2009 February 17 Tuesday
End Game For Old Model Auto Industry Union

The losses have become so massive that the United Auto Workers union is going to cease to be the last industrial union with high blue collar wages.

Over the past 30 years, the returns have gradually disappeared under the pressure of foreign and domestic competition. Yet despite the gradual decline in the power of the union movement, autoworkers have nonetheless been able to negotiate pay and benefits, job security and work rules that have remained significantly more favorable than those at nonunionized factories run by foreign firms in the United States. Now, as General Motors and Chrysler enter the final phase of what amounts to a bankruptcy-like reorganization under the auspices of the U.S. Treasury, that unsustainable old model is at long last being put to rest.

Instead, a new model is emerging that follows the outline of earlier restructurings in the steel and other heavily unionized industries. Under such a model, Detroit's Big Three customers would finally be treated to cars that offer competitive performance and styling to go along with the competitive pricing of recent years.

Employees would be forced to accept lower base pay and benefits, in exchange for a reasonable share of company profits through a combination of performance bonuses and company stock held by the union health and retirement fund.

This is really the end of an era. It is amazing to me that the UAW has managed to ride the Big Three down to such an extreme before they finally had to stop getting wages and benefits so far above the market rate for low skilled manual labor. The losses the Big Three (and their creditors, suppliers, and stockholders) have experienced on the way down have been immense - especially in this final chapter.

The UAW has agreed to cuts in layoff benefits. Those layoff benefits mean the Big Three have to shell out large sums during recessions to supplement unemployment payments that laid off auto workers receive.

The United Auto Workers union, in deals with General Motors Corp. and other U.S. automakers, tentatively agreed to concessions that may include a pay freeze, cuts in layoff benefits and reductions in so-called skilled-trade positions, people familiar with the talks said.

A new advisor for Obama on the auto industry has a background that doesn't inspire hope for the UAW that they can escape making big concessions.

The administration stepped back over the weekend from naming a "car czar," as it had planned, to oversee the restructuring. But according to people familiar with the task force, it named former Lazard Freres & Co. investment banker Ron Bloom a key adviser. Mr. Bloom, who made a name advising U.S. steelworkers to accept major concessions in several bankruptcy cases, is expected to take the task force's lead role, a senior U.S. Treasury official says.

People who know Mr. Bloom expect him to be tough on the auto makers, the United Auto Workers and other parties involved in their restructuring.

Obama sounds like he's smart enough to realize he can't set up a permanent subsidy to keep the Big Three on life support just to pay the UAW well.

President Barack Obama’s top spokesman told reporters aboard Air Force One on Tuesday that he wouldn’t rule out bankruptcy for the Detroit automakers. But GM Chief Operating Officer Fritz Henderson said the bankruptcy scenarios the company has looked into would cost the government more than $30 billion. The worst would cost $100 billion because GM’s revenue would severely drop, he said, citing research suggesting that sales for a bankrupt automaker would “fall off a cliff.”

If the Big Three do not get big enough concessions they'll end up in bankruptcy in 2010 or 2011 if not sooner. BusinessWeek has a pretty good summary of where the Big Three stand with the UAW, debt holders, and their total costs.

Share |      By Randall Parker at 2009 February 17 11:16 PM  Economics Labor


Comments
Ned said at February 18, 2009 7:24 AM:

The "Business Week" article is good. GM has already reached a deal with the UAW to allow it to pay their few new hires around $14/hour, about half what the experienced workers get. This is competitive with the foreign automakers. However, GM's enormous debt is still a problem - the bondholders and the UAW have got to come to some sort of agreement if the company is to survive. GM will euthanize its superfluous brands, but reducing its bloated dealer base will be a problem due to state franchise laws. Even so, the company has a tough row to hoe - I'm not sure it will survive even with more government bailouts.

The scary bankruptcy scenario that Fritz Henderson paints is very self-serving. If GM goes bankrupt and is liquidated, obviously Fritz and everyone else who works there will be on the street, plus no more legacy benefits for the retirees. But if the company restructures in bankruptcy and a new GM emerges, the existing management and board will be dumped and all the union contracts and benefits will go bye-bye. Either way, Fritz and the UAW lose. So get ready for lots of bleating in the media about the horrors of a GM bankruptcy.

Not that I wish anything bad for GM and the other US auto makers - rather, I want them to be strong and profitable. I live in Michigan, home of the nation's worst economy, and I know the hardship that a GM bankruptcy will cause. But these guys (both management and union) have experienced decades of declining profitability and market share and have done nothing to get their act together until the whole thing is on the brink of collapse. Bankruptcy may be the best way out. Rick Wagoner's plan looks like a house of cards - IF the bondholders and UAW can come to an agreement on the debt, IF the government kicks in billions more of taxpayer dollars, IF US car sales rebound to optimistic levels, IF the aroma of a threatened bankruptcy doesn't alienate American car buyers, then the company MIGHT survive. But pull out one of the cards, and the whole thing comes crashing down. Well, at least I can say that I did my part to help - I took my Cadillac SRX in to the dealer yesterday for routine 60,000 mile maintenace - not repairs, just maintenance. It cost $980! I expect a thank-you note from Rick Wagoner and Ron Gettelfinger any day now.

James Bowery said at February 18, 2009 7:37 AM:

People, especially Democrats for open borders, don't get the fact that FDR's New Deal was basically about nationalizing the labor unions.

The Union became The Union, as in Abraham Lincoln's Union. The US border became the picket line. The first major assault on the New Deal was the 1965 Immigration and Nationality Act. Then the Republicans basically turned their back on Abolition by ignoring working conditions in international trade.

Obama can't bring back the New Deal due to his commitment to international socialism aka communism. He has to try to bring world worker conditions up to New Deal standards which, of course, he's no intention of doing.

M said at February 19, 2009 8:44 AM:

Auto management to Congress:Please give us endless credit so we don't have to give up our fat compensation packages.

UAW to Democrat Party:Please make it 1956 again.

Culture matters and the hedonist culture of the last 40yrs has largely destroyed the ability of people used to instant gratification to think and plan long term.
Biz managers don't plan 10-15 yrs into the future.Why should they,as they know they won't be there in 10-15 yrs?

The country is now run by Boomers,a generation noted for it's relentless pursuit of gratification and militant rejection of personal responsibility.
The NYT story about college students who believe they are entitled to B's for simply showing up for class and A's for actually doing any work in the class shows how the Boomers bequeathed this culture to the rest of us.
There will be much schadenfreude when the Boomers realize how truly screwed they are(happyhappy/joyjoy)until we realize how screwed WE are because of this nonsense.

As we have exported our real economy,we have replaced it with a series of debt driven bubbles.
First,Greenspan's dollar bubble of artificially cheap money and credit boosted the tech revolution and created the tech stock bubble.
When that popped,we inflated real estate.
That has now popped and we have no more assets to inflate,our wages and standard of living will have to decline until we're competitive,culturally as well as economically and given the entitlement culture,that will be a long time coming(and only after a whole lot of kicking,screaming and populist blowback),if it comes at all.

HellKaiserRyo said at February 20, 2009 8:07 PM:

I do not think Sweden has the same "entitlement culture." They do not prefer instant gratification, but they do like stability and safety. I am sure that most people who are "conservative" in Sweden do not want to abolish the welfare state and use their conservativism to oppose immigration. I think Sweden will maintain their standard of living through this crisis. I do not expect the Republicans to gain political control (even if the economy is bad because they will just blame it on Bush) unless they use anti-immigration and anti-free trade rhetoric to strike populist chords as immigration and free trade did reduce the standard of living for plenty of people (there are a few winners though). I do not even hear Rush Limbaugh talking about those points enough though.

And why do most (or some) people need to work anyway? (Only a few people do anything useful such as hedge fund managers like George Soros and cancer researchers / most people only produce worthless services) The world would be a way better place if many people could live like hikikomori as they would simply stay in their parent's homes not commiting any crime, harming anyone, or producing more liabilities such as children. Plus if people are hikikomori, it would clean up plenty of the pollution in the labor market. Many people would simply stay at home not looking for jobs which is a good thing as it would reduce the supply of labor.

Why do people think hikikomori are a bad thing? Can't people see its very beneficial side effects and encourage it?

Randall Parker said at February 20, 2009 10:35 PM:

Sweden's people are more resistant to the effects of a welfare state. But they are not immune.

You reveal a lot here:

Only a few people do anything useful such as hedge fund managers like George Soros and cancer researchers / most people only produce worthless services

Hedge fund managers are useful? Really? They struck you as more worth mentioning than:

- engineers and software developers
- police
- firemen
- doctors
- dentists
- farmers
- plumbers
- electricians
- toothpaste factory operators
- surgical implement designers and manfacturers
- trash collectors - should we just stop trash collection?

I could go on. Why do you think few people do anything useful? That makes no sense at all.

HellKaiserRyo said at February 20, 2009 11:37 PM:

I was too lazy to mention all those occupations. The problem is that there are too many people available to qualify for some of the aforementioned jobs that require low skill (although they perform a useful function) and probably not enough people to be dentists, doctors, surgeons, scientists, etc. Well, isn't too many unskilled people in the labor force a problem (unless you are a capitalist who wants cheap labor though)? Well, I mean to imply people that are working in McDonalds for minimum wage as a job that provides little utility. I think the labor market would be better off if those people just merely stayed home and not drive down the price of unskilled labor by being in the labor market. (Instead of encouraging hikikomori, one can cut off access to foreign overcapacity [e.g. protectionism/immigration restriction] to increase labor demand.) Surely a supply/demand imbalance would be problematic and excess supply surely "pollutes" the labor market. Also, do people at McDonalds do anything particularly useful? Hikikomori is a form of protectionism as those people shut themselves in their rooms to protect themselves from the cruelity of the world and competition of the labor market. Randall, do you think it is better to be a hikikomori receiving food from your parent's everyday or getting laid off and getting it from a food bank? What do you think is more humiliating? I really do not see what is bad about hikikomori (from a relative point of view) as it is better than being poor in an undeveloped country or in a developed country without a European like-welfare state.

Unfortunately in the United States, some people are not affluent enough to support hikikomori and culturally it is encouraged for people to live independently. So few people could withdraw and live isolated in their rooms without polluting the labor market. The environment is not friendly to hikikomori so it would make the deflationary bust worse as there is no sink for the excess labor which would drive down wages. Too bad the labor unions did not promote population control in poor countries that would be appealing for capitalists who want cheap labor.

I idolize George Soros and Stanley Druckenmiller though. George Soros is like a messiah to me. (Maybe I do not like hedge fund managers, just George Soros.)

M said at February 21, 2009 5:35 AM:

"do you think it is better to be a hikikomori receiving food from your parent's everyday"

Checked out this hikikomori crap you're constantly bleating about,what a load of bullshit.
This is not some high minded rejection of anything,it's just a collection of spoiled,arrogant,narcissistic,selfish,self absorbed parasites who have concluded that they're just so damned special that their parents and the whole f*****g world should cater to them.
Just because it's those really cool Japanese type people doing it doesn't make them any different from the basement dwelling losers in SoCal who yell up the stairs:
"I already took the trash out once this month,Mom,I'm not your slave or anything and did you remember my Hot Pockets?The right ones this time?You KNOW the pepperoni one's give me diarrhea!"
Cut off the Hot Pockets and and they'll come crawling out of the basement when they get hungry,scrounging for corn chips and bean dip.

"do people at McDonalds do anything particularly useful"
Extremely useful when you want a big mac.
And when their parents croak and society tells them to f*** off,you're beloved hikikomori will have to work somewhere.

HellKaiserRyo said at February 21, 2009 11:52 AM:

I do not think the Japanese people act like that though and they do not eat corn chips and bean dip. BTW, why do you dislike hikikomori? Do they harm anyone? I think they would commit more harm to society if they were in job market as they drive down wages to minimum wage as they would increase the supply of labor. They do not have children (which is not a problem, but the real problem is that the "productive" people in Japan do not have children too.)

Hikikomori might be "pathetic," but they rarely harm anyone as they not interacting with the world. How are they more pathetic than people working a dead end minimum wage job? They do not even talk to their parents at all; they are mostly dejected people. How do hikikomori conclude that they are "special" and that the "world should cater to them" when they want protection from that world.

Regarding entitlement, the Swedish welfare and hikikomori are not about an entitlement to prosperity, but protection from harm.

Here is a depiction of a hikikomori in a painting:

http://www.kendrascarlavai.com/detail%20hikikomori.html

Bob Badour said at February 21, 2009 1:27 PM:
they are mostly dejected people.

We hold these truths to be self-evident, that all men are NOT created equal, that some are endowed by their Creator with certain unalienable Rights, that among these are Life, Isolated Segregation and the pursuit of Dejection.


Um, I don't know for sure but I think the revolution might have been just a tad tougher sell with that headline.

Randall Parker said at February 21, 2009 1:43 PM:

HellKaiserRyo,

People who work contribute more than people who do not work. Also, as my grandmother used to say "Idle hands are the devil's workshop".

A large population of the permanently unemployed is a really bad idea.

As for idle Japanese people: The Japanese have such lower crime rates than whites that an idle Japanese guy in his 20s is probably a lower crime risk than a white working person of the same age and way lower crime risk than a black of the same age, working or not.

You can point to Sweden and Japan as models of how you would like the world to be. But they are not useful models because they are full of Swedes and Japanese.

HellKaiserRyo said at February 21, 2009 4:04 PM:

"We hold these truths to be self-evident, that all men are NOT created equal, that some are endowed by their Creator with certain unalienable Rights, that among these are Life, Isolated Segregation and the pursuit of Dejection"

I am sure Randall would agree with that statement that all men are not created equal. Didn't the founding fathers agree with the aforementioned statement when they advocated a "natural aristocracy." Regarding my own views, I do not think people have "rights" only preferences.

The hikikomori choose their lifestyle because they prefer a life without competition and they want protection. I do not see the benefit of putting them in the labor force. All they will do is increase the supply of labor which is not a good thing (as it would lower wages). It is unlikely that they have the capacity to accomplish something meaningful such as becoming a member of the National Academy of Science, computer programmers, private sector scientists who work in biotech or in the pharmaceutical industry, civil engineers, philosophers such as Peter Singer, or successful speculators and security analysts like George Soros and Stanley Druckenmiller, etc. They could do other productive things that require less skill, but unfortunately, those fields suffer from overcapacity and lowered wages so that does not seem to be a realistic solution either. (Another way Japan dealt with their deflationary environment is that they are able to export their overcapacity using the ZIRP which facilitated the carry trade and quantitative easing [I think the printed yen went to other economies so it did not stimulate domestic inflation] which made the yen weaker and made exports more attractive to other countries. I think the US deflationary bust would be even worse and prolonged like the Japanese bust as the US has massive overcapacity in the service and construction sector and unfortunately little capacity in the manufacturing sector [with overcapacity in manufacturing from abroad].) The hikikomori realize this and just want live out their lives in peace without much suffering (they do not crave “instant gratification” like the baby boomers though). Consider the hikikomori lifestyle a put option from the competition from the real world and the dark side of the free market. I do not think people who would become talented scientists and people going into the aforementioned fields would “exercise” the put. Relying on charity is like a put option too, but it has a lower “strike price” as it is more humiliating than simply being isolated like a hikikomori.


If you do not want people idle, just send them to so-called "labor market political activities":


"The headline unemployment rate in Sweden is only 5-5.5%, but this number is extremely misleading as it only includes a small number of the people who the government pays not to work. Many unemployed are sent to so-called "labor market political activities" who have no meaningful purpose then to reduce the headline unemployment number. Including them, unemployment is 8%."
http://stefanmikarlsson.blogspot.com/2005/11/does-sweden-defy-economic-logic.html

Or do what the Japanese do:

http://www.quirkyjapan.or.tv/useless.htm

Besides that, how are you going to convert those people to be productive?

I do not see how Randall would argue that overcapacity is not a problem as I think his intellect and intellectual honesty would preclude him from taking that side. (In the original post, he did acknowledge that the market precludes high wages for their type of labor and he proclaims it is the end of the "Old Model Auto Industry Union" because there are supply and demand side problems for that.) I wonder how he would deal with this issue. I proposed letting people live like hikikomori as one way to ameliorate this problem. [Maybe restricting the mobility of capital would be an attractive populist way to deal with this as I suggested that it would be impossible for the Republicans to gain political power unless they become anti-free trade and anti-immigration.] Hikikomori and restricting the mobility of capital would not solve the demand side problem as it only tackles the supply issue though. I do acknowledge that giving some people welfare will subsidize the act of having children, yet the hikikomori evade this problem. In my mind, more people means more poverty and competition.

One might ask how hikikomori is relevant to the original blog post, so I’ll say that UAW wasn’t threatened by overcapacity in the 50’s (there was no global competition and full employment.) I do not think full employment is possible anymore so we should just encourage some people to live hikikomori.

Bob Badour said at February 21, 2009 7:04 PM:
I do not think full employment is possible anymore

With all due respect, what you think is of no interest to most people, including me. What can you support with real evidence? What evidence do you have that the cohort of unemployed is perennially larger than the cohort of illegal aliens?

HellKaiserRyo said at February 21, 2009 7:56 PM:

I said there is massive overcapacity which would hinder full employment. Do you deny there is (or was) massive overcapacity in the world economy? Do you think full employment is possible with global wage arbitrage? I also implied in my previous entries that overcapacity is a world wide problem, not a domestic problem too.

Look at Mish's blog for evidence of overcapacity: he was one of the few people who predicted the deflationary shitstorm. He is also an Austrian economist which for a libertarian, I think you would respect his economic views.

http://globaleconomicanalysis.blogspot.com/2005/04/deflation-is-in-cards.html


For example:
"There is simply no pent up demand for housing, no growth in wages, and no way cash strapped consumers can service current debt loads. There is also no source of jobs that an overheated housing market created. There is no need for more Home Depots, Lowes, Pizza Huts, Applebees, nail salons, strip malls, Walmarts, etc etc. In fact there is a need for less stores not more and the coming consumer led recession will prove it. Overcapacity is simply rampant. It would take even more miracles to correct all of that."

http://globaleconomicanalysis.blogspot.com/2007/08/will-rate-cuts-save-economy.html

So what are those people working in Pizza Huts, Applebees, etc. are going to do during the deflationary bust? Where are they going to be employed? Do you have any miracles you could invoke so they could be employed? And I am going to say what we all know: Obama's stimulus package(s) will not work.

Randall Parker said at February 22, 2009 11:41 AM:

HKR,

I think (and correct me if I'm wrong) you are misinterpreting the significance of the excess capital supply. You seem to be saying there's a permanent surplus of labor. Is that right? You want to embrace a welfare state for this surplus.

Since you are on the Left you probably haven't read Murray Rothbard's The Great Depression and other works of a more free market leaning on what caused it. The problem wasn't really excess supply of labor. That became a symptom of the Depression. But it was not a cause.

To reduce this to a nutshell: Capital misallocation and a capital assets bubble will cause a massive correction like we are seeing now where aggregate demand drops in a big way. That'll cause a big rise in unemployment. But the root problem is the capital misallocation. An economic downturn caused by a capital bubble is longer lasting than an economic downturn caused by central bank tightening in response to inflation.

How to fix this? Part of the solution is to convert debt into equity. Debt holders have got to become asset owners and replace the existing asset owners. This cuts the burden of excess debt. Also, wages have to drop to levels that increase demand for labor.

A capital asset bubble damages financial institutions. It also leads to a huge drop in demand for capital. Whereas too much capital gets created during the bubble the surplus of capital means demand for capital equipment plummets. Steel demand has dropped enormously for example. We need to avoid asset bubbles since the corrections are so painful.

HellKaiserRyo said at February 22, 2009 1:04 PM:

Randall,

I do not see how you could disagree with the argument that there is an excess supply of labor. Think about it on a global perspective. If you deny that there is an excess supply of labor, then show me evidence that global wage arbitrage isn't happening or never happened. It would falsify my position about a permenent "reserve army of labour" to put in a Marxist context. You also claim it is the end of the Old Auto Industry Union Model. Do you agree with the assertion that one reason for this is the excess supply of labor and capital? Remember that these industries were protected from an excess capital in 50s. And regarding the reducing the supply of labor, I did implicit state the welfare state is not enough; I suggested that global population control is one way of dealing with it along with encourging plenty of people to become hikikomori and putting some people in "labor market political activities". In other words, I want ways to supress the supply of labor.

On other posts, you also argue that immigration (which is an increase in the supply of domestic labor) decreases the wages of domestic workers and if I remember correctly, criticize David Card.

Most sectors suffer from overcapacity domestically or abroad. The only sectors I could think of as an exception are the health and energy sectors. I didn't argue there wasn't a misallocation of capital as that was one reason for this deflationary bust and I most certainly do not deny the importance of the housing and finance bubble as that misallocted human capital by having too many people in construction builiding McMansions and highly intelligent people in finance instead of being scientists, engineers, doctors, etc. I also quoted Mish:

"There is simply no pent up demand for housing, no growth in wages, and no way cash strapped consumers can service current debt loads. There is also no source of jobs that an overheated housing market created. There is no need for more Home Depots, Lowes, Pizza Huts, Applebees, nail salons, strip malls, Walmarts, etc etc. In fact there is a need for less stores not more and the coming consumer led recession will prove it. Overcapacity is simply rampant. It would take even more miracles to correct all of that."

So how did I not acknowledge that there was a misallocation of capital too?

Randall, if capital was "properly" allocated, how will full employment will be achieved? Will people get a nice retirement and health benefits? What would happen if there wasn't a housing bubble and stock bubble? Of course, it seems likely the world would be a better place economically now. Maybe people would find out that they weren't benefiting from the "Reagan Revolution," sooner instead of later, which caused a drop in most people's real wages (from declining unions and wage arbitrage) and vastly benefited the top people in society. Yes, the credit bubble and inflated asset prices hide the detrimental effects of that.

"The fact is our day of reckoning is upon us. We will soon realize that our massive debt and an outsized credit bubble have not only saddled us with debt, but it has also misallocated capital so that we are less productive than we believed. We have built miles and miles of telecom dark fibre when we could have invested in schools. We have built massive numbers of new homes, when we could have repaired our bridges and roads. The last 35 years have been an illusion of extreme productivity and wealth because we have artificially pulled forward demand by misallocating resources in order to consume today, what could have been consumed tomorrow. In essence, we are consuming today, while unwittingly making it more difficult to consume tomorrow because we believe we are wealthier than we truly are.

And as for fairness, Real Weekly Earnings peaked over 35 years ago in September 1972! Using the CPI to adjust wages to today’s dollars, the average worker made $738.48 per week in September 1972. In January 2008, that figure was $598.18.

(Note: these figures are expressed in Jan 2008 dollars. I use the CPI Index to calculate real dollars, which is based on 1982-1984 dollars. But, I then multiply this figure by 2.1108, which represents the BLS’s index factor for Jan 2008).

So, we are getting poorer. And we have been for over 35 years. Only during the end of the Clinton Administration was there an appreciable upswing in real weekly wages over this time period. Don’t believe me? See the raw data yourself, here and run the numbers.

In the meantime, CEOs are earning hundreds of millions of dollars, even when they are forced to leave because of poor management which cost their firms billions. In 2005, the average CEO earned 262 times what an average worker gets. In 1965, that figure was 24 times (see story).

Conclusions
There it is: the U.S. ruling class is not living up to its role in either efficiency or fairness. We are getting poorer.

That is why people are so angry. That is why the poll numbers for the President and Congress are so low. And that is why so many people are suffering from the housing bubble.

The question you should ask yourself is this: Why has it taken the citizens of the U.S. so long to figure all this out? Answer: Even though the gulf between rich and poor was widening and the rich were getting richer, we thought we too were getting richer as well. We thought that we too were profiting from all of this “productivity.” In the 1980s, we came out of a steep double dip recession and stagflation and we won the cold war. This inflated our sense of well-being. In the 1990s, there was the tech bubble to inflate our assets. In this decade, there was the housing bubble. So, we thought we were getting rich too. We didn’t mind that the ruling class was benefiting disproportionately as long as we too appeared to be benefiting.

But, what was really happening is we were loading up on debt. We were not benefiting at all

And now that there are no more cold wars we can win quickly, no more tech stocks, no more double digit house price increases, and no more asset bubbles to hide the naked truth — now we realize that we were getting poorer all the time — just as it felt to us. The ruling class have used the four methods to maintain popular support that I enumerated before in order to give the appearance of equity and efficiency. All the while, the rich were milking the system for all they could."

http://www.creditwritedowns.com/2008/03/populist-interpretation-of-latest-boom.html

Bob Badour said at February 22, 2009 4:17 PM:
I do not see how you could disagree with the argument that there is an excess supply of labor. Think about it on a global perspective. If you deny that there is an excess supply of labor, then show me evidence that global wage arbitrage isn't happening or never happened.

I don't know about Randall, but I disagree. Global wage arbitrage requires international capital and labour mobility. Ricardo identified international capital and labour immobility as requirements for free trade as far back as 1821 and probably as far back as 1817.

Your recommendations and beliefs about economics and politics would be better and more effective if you were better informed about the fundamentals and history of same.

Bob Badour said at February 22, 2009 4:30 PM:
how will full employment will be achieved?

My question is: Why would anyone want to achieve full employment? Sustained employment above the natural friction in the market requires inflation. We tried that and didn't enjoy it. Sustained employment below the natural friction in the market causes deflation. We tried that a long time ago and forgot we didn't enjoy it so now we get to try it out again.


Why has it taken the citizens of the U.S. so long to figure all this out?

That's easy: The median IQ is only 100 and the median IQ of some significant groups in America is as low as 85.

HellKaiserRyo said at February 22, 2009 4:36 PM:

So capital was immobile in the 1990s and 2000s? Companies cannot relocate to a lower cost country? Are people such as George Soros are hindered by capital controls to prevent them from engaging in currency speculation? I guess all those threats to outsource were empty then since you think there is little international capital mobility.

Immigration is another example of wage arbitrage too. I suppose not having a border increase labor mobility.

Show me some information so I could be better informed about the alleged immobility of capital and absense of wage arbitrage in the era of globalization.

Bob Badour said at February 22, 2009 4:38 PM:

P.S. Time and empirical evidence have confirmed the legitimacy of Ricardo's economic theories. Time and empirical evidence have proved the illegitimacy of Marx's political religion even though Ricardo's most famous work was published a year before that monstrous idiot Marx was even born. Ignorance is no excuse.

Bob Badour said at February 22, 2009 4:56 PM:
So capital was immobile in the 1990s and 2000s?

What an absurd question. What are you? A fucking idiot?


Show me some information so I could be better informed about the alleged immobility of capital and absense of wage arbitrage in the era of globalization.

Show me where anyone suggested anything so absurd. And learn to read.

HellKaiserRyo said at February 22, 2009 5:06 PM:

Apparently you do not read your links:

"Free mobility of capital in a globalized world
Ricardo explicitly bases his argument on an assumed immobility of capital:

" ... if capital freely flowed towards those countries where it could be most profitably employed, there could be no difference in the rate of profit, and no other difference in the real or labour price of commodities, than the additional quantity of labour required to convey them to the various markets where they were to be sold."[2]

He even explains why from his point of view (anno 1817) this is a reasonable assumption:

"Experience, however, shows, that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connexions, and entrust himself with all his habits fixed, to a strange government and new laws, checks the emigration of capital."[2]

In the 21st century however, capital is much more free to move internationally than Ricardo could possibly have imagined. An indication of that is "the fact that about one third of the $6.1 trillion total for world trade in goods and services in 1995 was trade within companies — for example between subsidiaries in different countries or between a subsidiary and its headquarters" and a further reduction of barriers against transnational investments is actively pursued by the WTO [3].

Consequently, Ricardo's original idea in its pure form does not apply to the modern world and neither do more modern versions of models for international trade that are based on the idea of comparative advantage, like the Heckscher-Ohlin model. "International trade (governed by comparative advantage) becomes, with the introduction of free capital mobility, interregional trade (governed by Absolute advantage)."[4]

This limit of applicability has been prominently voiced by renowned economist Herman Daly."

All you could do is assert that Ricardo is correct. So where is the "empirical evidence" you have that one of Ricardo's assumptions, the immobility of capital is valid?

And what information do you have about global wage arbitrage? What mistaken claims I made about it?

Randall Parker said at February 22, 2009 5:45 PM:

HellKaiserRyo,

It would be easier when you quote someone else that you use the blockquote tag.

Excess supply of labor: There is a price at which the demand for labor and the supply of labor will meet. Granted, that price may be lower than you want it to be. My dispute is with the term "excess supply". There's certainly an excess supply of some types of capital. But not for all types.

Also, the asset bubble caused a misallocation of labor. There's no way to painlessly reallocate it. People need to start up and expand new kinds of businesses in areas that would have been funded already if the capital misallocation hadn't occurred.

But you seem to advocate a permanent leisure class of people too dumb to work. Is that your position? I have a few problems with it. First off, if you pay people to sit on their butts that will slow the reallocation. Second, I pay enough taxes as things stand without paying for a permanent welfare state leisure class. Third, I think it is bad for the idle to be idle. Plus, there's the whole "idle hands are the devil's workshop" problem.

That more Asians are integrated into the world economy does not mean there is a global surplus of labor. It does lower the demand for manual labor in the US so that the price point where demand and supply equals is lower than it used to be. But that's not an argument for paying American manual laborers to sit at home. Manual laborers in India make far less and yet they work.

Bob,

The median IQ of America is below 100. I think its 97.

Bob Badour said at February 22, 2009 5:54 PM:
Apparently you do not read your links:

"Free mobility of capital in a globalized world
Ricardo explicitly bases his argument on an assumed immobility of capital

Exactly how does that contradict what I wrote? Learn to read.


So where is the "empirical evidence" you have that one of Ricardo's assumptions, the immobility of capital is valid?

Nearly 2 centuries showed that, when capital and labour remain within countries without moving among countries, free trade can employ labour throughout the world to the betterment of all. Keep in mind that is capital not money. Ricardo's theory predicts, as long as capital and labour remain inside international borders, free trade will allocate global resources to the benefit of all and, when capital and labour cross borders, the price of labour will decline relative to the price at retail. Your own statistics confirm his theory.

We face the current crisis we face precisely because both capital and labour have been allowed to move freely across borders. China has waged economic warfare against the US by manipulating prices such that capital has fled the US for China in a stunningly massive way while at the same time causing an inflationary expansion of US money supply. Unbridled immigration of unskilled workers has driven down the real minimum wage.

We have misallocation of labour and capital due to capital and labour mobility. Capital in the US has been idled due to asset price inflation. Labour in the US has been idled due to immigration. Productivity and innovation have been stifled in major sectors of the economy.

HellKaiserRyo said at February 22, 2009 6:49 PM:

"We face the current crisis we face precisely because both capital and labour have been allowed to move freely across borders. China has waged economic warfare against the US by manipulating prices such that capital has fled the US for China in a stunningly massive way while at the same time causing an inflationary expansion of US money supply. Unbridled immigration of unskilled workers has driven down the real minimum wage.

We have misallocation of labour and capital due to capital and labour mobility. Capital in the US has been idled due to asset price inflation. Labour in the US has been idled due to immigration. Productivity and innovation have been stifled in major sectors of the economy."

I do not argue with anything you say there. I think we would agree.

Randall,

I still like the hikikomori proposition. I do not see how putting plenty of unskilled people in the labor force is really a good idea (you would agree with me if you frame this around immigration as this is one effect of immigration). It does not seem to promote any productive endeavor or increase general welfare. Why is it a bad idea to try measures to choke off the supply? To the contrary, allowing these people to work would cause more suffering. Just sequester them and encourage incentives for them not to reproduce (which would cause a lot more problems) as this happened for the Japanese hikikomori. I refuse to think of the hikikomori as a "leisure class," they do not seek leisure, but merely protection from the real world. I likened it to a put option in a previous entry.

Bob Badour said at February 22, 2009 7:03 PM:
I refuse to think of the hikikomori as a "leisure class," they do not seek leisure

Why then does the painting of the hikikomori you posted a link to previously show the individual engaged in a leisure activity? (Playing a video game.)

Bob Badour said at February 22, 2009 7:15 PM:

And why is he surrounded by the detritus and accoutrements of modern leisure: junk food wrappers, stereo etc. ??

When I looked at that painting, I almost wrote a sarcastic reply about how I could now see the difference: instead of hot pockets it would be tekka maki and instead of pepperoni it would be herring roe.

HellKaiserRyo said at February 24, 2009 12:10 AM:

I still like the hikikomori idea. Let's say that we all agree that hikikomori are pathetic and that guy in his room playing video games is pathetic.

My main point is that being a hikikomori isn't so bad compared to other possible outcomes.

"Hikikomori might be "pathetic," but they rarely harm anyone as they not interacting with the world. How are they more pathetic than people working a dead end minimum wage job?"

do you think it is better to be a hikikomori receiving food from your parent's everyday or getting laid off and getting it from a food bank? What do you think is more humiliating? I really do not see what is bad about hikikomori (from a relative point of view) as it is better than being poor in an undeveloped country or in a developed country without a European like-welfare state.

Those people do not harm anyone when they choose to be isolated. (I think they do the world more harm if they were in the labor force.) And I really do not regard them as a leisure class. When I think of leisure class, I think people engaging in conspicious consumption.

Bob Badour said at February 24, 2009 6:11 AM:

Fast-food, stereos and video games are not conspicuous consumption?!? Since when?

I completely disagree about them in the labour market. We would be much better off if they were actively innovating, producing or selling.

And as a "solution" it doesn't translate in any case. As Randall has already mentioned, the problem with looking to Japan for solutions to social problems is Japan is filled with Japanese. The Japanese are significantly different in temperament and attitude from most populations of the world.

Randall Parker said at February 24, 2009 9:36 AM:

HKR,

Then if you like the hikikomori idea that much you better start working on virus bioengineered to turn America's dumbest people into Japanese. But even if you do that you still face a problem: Lots of hikikomori live off their parents. But the parents of our non-workers tend themselves to also either not work or not make enough money to support their adult sons.

Of course, their adult daughters are making babies out of wedlock. Hikikomori babies?

You have an active fantasy life.

JHan said at June 27, 2011 9:12 AM:

Stopping production for the old models, the classical ones, would probably disappoint many people! Those already very well known cars have become the passion of many people, and stopping production will make it very hard for them to find new spare parts for their cars. I recently found a perfectly working class B motorhome for sale, which I'm sure it won't give me any trouble in the next years, but what will I do in 10 yrs? Where will I get good and, of course, new spare parts, if the production will be stopped?


Post a comment
Comments:
Name (not anon or anonymous):
Email Address:
URL:
Remember info?

      
 
Web parapundit.com
Go Read More Posts On ParaPundit
Site Traffic Info
The contents of this site are copyright ©