Educating Obama on NAFTA

Philip Levy explains why Obama is so far off on NAFTA. He also tackles one of the basic misunderstandings about trade agreements -- that they have an effect on employment.

If we want to find the true consequences of NAFTA, we need to disentangle this mess of events. We could be guided by the wisdom of economic theory, but it says, loud and clear, that trade agreements have no impact on overall employment. Trade substitutes better jobs for worse jobs, but leaves the job total unchanged.

This is the type of answer that drives politicians berserk. Economic policies are loved or loathed by the public on the basis of how many jobs they create. How can trade policies not affect overall employment?

The number of jobs in an economy is set by the size of the work force, the health of the labor markets, and macroeconomic fluctuations. Trade can certainly create new jobs with export opportunities or cheaper inputs. It can also destroy jobs when firms succumb to import competition. Lots of job creation and destruction occurs every year in the U.S. economy. In an average year, 17 million jobs are created and 15 million are destroyed, with a net job creation of 2 million. When net job creation matches growth in the labor force, the unemployment rate stays constant.

He explains in greater detail why Obama's claim of 1 million jobs lost does not hold water -- because unemployment has been so low that the Fed would have taken steps to slow economic growth:

What of Obama’s claim that NAFTA cost the United States 1 million jobs? Imagine this were right. Then, without NAFTA we would have had 1 million more jobs. In the year 2000, this would have made the unemployment rate just under 3.3 percent, rather than the 4 percent we actually enjoyed. But Federal Reserve governors would have been in a panic long before we got down to that level and would have raised interest rates to slow the economy. They would have known they had gone far enough when unemployment increased to a level they were comfortable with – the same as with NAFTA.

Then what happened to those US manufacturing jobs? Simple: they continued to migrate to lower-cost locations -- as they had been doing, and as they will do even if NAFTA were to be repealed:

But what about the factory workers in Ohio? Are they just imagining those lost jobs? Of course not. Manufacturing employment in the United States did hit a peak and then begin a steady decline. The problem is that the peak was in 1979, 15 years before NAFTA came into force. The long-term decline of American manufacturing jobs has much more to do with technological change than with trade. We’re producing more stuff with fewer workers.

An excellent summary of an issues that will never be discussed honestly in a presidential campaign.

Will Democrats Bet on MUCH Bigger Government?

As Congress and the president are trying to figure out how to approach negotiations over an economic stimulus package, Rahm Emanuel is floating a trial balloon: a 'New Deal for the New Economy:'

Rep. Rahm Emanuel (D-Ill.) proposed today a far-reaching "New Deal for the New Economy" that includes a requirement that every American get another year of education after high school.

In a speech to the Commercial Club of Chicago, the Emanuel outlined a plan to expand health care, energy incentives, and savings as a way to respond to the economic pinch caused by globalization...

He said he supported universal health care but, short of that, he said Congress should build on recent efforts to expand health-care coverage. He put in a plug for an expansion of the State Children's Health Insurance program that President Bush vetoed. And he called for expanding the Medicare program so retirees from age 58 to 64 could qualify.

And he made a strong push for more government investment in energy that he said would create new markets and new jobs.

Emanuel said Americans must increase their savings, although many do not have the wherewithal. He supported universal savings accounts, which would supplement not replace Social Security. Employees and employers would each contribute 1 percent of paychecks into these accounts. The contributions would be tax deductible.

Emanuel is very influential within the House Democratic caucus. While his personality and ambition rub many the wrong way, his political instincts are widely respected. Plus, he gets a lot of credit for heading the DCCC in the cycle when Democrats took control of the House.

That said, it's clear that this proposal is not going to be enacted as a stimulus plan in the weeks ahead. It's unlikely to become the official Democratic position. Rather, Emanuel is setting a marker for the Democratic presidential campaign this year. He's clearly decided on a populist message, which offers new government programs for health care, education, and energy.

Interestingly, his plan includes a new tax-free, employer-matched retirement savings plan. While this sounds somewhat like the 'private accounts' favored by many Republicans as an option within Social Security, this one would be above and beyond the current Social Security system. Depending on how the program is structured, it could be superior to the private account--if for example, workers were allowed to save more, or had more flexibility to direct their investments.

It will be interesting to see which candidates--if any--latch on to Emanuel's plan. While it's likely to be costly, so are the current economic plans of the Democratic candidates. Plus, the plans for tax increases are already on the table.

Bush Considers Canceling Earmarks; Using Proceeds for Economic Stimulus

Read it at the Standard.

Beware Greeks Bearing Gifts

The Politico reports on an 'olive branch' extended by Congressional Democratic leaders -- an offer to meet with the president on a stimulus package before either side is committed to a proposal:

In an [sic] magnanimous move, Speaker Nancy Pelosi and Harry Reid have sent President Bush a letter asking for a high level meeting so both sides can try to work out a bipartisan economic stimulus package before Democrats and Republicans start bickering about the specifics in public. In the letter, to be released this afternoon, Pelosi and Reid say they want to work with the White House and Republican leadership to "immediately develop a legislative plan."

Rather than pre-empting the president's expected economic proposals in his State of the Union address later this month, Democrats say they want to visit the White House next week and hash out a plan before either side releases its economic ideas.

"We would strongly urge this meeting take place before any economic packages are announced," Reid and Pelosi wrote in their letter.

Why the sudden conciliatory tone from Congressional leaders, who have so far sought to bully the White House at every turn? My guess is that it's because they're committed to new spending, and they want to get to the President before he has a chance to commit to a stimulus package with no new spending.

Last year, Congressional Democrats staked out their position and tried to force the President to come around. Presented with a 'take it or leave it' spending proposal, the president had little problem sticking with fiscal conservatives. They ended up getting rolled, and have been forced to reassess their strategy for the year ahead.

They seem to have decided that they might have better luck if they can get to the president early. If he doesn't take a firm position against them, maybe they can make a deal -- for $20 billion, $50 billion, or $100 billion in 'emergency' spending. It would all be tailored to stimulate the economy (of course), and it would be merely a coincidence that it included all the same spending items that got dropped from the appropriations bills last year.

Conservatives should get to the White House early, and tell them that before agreeing to any summit, they should stake out a position that any stimulus spending should fall within the regular spending caps.

Dems: Slow Economy? Spend More

If the economy slows down, there's a problem in the housing market, or politicians otherwise see a need to do something to get the economy moving, there's just one answer: spend more. The Wall Street Journal today discusses White House deliberations on the proposal anticipated from the president:

The president's main options include a tax rebate of perhaps $500 for individuals to encourage spending and a change in tax laws that would allow companies to deduct from their taxes a substantial portion of investments in equipment, according to people familiar with the discussions. President Bush is expected to prepare the economic-stimulus package before his State of the Union Address on Jan. 28.

The two measures at the top of the president's list would reprise his tactics during the economic slowdown faced during his early years in office. In 2001, while the economy was in recession, the Treasury sent checks of $300 or $600 to two-thirds of U.S. households during a 10-week period. The rebates represented advance payment on retroactive reductions in the lowest tax bracket, to 10% from 15%. In 2002, Congress, at Mr. Bush's urging, authorized companies to take deductions for 30% of the value of investments in equipment. The following year, Congress upped the so-called bonus depreciation to 50%, until it expired at the end of 2004.

What is the Democratic response?

House and Senate Democrats are working on a joint proposal to address the economic situation. "There's going to be things on the tax side and things on the spending side," said Sen. Charles Schumer (D., N.Y.), who is involved in the discussions. Sen. Schumer wouldn't elaborate as to what specific measures Democrats are considering, but he said if Mr. Bush "takes spending stimuli off the table, it's going to be hard to deal with him."

This sounds a lot like the liberal line taken by Congressional Democrats when Bill Clinton took office in 1993. Under pressure from Congressional leaders eager to spend, Clinton proposed a package that included $15 billion in pork. What did the New York Times have to say? That it wasn't enough:

The troublesome combination of slow growth and high unemployment presents Mr. Clinton with an opportunity. He can jack up Federal spending without fear of straining the economy or fueling inflation. The situation invites boldness; so far, Mr. Clinton offers timidity.

In the past, most stimulus packages have emphasized higher transfer payments, like unemployment compensation, and lower income taxes. The idea was to stimulate consumption. Mr. Clinton offers a better idea. He plans to boost investment by accelerating public projects that are ready to go but held up by state and local governments for lack of funds. And he proposes to cut taxes on private investment in new plant and equipment -- a powerful way to boost productivity...

A $50 billion package of accelerated public investment spending and targeted tax cuts would boost long-term growth and short-term jobs. It would be big enough to do some good, but not so large as to do any harm.

Eventually Clinton's stimulus package collapsed under its own weight. Too many liberals were disappointed that it didn't go far enough; too many conservatives said it went too far. And of course, the economic recovery was already well under way by the time Clinton came into office. No stimulus package was ever passed.

In the end, it looks like the U.S. didn't actually need all that new spending anyway. The U.S. created 22 million new jobs during Clinton's presidency.

Just as then, our economy will do just fine -- even without tens of billions of pork-barrel projects.

OMB Director Talks Deficits, Budget Busting

Read it at the Standard.

CBO: 2007 Was a Very Good Year

According to the Congressional Budget Office, fiscal year 2007 (which ended on September 30) saw dramatic improvements in the nation's fiscal picture:

CBO estimates that the federal budget deficit was about $161 billion in fiscal year 2007, $87 billion less than the shortfall recorded in 2006. Relative to the size of the economy, that deficit was equal to 1.2 percent of gross domestic product, down from 1.9 percent in 2006.

You may say 'no big deal -- so what if the federal deficit was down dramatically -- we expected that.' You want to know about the bigger picture, right?

Well, income taxes and payroll taxes were up significantly -- as were wages and salaries:

Receipts of individual income taxes, the largest tax source, increased by an estimated $118 billion (or 11 percent), and receipts of social insurance (payroll) taxes, the second largest source, rose by an estimated $32 billion (or 4 percent). Receipts from withheld individual income and payroll taxes, the largest source of income and payroll taxes, grew by $107 billion—or 6.7 percent. Those receipts grew at similar rates of 6.9 percent in 2006 and 6.3 percent in 2005. Those gains in withholding reflect continued growth in wages and salaries.

What about corporate taxes? They were up too -- but because of slow growth in corporate profits, they weren't up as much as in previous years:

CBO estimates that receipts in 2007 from corporate income taxes grew by about $18 billion (or 5 percent). That represents a substantial slowdown from the growth in the prior three years, which averaged 39 percent per year. Receipts slowed progressively through 2007, with gains in the first three quarters of 22 percent, 11 percent, and 4 percent, respectively, followed by a decline of 11 percent in the fourth quarter—reflecting slowing growth in corporate profits.

All this is according to the Congressional Budget Office.

In light of all this, does it really seem wise for Congress to consider huge tax increases -- in particular on corporate profits? Wouldn't a wiser course of action be to continue current policies -- which are yielding significant economic growth, increasing wages and salaries, and increased corporate tax receipts?

Hooray! Weak Dollar Means Higher Prices, Less Choice

For years politicians have worried about the trade deficit. The answer from the economist has been two-fold:

1. Don't worry; it won't last forever; and,
2. The trade deficit will 'solve itself' when the dollar gets weak enough to drive up import prices so Americans can't afford as many imports.

Looks like politicians are getting their wish:

Weakness in the dollar means prices of imported goods, particularly oil, will go up, raising the risk of inflation. American consumers will be paying more soon, with the looming threat of paying even more later on.

"The inflation risk from higher import prices will be the dominant initial effect," said Howard Chernick, an economics professor at Hunter College in New York. "The most immediate effect is imports denominated in dollars -- mainly oil. We already saw a spike in oil prices. So a bit down the line, that's 10 to 15 cents more per gallon of gas at the pump."

A weaker dollar can help narrow the U.S. trade deficit by making America's exports more affordable abroad...

On the other hand, the pressure on the dollar is increasing the international buyout appeal of American companies and real estate -- and Main Street itself might end up on the auction block.

The weaker dollar will also affect Americans in the long term in ways they might not have even considered, if companies here have trouble affording capital goods.
Chernick cites as an example Europe's leadership in producing wind power technology. It's a cutting-edge niche market that is suddenly even more expensive for the U.S. energy industry as the euro gains more muscle.

"The cost of increased reliance on renewable energy just went up -- so more pressure to build more coal power plants," he says. The dynamic can have far-reaching consequences.

To be sure, the effect is not all one-sided. American exports become cheaper and more expensive, and foreign tourism to the US is likely to increase. However, a weak dollar and a narrowing trade deficit isn't something consumers should look forward to.

GAO Pushes a Simpler Tax Code

An interesting piece from Congressional Quarterly regarding a recent House Budget Committee hearing on performance budgeting.

The cost of tax expenditures approximate the level of total discretionary spending, “yet relatively little is known about the effectiveness of tax incentives in achieving the objectives intended by Congress,” Walker told the panel. He said too little attention is paid to those tax provisions — which are tax exemptions, deductions, credits and preferential rates in the tax code. He noted that the mortgage interest deduction alone cost the government $68.3 billion in lost revenue in 2006, more than the $42.4 billion spent on HUD. But while HUD programs get a performance review from OMB each year, there is no equivalent check on the effects of tax policy. Congress and administration should develop a system of periodic review of tax policies to “identify and mitigate against mission fragmentation, overlap, and conflict, as well as service gaps,” Walker said.

Walker also said the unintended consequences of tax breaks are not well examined, citing health insurance as an example. The tax exclusion for a company that buys health insurance premiums for its employees cuts costs for those employees, while increasing the tax burden on those who purchase their own insurance. CBO Director Peter Orszag also highlighted the impact of tax policy on health insurance, calling it the “most prominent example of a tax expenditure that appears to be inefficient.” The tax preferences for an average worker amount to a government subsidy of more than 30 percent of the cost of health care provided through employer-sponsored insurance, he said. “By reducing the price of that insurance, the tax subsidy encourages workers to purchase coverage through their employer and to secure more-extensive policies, increasing the share of costs that is covered and decreasing the share that is paid out of pocket.” That, he said, helps to inflate health care spending.

Here's a link to the referenced testimony of Comptroller General Walker. Here's one for CBO Director Peter Orszag. First off, let me object to the choice of verbs. It may be repetitive to note it, but tax breaks don't 'cost' the government revenue; taxes cost the taxpayers. That said, it only makes sense to do the best we can to understand the effects of tax breaks intended to promote certain outcomes. How much does the federal government 'spend' in the form of tax breaks, intended to promote desired outcomes? This chart from Walker's testimony is illustrative and surprising:


The chart confirms that our government 'spends' more on tax breaks than it does in discretionary spending. (Entitlements meanwhile, grow inexorably -- but let's leave that for another post.) As a conservative, I want simplicity in the tax code whenever possible, and I want the smallest tax bite possible. If a given tax break is not achieving the desired goal, it should be eliminated in favor of overall tax reduction. To do that however, I need an assessment of the effectiveness of tax breaks.

The biggest tax break, according to Walker, is the incentive for employer-provided health care -- $188 billion annually. And what do we buy with that money? The screwed-up system we currently have -- which subverts patient choice, encourages higher health costs, and drives providers mad. That's why many free-market health care reform plans begin by repealing the existing tax preference.

What about other such preferences? There's a significant amount of attention to the federal government's discretionary spending, but relatively little to the revenue foregone in the tax code. It's worthy of greater scrutiny.

Wal Mart Innovates Health Care

Courtest of Reason:

Wal-Mart, long criticized for its health care coverage, unveiled a broad plan yesterday that is intended to cut employee costs, expand coverage and offer workers thousands of cheap prescription drugs.

Starting Jan. 1, Wal-Mart's insurance will look a lot like that offered by many other American companies, but with some twists that even longtime critics described as innovative. Independent experts praised several features of the plan and said it could represent a turning point for the retailer, the nation's largest private employer.

...

Helen Darling, president of the National Business Group on Health and a former benefits consultant, called it "a very good plan," saying that "parts of it, like the $4 generics, are game-changing for the industry."

...

The new program, for which workers can sign up starting this month, offers 50 ways to customize coverage, with varying trade-offs like higher premiums and lower deductibles.

In one plan, for example, an employee would pay premiums up to $79 a month, receive a health care credit of $100 and pay a deductible of $500. In another, the employee would pay premiums of $8 a month, receive a $100 health care credit, but pay a deductible of $2,000. Though many generic drugs will be available for $4, brand-name drugs will cost $30 to $50.

If the proverbial alien arrived from Mars to assess our system of health care, he would be shocked to learn that it so intricately and deeply involves our employers. This artifact needs to be ended.

The Genius of Capitalism

Found it!

I've been trying to find this short for months -- years, maybe:

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As a child, I thought this was brilliant. As an adult, I'm surprised at how well it holds up. This cartoon and several others were produced by the Sloan Foundation and were intended to help kids understand the underpinnings of the US system.

The second short in the Sloan Foundation series was 'Heir Conditioned," which focused on the importance of investment. The best part runs from 5:35 to 6:10 or so.

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The third and final one was "Yankee Dood It," about how business runs :

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No mention of Joseph Schumpeter or David Ricardo, but still a great view. Each runs 7-8 minutes.

I sure wish they made stuff like this nowadays. Perhaps one on international trade...

Services Surpasses Ag as World's Largest Employer

The International Labor Organization notes an extraordinary milestone in the history of mankind, met and surpassed with no fanfare:

So, firstly, modernization of large ecnomies [sic] is largely bypassing industrialization and going straight for service industries - in our western economies the service sector was about two-thirds of the economy, and has grown further (to 71.2%). But the so large parts of the world economy are moving straight to service industries that their roles have changed. Worldwide, in 1996 agriculture employed 42%, industry 21%, and services 37%. In 2006, the numbers are 36%, 22%, and 42%. So in the period, services has overtaken farming on a global scale.

To me this stuck out as the news of the day. This is a tremendous milestone. In the west we’re accustomed to the farming sector being 4-6% or so, but that certaintly not true in most of the word. You might think the industrial revolution was a long time ago, but the reality is that more people have continued to work in farming. Until sometime in these past few years that is.

And thus passes a tremendous milestone in the history of our species. Farming, invented around 8000 BC, quickly dominated human activity and has so continued to for the following 10,000 years (give or take a few). And we even find that the tradition agriculture->industry->services transition doesn’t hold up globally. The industry segment simply isn’t big enough, so many workers skip to services.

According to the United Nations Food and Agriculture Organization, world agricultural production has climbed steadily even as a smaller and smaller percentage of the world's workforce has been devoted to it. This is the definition of improved productivity of course -- a smaller workforce producing equal or superior results.

The United States and the advanced western world have devoted a larger share of their labor force to services than agriculture for many years. It's the sign of an advanced and wealthy economy that so many workers can focus on services to improve the lives of others. The fact that the world as a whole now enjoys this state is an indication that the globe is becoming a more comfortable place to live -- and will continue to improve.

That's not to say that there are not places of extreme poverty and starvation in the world of course; there are. Sub-Saharan Africa is one such place, as are parts of asia. The goal of us in the west should be to continue to promote the spread of western-style capitalism -- which allows the development of capital and the communication of tools for more productive agriculture. We should also continue to eliminate the barriers to trade, which allows all products to flow to where they are most needed.

Be Careful What You Wish For

From Spiked:

Imagine an egalitarian world in which all food is organic and local, the air is free of industrial pollution, and vigorous physical exertion is guaranteed. Sound idyllic?

But hold on… Life expectancy is 30 at most; many children die at or soon after birth; life is constantly lived on the edge of starvation; there are no doctors or dentists or modern toilets. If it is egalitarian it is because everyone is dirt poor, and there is no industrial pollution because there are no factories. Food is organic because there are no pesticides or high technology farming methods. As a result, producing food means long hours of back-breaking physical work which may end up yielding little.

There is – or at least was – such a place. It is called the past. And few of us, it seems, recognise the enormous benefits to humanity of escaping from it. On the contrary, there is a pervasive culture of complaint about the perils of affluence and a common tendency to romanticise the simple life.

This tendency most clearly evinces itself in the patronizing attitude of many residents of the advanced western world to extreme poverty around the globe. A lack of potable water, of a good educational system, of easy access to capital, of strong physical infrastructure, of a transparent legal system and sound government -- in some people's minds these conflate to a paradise -- unless it is they who are living in such misery.

This is why the best thing we can do for the rest of the world -- for peace, prosperity, and justice -- is to do our best to help other nations adopt our free-market, capitalist system of government. For all its myriad flaws, it is the best system there is for delivering from physical wants and needs, and allowing people to pursue happiness as they see fit.

Go read the whole thing.

Hat Tip: Reason blog

America's Upwardly Mobile Poor

Reason's blog has a strong literary way to think about the better standard of living enjoyed by America's poor.

It was still a great scene, though:



Regardless of the views of Mr. Joad, this blog is officially in favor of cops beating up guys when they gots it comin' to 'em.