as possible.
My view, which I’ve been expressing for some years, that has become
more fashionable in the last few months, at least in some part of it, is that
people, historians will look back on American views of the Soviet Union
in 1960, American views of Japan in 1990 and American views of China
in 2020 in quite similar ways as maximum alarm just at the moment of
maximum mean reversion for the economy in question.And I think we have to think very hard about, in the context of that
possibility, what the right strategies are and strategies that are about
maximum pressure can also be strategies that provoke maximally sharp
responses. Every time I hear somebody talk about Britain in the 1930 with
an emerging threat, I’m led to think about the antecedents to Pearl Harbor
in terms of Japanese perception.
Exactly.
HT: David Levey