Wednesday, June 5, 2019

The popularity of the nationalistic rhetoric of Trump, Warren, and Sanders is a failure of economics

Elizabeth Warren posted "A Plan for Economic Patriotism" this week.  It begins like this:
I come from a patriotic family. All three of my brothers joined the military. And I’m deeply grateful for the opportunities America has given me. But the giant “American” corporations who control our economy don’t seem to feel the same way. They certainly don’t act like it.
Sure, these companies wave the flag — but they have no loyalty or allegiance to America. Levi’s is an iconic American brand, but the company operates only 2% of its factories here. Dixon Ticonderoga — maker of the famous №2 pencil — has “moved almost all of its pencil production to Mexico and China.” And General Electric recently shut down an industrial engine factory in Wisconsin and shipped the jobs to Canada. The list goes on and on.
These “American” companies show only one real loyalty: to the short-term interests of their shareholders, a third of whom are foreign investors.
As with her other proposals, there is a mixture of good and bad, and a lot of details.  Maybe the rhetoric isn't that important, in the end, to the actual policies.  But, the rhetoric here is chilling.  The history of public movements calling out groups for their supposed divided loyalties is a long and disgraceful one.  Considering the starkness of the rhetoric, and the parallels between Trump, Warren, and Sanders regarding their use of the form, it is interesting to consider how, for all of us, our reactions to each of them differ so much.  The bridge between Warren and Trump voters seems to be increasingly noted.  It seems plausible that this new press release is part of a plan by Warren to build on that.

But, I want to step back from that for now, and just consider the practical issues raised in Warren's statement.  Economics, at the least, should serve as an inoculation against this sort of rhetoric, and in this, it seems it has failed.

Consider the global economy as it might be, full of functional, productive societies with wealthy residents.  In that world, the places we currently consider developed might produce 20% of global goods and services.  Instead, today we produce something more like 70%.  At some previous point, it was more like 80%, and developing economies have been catching up.

That process of catching up is fabulous.  It is all to the good.  The only sustainable way of becoming a developed prosperous place that we know if is to move toward a system of a universally applied rule of law, human rights protections, personal freedom, and self-determination.  With that foundation, people engage in the process of specialization and trade that is the source of economic abundance.

This is the key - specialization and trade.  So, imagining this fabulous development - the whole world becoming civilized, humane, and wealthy until our part of it only produces 20% of that abundance - exactly how does one expect that shift to happen?  As the developing world moves from 20% to 30% of global production, they will necessarily specialize in some additional portion of world production.  It might be apparel or pencils.  It might be something else.  But it will be something. And much of it will be items that used to be produced in the developed economies.

The idea that the Dixon Ticonderoga company has much of a say in this is obtuse.  And, furthermore, the idea that their acquiescence to this global transformation is the result of "the short-term interests of their shareholders" is ludicrous.  There is nothing short term about this.

The reason that this rhetoric doesn't destroy Warren's public credibility is because of the failure of economics education.  The reason this can be construed as a short-sighted decision is that it is almost universally seen as a way to take advantage of the low wages of developing economy workers.  As if this is just a heartless example of exploitation rather than a reaction to epochal shifts in global productivity.

I propose a simple statement as a starting point for remedying this problem: "Production doesn't move to where wages are low.  It moves to where wages are rising."

That is the story of economic development.  This doesn't mean there aren't growing pains that sometimes hit some workers the hardest.  But, it does mean that in the end, all of those gains, on net, go to workers.  Returns to global at-risk capital are about 8% plus inflation.  They were 8% a century ago, they average about 8% today, and they will likely be 8% or less a century from now, if the world continues to grow with a capitalist framework.  But, workers today earn ten times or more what they did a century ago, and in another century - especially in places that are catching up - they will earn at least ten times what they earn today.

It really is ironic that Warren uses the Dixon Ticonderoga company as an example here.  Leonard Read, the founder of the Foundation for Economic Education was perhaps most famous for writing the essay, "I, pencil".  An excerpt:
I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human masterminding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.
An interesting aspect of that essay is that it contains several practical references to geographical locations of production, many of which I am sure have become dated as global production and specialization have evolved.  The essay is at once a timeless conceptual reminder of the profoundness of the invisible hand and a record of the fleeting nature of its operation.

I found this with a quick google search, which is a nice educational aid used in some New York state elementary school classrooms.  The education is being done.  But, the continued popularity of its absence is a call for ever more.  Godspeed, New York elementary teachers.

(PS; Karl Smith weighs in here with some interesting supporting details about the history of Dixon Ticonderoga.  He also discusses currency manipulation, but I think that is an overstated factor in the American trade deficit.)


  1. Well yes, but more paeans to free trade will lack traction if...

    1. Real wages are stagnant or worse due to pervasive property zoning, heavier taxes on wages, and a Federal Reserve that targets a 5% rate of unemployment as measured by U3.

    2. Free trade is often married with the idea of open borders for immigration, in a nation that cannot build housing or infrastructure and which until very recently suffered from chronic labor surpluses (due in large part to central bank suffocation of the economy but also porous borders).

    3. The same people who promote "free trade" also promote a hyper-mobilized, globalized and fantastically expensive world military to serve as a global guard service for supranational commercial interests.

    Kevin Erdman, you know and I know that inside the US the globalists are ever eager to (amplified by large pots of money) chant about free trade and the need to eliminate minimum wages and rent controls.

    But to eliminate property zoning or the near-universal criminalization of pushcart vending, or reducing taxes on wages are never topics.

    Don Trump is hardly an appealing figure. But is he any less attractive than a Hillary Clinton or a Jeb Bush? You tell me, my friend, you tell me.

  2. I see people talking about zoning a lot. In fact, I'll be at FEECon in a week on a panel talking about zoning.

    Thinking about a place like Germany, I don't think they have higher manufacturing employment because of protectionist policies, do they?

    Before the crisis, US per capita GDP was about 20% higher than Germany. We would be even higher today if we hadn't created the crisis. It is an interesting problem. I think we have less manufacturing because we have a stronger economy than Germany and we are farther into the post-industrial transition, but urban housing constraints are creating inequities as we make that transition.

  3. Kevin Erdmann has been a light in the murkiness of macroeconomics as practised.

    I left out my rant about how free trade might be nice in theory but large and chronic current-account trade deficits are a result to be avoided in fact ( the IMF agrees with me on this point).

    Check out the figures on how many hours per year a typical German works against the US average.

    1. Whoa!