Barack Obama: Another F in Economics

President Barack Obama:

Our mission has to be to accelerate hiring and to accelerate growth. And that depends on making our economy more competitive so that we’re fostering new jobs and new industries and training workers to fill them.

.
Paul Krugman:

[T]he rhetoric of competitiveness…has become pervasive among opinion leaders throughout the world. People who believe themselves to be sophisticated about the subject take it for granted that the economic problem facing an modern nation is essentially one of competing on world markets–that the United States and Japan are copmetitors in the same sense that Coca-Cola competes with Pepsi–and are unaware that anyone might seriously question that proposition.

[I]t is simply not the case that the world’s leading nations are to any important degree in economic competition with each other, or that any of their major economic problems can be attributed to failures to compete on world markets. The growing obsession in most advanced nations with international competitiveness should be seen, not as a well-founded concern, but as a view held in the face of overwhelming contrary evidence.
(Pop Internationalism, pp. 4-5)

One of these two men earned his Nobel Prize. That’s probably the one we should listen to.

About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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42 Responses to Barack Obama: Another F in Economics

  1. D. C. Sessions says:

    It’s a very short rhetorical distance between “help our citizens compete” and “make our economy competitive.” Bogus, but short.

    Unfortunately, the steps too often taken to accomplish the latter end up jettisoning the former.

  2. Pinky says:

    .
    These quotations seem to put a focus on something a little beyond how “we” have understood economic matters as the twentieth century was coming to a close.
    .
    Things have changed.
    .
    We’re moving into the future whether we like it or not.
    .
    Today, we’re faced with the idea of “State Capitalism” which puts a different perspective on economic matters.
    .
    Whereas the American People believe they benefit from America’s private capital interests abroad, it seems the Chinese People actually benefit from China’s state capital interests abroad.
    .
    Somehow, we need to get a better handle on the ideas of statism.
    .

  3. the innominate one says:

    Maybe the U.S. isn’t competing with, say, India, but isn’t it true that certain workers in the U.S. are competing with certain workers in, say, India (or any of a myriad of other countries)?

    Infrastructure is pretty expensive, no matter where it’s located and it’s unlikely to be relocated once installed. Workers are more variable in cost depending on where you locate your infrastructure.

  4. James K says:

    Ah, now there’s the Krugman that earned that Nobel. Why don’t we hear more from that Krugman these days?

  5. D. C. Sessions says:

    Why don’t we hear more from that Krugman these days?

    His blog spends a fair bit of time on international finance. Not exclusively, but quite a bit.

  6. James Hanley says:

    Pinky–“state capitalism?” Wouldn’t that be state ownership of the capital means of production, also known as socialism?

    You’ll need to do more than throw out undefined terms–that’s a way of sounding like you’re making an argument without actually coming to grips with the details. So far as I know, private ownership of capital is becoming more, rather than less, common, and so it’s still firms that compete, not states.

    States can make their regulatory regimes more or less conducive to innovation, job creation, and business development, but that’s not about “competitiveness” per se, because the vast majority of the business development will be to meet local and national markets, not international ones.

  7. D. C. Sessions says:

    Pinky–”state capitalism?” Wouldn’t that be state ownership of the capital means of production, also known as socialism?

    Tsk, tsk, Professor! “State capitalism” is a term for any of several forms of partnership between the State and big business where they are perhaps best described as partners or allies against common enemies, with both (at least in theory) benefiting. Think, “military industrial complex.” Or the cozy arrangements currently dominating China.

    Some of the most famous instances of self-described “state capitalism” were the fascists.

  8. Michael Heath says:

    “F”? I’d give him a B+ and note Obama and Krugman are apples and oranges and therefore different standards apply when grading their rhetoric.

    I’m comforted that the President realizes the economic challenge requires policies which focus primarily on growth. I find his rhetoric here, benign, pedantically challenged only if he were an economist, but he is not, and focused on the right priorities. I can’t reconcile that Krugman’s point about who is really competing extends to Obama’s point either. And let’s compare the President to his opponents, who argue the challenge should be primarily cutting spending which we know is contractionary given our debt (which requires growth and jobs to solve more than spending cuts which are needed in some areas), our current incredibly low effective taxation rate (a primary reason for our debt), our stagnant growth rate (in spite of low taxes and profligate spending), our jobless rate (which Krugman argues isn’t structural – I’m not so sure), the mismatch between labor demand and supply, and some awesome global growth opportunities. Given these challenges the President appears to be properly on point.

  9. James K says:

    Michael, it’s all very well to say that Obama recognises the importance of growth, but in practice there’s essentially nothing the President can do to affect growth beyond short time frames (i.e. approximately 18 months). Long run growth rates aren’t amenable to policy, at least not in a positive direction.

  10. D. C. Sessions says:

    Long run growth rates aren’t amenable to policy, at least not in a positive direction.

    Seriously? I would have thought that at least some policy decisions (foreign relations, trade, infrastructure) would have significant potential for increasing growth.

  11. James K says:

    Not really, especially if you want growth that genuinely enhances standard of living as opposed to (for example) the growth that follows a natural disaster (GDP rises but people ar just recovering what they lost, not getting richer).

    Long run real growth rates have been constant in the West since the Industrial Revolution (more or less) and it would probably take an event of similar magnitude to change them. There are other reasons to improve government policy, and some reforms (such as free trade) would have some effect, but nothing dramatic, and certainly nothing that will allow the US government to get out of its budget hole.

  12. D. C. Sessions says:

    Hmmm…. I guess I see things differently due to growing up in the West, where government played a key role (water and transportation, to name two) in making the area productive.

  13. James K says:

    By West I assume you mean Western United States?

    And I’m sure the government’s provision of essential infrastructure was a great boon to growth. But I’m talking about the effect of marginal government on growth, and in any Western country that stuff has been done already. Once the essentials are taken care of, there’s not a lot left for government to do that promotes growth.

  14. D. C. Sessions says:

    Once the essentials are taken care of, there’s not a lot left for government to do that promotes growth.

    I could add education. Not exactly one of those “essentials” that you can do once and stop worrying about. Arizona is currently doing an experiment in what happens when a State, in ostensible pursuit of being “business friendly,” cuts taxes by a very large margin over the course of two decades and then to balance the budget guts education from kindergarten up through research universities.

    Although those “essentials” don’t exactly take care of themselves. The USA has been letting deferred maintenance on its infrastructure pile up for decades and it’s starting to impact the economy. We’ll see how that all plays, too.

  15. James K says:

    Education is its own special can of worms. In practice I suspect that the problem with modern schooling in most countries is something too complicated and elusive for money alone to fix and more creative solutions are called for. I wouldn’t care to speculate on the wisdom of Arizona’s funding in specific, but in principle they can always get the educated people they need from other states, so it may be case of free riding on their part.

  16. D. C. Sessions says:

    In practice I suspect that the problem with modern schooling in most countries is something too complicated and elusive for money alone to fix and more creative solutions are called for.

    The point I was challenging was whether policy can have a positive impact on growth, and I propose to you that education policy is a good counter to your thesis. Historically you can use the USA generally in the 19th and well into the 20th century (*cough* Silicon Valley *cough*) contrasted to the South for close comparisons and much of the rest of the world otherwise for comparison.

  17. James K says:

    Better education could improve growth, I’ll agree to that, but the real question is what policies could be enacted that would improve education? There are some options that have potential, but no silver bullet.

    When I first started as a policy analyst I was told that pretty much every problem I would work on would be really hard because all the easy problems had been solved ages ago. That’s what growth is like, Western countries have used up the easy growth opportunities, which is why the US isn’t growing like China is. There are options left, but none of them are easy or straightforward.

  18. Michael Heath says:

    James K – I too strongly disagree with your point that federal fiscal policy can’t have a significant impact on growth. I agree with you that we could more easily grow fast in the past, but that’s also because we didn’t need to as competent then as we do now; both in policy development and then execution of that policy, i.e., governance. Coupled to the fact that from a relative perspective, we’re far less competent than we used to be (again relatively speaking) – this degradation of competency is therefore having an amplifying feedback given the need to be better than then rather than worse.

    We should also not ignore federal policy decisions that risk growth or cause it to stagnate. Here in the U.S. some of the obvious examples are:
    1) more liberal trade policies were implemented without commiserate changes in education to accomodate the tremendous loss of manufacturing jobs we’ve lost here. A policy debate we had where the liberals were right and lost to the fiscal hawks and conservatives.
    2) a failed healthcare finance market that continues to consume our GDP and wages (making us less competitive, an exercise I repeatedly encountered when moving business off-shore).
    3) an energy policy that consumes our military budget and therefore consumes domestic policy initiatives that would provide greater growth rates.
    4) related to the above, the U.S.’s deciding on “guns” in the old “guns or butter” debate where the answer was not just “guns”, but “guns defending the free world”; the only significant is entitlements primarily allocated to retirees.

    Our growth will also be severely impacted in the future due to our procrastination on a handful of other issues:
    1) Mitigating AGW, which continues to cause a burden on taxpayers for fossil fuel rent seekers, fossil fuel externalities, and increasingly – damage caused by AGW. In addition, we continue to lag in bringing up a green tech industry in spite of originally having a significant advantage on several though not all fronts.
    2) Not addressing debt. We’ve spent borrowed federal monies that weren’t very stimulative (the two wars) and the service on our debt is now the biggest expenditure after entitlements/Medicaid and defense with little return on those borrowings. This burden is high in spite of the fact interest rates remain relatively low.
    3) Our failure to spend on butter which results in less future growth, especially infrastructure, and research (where our rates are abysmally low when the current reality should realize increasing rates).

    All of these failures and procrastinations have suppressed growth and allowed Europe, Japan, and the developing economies to exploit more opportunities we should have also been able to compete for (not all, but many). It’s also suppressed our ability to better partner in their growth – especially when it comes to supplanting dirty coal emissions and selling more automobiles.

    I see trillions left on the table because of our incompetence.

  19. James K says:

    Ah specifics, that always makes a discussion easier. Thanks.

    1) I’m not sure that free trade has anything to do with it. I’ve seen studies trying to relate unemployment to trade liberalisation, and there hasn’t been any evidence to support a link so far. Furthermore there’s no theoretical reason why you should get persistent unemployment following trade liberalisation either. Furthermore manufacturing output in the US remains high.

    2) I can’t help but agree with your assessment of US healthcare as a failure, but question what effect it has on GDP. Sure it changes the pattern of production and consumption, but the total? That seems much less likely.

    3) Military spending is still part of GDP so high military spending doesn’t reduce GDP.

    4) Once again this is a pattern of consumption issue, not a size of GDP issue. Guns or butter, it’s still GDP.

    You second set of issues:
    1) For a while at least AGW mitigation will probably involve exchanging low cost energy (coal) for high cost energy (wind, solar), unless some great new technology is developed or the US suddenly get serious about nukes (and even then there are wrinkles). Higher cost inputs means lower productivity and therefore lower GDP. If there are GDP gains they will be R&D related, so see my point 3 (below) for that.

    2) If US government debt isn’t addressed bad things will happen, but most of them won’t be visible through GDP, at least not beyond relatively short timeframes. A bunch of people who relied on welfare will suddenly find themselves without, much to their detriment. Some parts of the world may suffer geopolitical instability as the Pax Americana is unceremoniously cut back or withdrawn. These things will cause suffering, but they probably won’t show up much in real GDP. Cutting public payrolls might lead to some short-run declines, but the effects will probably be hard to detect, especially since the budget crunch will most likely occur in a recession.

    3) Here I think we somewhat agree, expect perhaps over magnitude. Infrastructure and R&D are areas where government can promote GDP growth. However the effects are fairly modest and one has to consider the quality of the political decision-making process. Frankly given the low quality of political decision-making in the US I am fairly sceptical that more investment in R&D or infrastructure (expect perhaps more infrastructure maintenance) will have a positive effect on growth, rather than being an ill-conceived porkfest.

  20. Michael Heath says:

    James K – mfg’ing output is high but as I noted, mfg’ing employment is dropping like a rock which has resulted in a far weaker job market. That is a major reason we had a weak decade with median discretionary income weak and a continued gap between the rich and the rest of the population. The second biggest component of our current deficit is the affects of the recession, which decreases revenues because of both unemployment (which increases expenditures) and underemployment. In addition we’ve got ample evidence that trade liberalization optimizes growth; the U.S.’s problem is not adapting to the new global environment in order to maintain a strong labor market.

  21. James K says:

    Yes, I get manufacturing employment is poor, my point was that I can’t think of a mechanism by which manufacturing employment could adversely affect GDP without lowering manufacturing output.

  22. Jennifer says:

    I’m no Obama fan by any means, but in your two quotes here, James, Obama sounds far more sensible that Krugman. The way I interpreted the two quotes was, Obama understands the need to be competitive if you want to make it in business, whereas Krugman seems to believe “competitiveness” is some wicked lie capitalists invented to make lazy people feel bad or something.

    I’m be mildly curious to know what Krugman thinks about why China manipulates its own currency so heavily. Surely it can’t be because the Chinese wish to remain competitive or anything; there must be some warm-n-fuzzy peace-and-love Woodstock-style explanation.

  23. James K says:

    The thing is Jennifer is that the United States is not a business, and neither is China. They do not compete economically in the way that businesses or individuals do. If a Chinese company manages to outcompete an American one, driving it out of business, that is good for America and China. Economics isn’t a race, and treating countries as a single economic unit is unwise for the vast majority of cases.

    As to what China is up to, (assuming they’re actually influencing their exchange rate by much, it’s actually very hard to do, ask the Bank of England), I imagine they’re doing what most governments do – trying to “make their economy more competitive” by subsiding their exporters. If that’s what they’re doing, the joke’s on them. The principal benefactor of export subsidies (other than the owners of the export firms) are foreign consumers – that’s you guys. China is effectively giving you foreign aid, and financing your government debt while doing it.

  24. Jennifer says:

    James K., maybe you and I have different things in mind when we talk about “competitiveness” — and I’m no economist, so I speak in layman’s terms, and perhaps my words mean something different than the same terms would to an economist, but — of course countries are competitive. Even individual states in America are competitive — I saw a news story the past week or so, wherein Illinois raised taxes across the board and Indiana’s governor jumped on the chance to announce that his state now offered a more competitive business environment. In my state of Connecticut, it’s a common complaint that we’re not “competitive” enough — between our outrageously high taxes and our highest electricity costs in the nation, it’s a stone-cold fact that starting a business here will cost you a hell of a lot more money than starting that same business in a less-expensive state.

  25. Jim51 says:

    Jennifer,
    I tend to agree with you that countries (and states) are competitive. I think Krugman overstates his case. It seems apparent to me that the businesses in a country with a national health care system will have a systemic advantage over businesses in a country that burdens employers directly with those costs. This is only one example. So, OK, it’s not mano y mano, country vs. country, but rather the businesses of one country vs. the businesses of another. Countries can, I think, fashion a business ecology that fosters advantages vis a vis other countries.
    As to Obama’s statement quoted above, in and of itself it seems to be to be a bit fluffy. Even though there is some truth to it, it has become a bit of a political mantra to talk of the ‘new businesses’ and ‘technologies of the future’ as our best hope for growth and competitiveness. I am not convinced that the two statements are really at odds with each other.
    Jim51

  26. Michael Heath says:

    Jim51:

    It seems apparent to me that the businesses in a country with a national health care system will have a systemic advantage over businesses in a country that burdens employers directly with those costs.

    It depends. Marginal factors considered when making business deployment decisions consider wages, which is where healthcare costs are typically included in such managerial accounting analyses, but also taxes. So if wages are relatively low but taxes on businesses relatively high to subsidize universal health care, the “go or no-go” decision is muddied. To add to the complexity, governing bodies also have some latitude in creating ways for businesses making such decisions to avoid taxes.

    I’ve participated in a number of these types of activities in the tech sector. It was my experience that healthcare costs were not a major cost differentiator but it was a factor in some cases. The frequency when it was a factor was increasing because our costs were increasing faster than they were in competing countries. In those cases where the U.S. had a cost disadvantage, that was also partly due to foreign governing bodies being more aggressive in tax breaks to attract businesses since some European countries do have high effective tax rates on businesses in order to fund healthcare. From that perspective it’s merely a tax rather than part of a wage.

    It was this sort of analysis that helped convince me that the U.S. would be much better off not taxing businesses at all beyond the costs of government’s directly servicing them and replace that revenue with a VAT or consumption tax.

    I live in Michigan and it is a common understanding here that the employer burden for healthcare costs was a contributing factor to the auto manufacturing industries building more plants in Canada than here in Michigan over the past couple of decades (along with other employee costs like pensions and pay rates). I’ve never researched that to validate it so I’m not sure as to its veracity. I have had auto execs in that industry tell me this personally, Ford in particular, but that could have been them merely repeating a false meme in their organization as well which they passively believed.

  27. James K says:

    Jennifer: Yes, we’re using different definitions of competitiveness. What you’re talking about I’d call efficiency. I think the distinction is important because competitiveness implies a zero-sum type situation. But Indiana growing more efficient doesn’t make Connecticut worse off. Equally China growing more efficient doesn’t make the US worse off, quite the opposite.

  28. Jim51 says:

    Mr. Heath,
    I don’t disagree very much with your comment above responding to me. Health Care is, as I said, but one example of the possibilities available to countries to fashion an advantageous environment for their businesses. Duties and imposts are another. Tax structures are another. The control/manipulation of a currency is yet another. Direct or indirect subsidy for the development of certain industries and technologies can also be a factor. Environmental regulation, labor law, …
    I am somewhat familiar with the tech sector issues having spent 20+ years in that industry, much of it on the international side of things. And you are right, it is complex.
    Jim51

  29. James Hanley says:

    Wow, an interesting discussion while I’ve been away trying to survive the first week of classes and finish a couple of articles. Just a couple of comments.

    1. Competitiveness is a bad way to understand the issue because it’s not a zero-sum game where (for example) China’s loss is our gain, and vice versa. Quite the opposite, in fact. The richer China gets, the more they can afford to buy from us. Then it’s up to us to produce something they are interested in buying–but not “us” as in “the U.S.” but as in “my business, your business, his business,” etc.

    2. Michael wrote: “mfg’ing output is high but as I noted, mfg’ing employment is dropping like a rock .” Yes, that’s because our manufacturing sector has become so much more productive, and if you want real growth, you need to get it from increasing productivity (because that allows you to produce more output with the same amount of, or even less, input). I don’t get worrying about growth and worrying about productivity in the same argument.

    3. Whether a national health care program would “remove” the costs from business and help them (not the U.S., but those individual businesses) compete depends on how it is structured and funded. If the funding imposes tax increases on businesses effectively equal to the amount they’re now paying (both directly and in their management/compliance costs), then I don’t see how it would help at all. And if the structure doesn’t reduce the continuing above-inflation rate growth in costs, then ultimately they’re going to have to continue to pay more. It seems to me that sometimes when people use the “removing the cost” argument they seem to assume that government programs come free. Obviously nobody here actually thinks that, but I think there’s often a gap in the analysis that equates to that.

  30. Michael Heath says:

    James,
    the loss of manufacturing jobs matters a hell of a lot since most of those who lost their jobs and the economy and its growth because:
    1) don’t make as much in their current job and therefore contribute less in taxes
    2) may not even have a job but instead now receive more than they pay-in in taxes

    We’ve had a weak labor market now since at least 2001 if one drills down into underemployment and those not actively seeking a job who want one.

    I get the productivity point, I lived it and was paid quite well improving it (e.g., getting buyers purchasing 35 direct mfg’ing parts per desk to about 250 in six years). I don’t get your point that manufacturing is in fine shape merely because volume is increasing which allows you to ignore the fact we’re suffering as a country because we failed to respond to the losses of jobs in that sector.

    While I don’t support businesses paying for employee healthcare, either by buying it for them or paying taxes, a tax neutral plan should be better than our current plan for one simple reason – it would make it easier for labor to migrate. Currently many people are trapped in their current jobs because other opportunities don’t pay for their healthcare to the point they can afford to leave.

  31. James Hanley says:

    Michael,

    So who is going to pay for healthcare? If it’s the public, through income taxes, then people will demand higher pay to compensate, and it’s still going to come from the businesses. They are the ones who create wealth, so ultimately they will be the source of the revenue for health care. I’m not arguing for or against any plan here–I’m just trying to figure out who the heck you think is going to pay.

    Manufacturing is in fine shape, and I can’t see any evidence that it’s not. How anyone can look at an industry whose productivity has increased so dramatically and suggest it’s got problems is a bit of a mystery to me, unless you’re conflating manufacturing with labor.

    The problem of a weak labor market in consequence of the decline in manufacturing jobs is regional, not national. I’d like to personally transport about 3 million Michiganders out of the state and dump them in great plains states where unemployment is much lower than the national average, and mostly has been since the early ’90s. It’s people insisting the jobs come to them, instead of going to the jobs, that are the problem.

  32. Michael Heath says:

    James,

    I favor a VAT to pay for healthcare. I don’t think it should be applied in a way that is blindly regressive either. Cost for healthcare per GDP goes up only if the consumption of it goes up more than economic savings yielded and pricing power dynamics remain the same. I think there are ways to bend the cost curve which would require buyers with more pricing power just like we encounter in countries worth benchmarking for cost management.

    I’m stunned you think U.S. manufacturing is in fine shape. That just blows me away. I’m not sure you realize the incredible volumes of business we should have here which isn’t but built here but elsewhere, far beyond products which require cheap labor and therefore are not a good fit.

  33. James Hanley says:

    Michael,

    As you know, I’m aware you are more familiar with tax issues than I am. I appreciate your answer on that point, as it clarifies your point for me.

    Incredible volumes of business we “should” have here? Please be more explicit. And please note that you haven’t yet showed recognition that an upward trending curve on total production is a good thing. What you’re claiming is that the curve should be trending upward more steeply than it is. I’ve not seen that argument made previously by anyone who acknowledges that the curve has in fact been trending upward over the past two decades of alleged “hollowing out.”

  34. Jennifer says:

    Indiana growing more efficient doesn’t make Connecticut worse off.

    But business leaving Connecticut and setting up in Indiana DOES make Connecticut worse off. And Indiana’s governor believes his state will be better off if businesses that might have settled in Illinois go to the Hoosier state instead.

  35. Jim51 says:

    Jennifer,
    Again, in general I tend to agree with you. I think that the ‘this-is-not-a-zero-sum-game’ argument has merit, but it has a temporal dimension to it. In the short term I think many of these competitions are, in fact, a zero-sum game. Your example of a business moving from one state to another (or one country to another) illustrates this. Certainly in the long term Connecticut may respond and ultimately reap benefits from their response. But this will take time.
    Likewise, in such competitions, if companies X and Y have widgets to sell and X gets the contract with company Z, then Y has a problem which may take time to solve, and therefore result in layoffs, lower profits (or losses) and a damaged stock price. Eventually company Y may improve its widget and find new applications for it, thus growing the market. Then we can say that it was not a zero-sum game. But in the meantime company Y may be substantially damaged by the loss in the competition.
    Jim51

  36. James K says:

    Jim51, I think you and Jennifer have a point here, but I guess my essential point is that the short run really doesn’t matter. An efficient polity will attract or create business, while “competitive” ones bleed themselves white trying to attract businesses from elsewhere.

  37. James Hanley says:

    Another thing to keep in mind is that businesses open and close all the time. A business that moves from Connecticut to Indiana is really no different for Connecticut than a business that just goes out of business. It’s just one more among many in what is a perpetually dynamic process, so it’s really not worth worrying about.

    What is worth worrying about is not whether you can snag a business from another state or whether another state steals a business from yours, but whether your state in general attracts economic development–whether it’s businesses moving to your state, expanding into your state, starting up in your state, etc. If you have a generally good climate for business–which means a lot more than slashing taxes, environmental protection etc., and includes a good education system and other quality of life issues–then you won’t really need to worry about whether another state “steals” one of your businesses.

    JamesK’s point about states “bleeding themselves” to attract businesses reminds me of an article I saw probably 15 years ago that showed that municipalities that give lots of tax breaks, etc., to attract businesses tended to have less stable economic growth than municipalities that didn’t. IIRC, much of it had to do with the type of business attracted–a business that was fairly easy to relocate and looking for tax breaks is one that’s likely to move on once its tax break runs out.

    Currently the states with the strongest economies are in the upper Midwest, and they’re not doing lots of tricks to steal businesses from other states. One of the towns that’s doing really well, for example, is Fargo, North Dakota. People who don’t know tend to think, “who the hell would move to Fargo?” But people who’ve been there realize that it’s a very nice community, a great place to raise kids, with good schools, reasonable real estate prices, three universities in the metro area (North Dakota State, Morehead State across the river in Minnesota, and Concordia), and lots of entertainment because all the shows that are going to the big cities find it a convenient stop in between, for example, Minneapolis-St. Paul and Denver or Kansas City. It’s the kind of place where executives move and eventually realize they hit the jackpot. That becomes very attractive for economic development, as long as you don’t have some real business unfriendly tax/regulatory policies.

  38. Jim51 says:

    Mr. Hanley,
    I don’t think that you are really disagreeing with me or with Jennifer. I don’t think that either one of us intended the example to be a one-off. The issue was whether geographies compete (states or nations), and I think that they do. You are correct that if only one moderately sized business moved out of state that it wouldn’t be worth worrying about in the larger context. However, if the business environment differences were the reason for the move it would be unlikely that only one business would, in fact, move. It would also be highly unlikely that needed new facilities for businesses would be located in the state with the less advantageous business environment. In the aggregate, these business decisions ARE worth worrying about. It feels like we are moving into violent agreement.
    Further, I agree with the point about PILOT agreements (Payment in Lieu of Taxes). This is quite common but I too question the long term efficacy of promoting one’s local economy in that way.
    Jim51

  39. James Hanley says:

    Jim,

    But states don’t compete by trying to “make their economies” competitive or “trying to make their businesses competitive.” They try to set up conditions that are conducive to investment.

    When people start talking about nations, they do begin talking about making “economies” or “the country’s businesses” competitive, which means they’ve slipped over into nonsense talk.

    And in the big picture, it’s important to remember that we’re not talking about a pie of a fixed size, where each slice I get is one you don’t get. Growing economies are beneficial to both sides. If China grows wealthier, they can afford to buy more from the U.S., which is good for U.S. business and labor. If China “taking” an American business helps them grow, that may actually create more business and employment opportunities in the U.S. in the long run.

    Also, if an American business moves to China and their product becomes available to us at lower cost as a consequence, that means consumers/businesses have more money left over after buying that product, which means they have more money that they can either invest or use to buy other things–and both of those actions will help the economy.

    It may appear as though “we’ve lost and they’ve won” (a zero-sum game) if we look only at the direct effects, but as Bastiat emphasized, we have to look at the indirect effects, too (check out his “What Is Seen and What Is Not Seen”).

    Violent disagreement? No, no, I certainly hope not. But humans have innate tendencies to focus more heavily on negatives than positives and to look only at first-order effects. That’s why so many people so badly misunderstand this issue. Once you start digging into the indirect effects, it turns out not to be such a problem. The real problem, the only one, is that the transition can sometimes be hard when you lose a major business (case study: Michigan). That’s a real problem that can negatively affect real people, and certainly policy responses to help them transition are legitimate.

  40. Michael Heath says:

    I think we’ve created a paradigm that is overly simplistic. Certainly we rightly predict and observe growth by liberalizing trade. However that doesn’t mean such growth produces all winners, both with people and with states. Is Michigan harmed when auto manufacturers build assembly plants in Canada? Of course they are. Is Michigan harmed when auto manufacturers build assembly plants in China and again, Canada? Not necessarily and in some cases no. Building plants in China creates new demand and increases wealth there opening that market for more consumption, as it can in Canada by also providing economic growth. So the end answer is, “yes in general, but we can’t make policy choices without drilling down further.”

    From my perspective the impediment to the answer always being “yes” is our ability to quickly adapt to an evolving global market. The slower we adapt the more harm we realize where I’d argue we’re adapting far slower than we could if we were a more serious nation.

    James – regarding a past post that published two graphs on manufacturing trends. One was a graph of manufacturing output and the other was manufacturing jobs. Was the output graph focused exclusively on domestic production or was it a graph portraying output of American manufacturers regardless of where they produced a given product?

  41. James Hanley says:

    Michael,

    Domestic output. It’s the BEA’s GDP by industry measure. That’s always a good question, of course.

    If I can find time, I’m going to put up charts showing value-added from manufacturing, and value-added as a percentage of GDP. But at a quick glance, the only data I saw on the BEA site was in nominal dollars, rather than chained dollars, and that’s too misleading due to inflation.

    Unfortunately I’m running a swim meet this weekend, and I still have to get hold of the high school coach so we can borrow his cowbell and lap counters for the 500 freestyle, so I don’t have time to play around with BEA data right now, even though that would be a lot more fun.

  42. Jim51 says:

    Mr. Hanley,
    Your comment-
    “But states don’t compete by trying to “make their economies” competitive or “trying to make their businesses competitive.” They try to set up conditions that are conducive to investment.”

    Yes. Exactly what I was getting at when I said-
    “…but one example of the possibilities available to countries to fashion an advantageous environment for their businesses.”
    and-
    “However, if the business environment differences were the reason for the move it would be unlikely that only one business would, in fact, move.”

    This is why what I actually said was…

    “It feels like we are moving into violent AGREEMENT.”

    Jim51

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