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2012 September 15 Saturday
Median Household Income In USA Still In Decline

Median household income has declined in 9 out of the last 12 years. Are you old enough to remember when living standards went up every year for the vast majority of Americans? Not any more. Median income in America peaked in 1998 and now we are partying like its 1995.

Median annual household income—the figure at which half are above and half below—now stands 8.9% below its all-time peak of $54,932 in 1999, at the end of the 1990s economic expansion.

Yes friends, no progress in 17 years. Even the 90th and 95th percentiles are below peak. A little poorer than last year.

The U.S. Census Bureau announced today that in 2011, median household income declined, the poverty rate was not statistically different from the previous year and the percentage of people without health insurance coverage decreased.

Real median household income in the United States in 2011 was $50,054, a 1.5 percent decline from the 2010 median and the second consecutive annual drop.

The nation's official poverty rate in 2011 was 15.0 percent, with 46.2 million people in poverty. After three consecutive years of increases, neither the poverty rate nor the number of people in poverty were statistically different from the 2010 estimates.

I've made this point before, but it bears repeating: try harder. If you want to avoid the decline you've got to move up. I am currently working harder than I ever have. So I'm following my own advice on this.

Note that the peak in 1999 was higher than the peak in 2007.

  • Median family household income declined by 1.7 percent in real terms between 2010 and 2011 to $62,273. The change in the median income of nonfamily households was not statistically significant.
  • In 2011, real median household income was 8.1 percent lower than in 2007, the year before the most recent recession, and was 8.9 percent lower than the median household income peak that occurred in 1999. The two percentages are not statistically different from one another.

You might wonder why. Obvious causes: 1) Outsourcing. Billionaires don't need your labor when they can buy cheaper labor elsewhere; 2) Immigration. More labor. Plus, the labor is lower skilled and therefore earns less; 3) Oil field depletion and other natural resource depletions; 4) Rising Asian demand for the remaining depleting resources.

What's amazing to me: these causes of stagnant living standards have swamped 17 years of technological progress. What's scary to me: These causes will get worse in their effects and yet these problems are not part of the mainstream political debate. Plus, we aren't getting as many fundamental discoveries that enable new industries as we used to. Name a discovery as economically enabling as the laser or the semiconductor that came after 1960. I can not think of one. We seem to be on a course of declining economic growth rate.

Share |      By Randall Parker at 2012 September 15 08:17 AM  Economics Living Standards


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Comments
Jason said at September 15, 2012 3:32 PM:

OK, but this is MEDIAN income, not average income. Average income is up I assume, so that means that while you have as many making above/below a certain point as you did 17 years ago, you probably have people in the bottom half making less, and people in the upper half making more. Given that we have millions more low skill, low ability Mestizo immigrants, that makes sense. It may also mean that the AVERAGE White college educated person is doing better than they were 17 years ago. Is that correct? I am just trying to think this through.

It looks like we are seeing more a bifurcation of society, which is what you would expect, demographically (growing permanent underclass). But if you are White, go to college, get a real degree, perhaps your situation has improved over the last 17 years? I say this as someone who believes in the long term decline of the US, yet I see a whole lotta BMWs out there!

Randall Parker said at September 15, 2012 7:33 PM:

Jason, click thru on the link where I mentioned about stagnant income at the 90th and 95th percentiles. Of course, as the lower levels grow the former 90th are now the 91st maybe.

I'd like to see the sort of analysis which breaks things out by race and educational attainment. How are white STEM majors doing for example?

But I expect the lower levels to become more parasitic on the upper levels. That's what Obama's health care program is all about. So even if the more cognitively able are rising in productivity more of their product is getting diverted. That's also true due to the aging of the population.

DirkY said at September 16, 2012 11:28 AM:

Census data is quite detailed if you use the data table generation features on their website.

For example, my neighborhood is about 88% white 12% Hispanic. Homeowners in my neighborhood however are 98% white and homeowners without mortgages are 100% white.

I'm sure you can find if you dig around the change in median non Hispanic white income. I would guess it went down but not by as much.

Also, household size is declining so this is another reason household income is falling. A household is a residence with at least 2 people related by blood or marriage.

Ronnie Mac said at September 16, 2012 12:46 PM:

Randall wrote: "But I expect the lower levels to become more parasitic on the upper levels."

You got it backwards big time. How can the lower levels become parasitic on the upper levels? You are some kind of a rich corporation psychophant, aren't you. What kind or a rich owner o politician's ass do you have to kiss?

You're really not funny you know. No matter how much you try.

Mike M said at September 17, 2012 9:45 AM:

Ronnie Mac - Are you a useful idiot for the Marxists or one of those parasitic slackers that wants more than he produces and how far up Obama's ass are your lips?

It's the entitlement minded morons such as you and the politicians on the left who buy their votes with even more benefits who have brought our economy down. There's only so much excess wealth that the productive classes can produce and donate via our tax system to those like you who feel they are entitled to a bevy of benefits before the producers themselves either run out of money or give up. The wealth of a nation depends not on how much money the government redistributes to you slackers who are unwilling to work. It depends on how much is produced and saved by those of us willing to work. Your kind consumes and destroys wealth. The rest of us create it.

PS You're not very funny either. You're just pathetic.

Mike M said at September 17, 2012 10:17 AM:

Randall - Your reasons for the decline in national incomes are flawed. Outsourcing actually increases our wealth. Each nation produces what it has a comparative advantage at producing. Because foreign nations have a comparative advantage at producing the goods or services that we outsource to them, i.e. they can produce them at a lower cost that we can, we can produce other goods or services where we have a comparative advantage. It makes no sense for American workers - who should have more education and skills than third world peoples - to sew garments when they can be engaged in higher paying tasks. Similarly, it makes no sense for you or I to hire (via American companies who produce domestically) someone to sew our clothes for $20/hour when we can pay someone else (via the outsourcing companies) to do the same task for $2/hour. The same argument goes for unskilled immigrant labor, i.e. I really don't care if the unskilled foreign born worker is in the US or his native country, the comparative advantage principal still holds. As far as natural resources go, commodities are essentially all global. The real problem is government interference with the development and utilization not only of our current natural resources, but of untapped natural resources and other sources of energy.

What, then, is causing the decline in national income? The problem becomes obvious if we examine production possibility frontier (PPF) curves. I'll explain briefly. When people their goods or services for cash, they have essentially two options for their profits. They can either consume them, i.e. buy other goods or services that they will consume, or they can save and invest the profits in things (tools, factories, etc.) that will enable them to produce even more goods and services with the same human resources as they previously had, i.e. things that will allow them to become more productive, or in language more to the point, to produce more wealth. Now, when the government enters the picture and takes from them what could have been invested in more tools or factories or even employees and gives that money to other people who use that money for personal consumption rather than investing it in means of production, we have a situation where, as a nation, we are transferring money from production to consumption, i.e. instead of having more means of producing wealth, we have less. With an expanding population, it's no wonder than per capita and per household incomes are down?

Mercer said at September 17, 2012 5:58 PM:

" when the government enters the picture and takes from them what could have been invested in more tools or factories "

Lots of big companies have plenty of money to invest. They prefer to invest their money in China. If US government intervention is the main thing stopping companies from investing in the US why are they investing in communist China? I think the main government intervention hurting growth in the US is China keeping its currency low against the dollar.

Randall I would add one item to your list of causes for stagnant income - rising medical expenses. The incomes of people in the medical industry are not stagnant.

CameCaseRob said at September 18, 2012 6:51 AM:

"Each nation produces what it has a comparative advantage at producing." What about the many nations that have no comparative advantage at producing anything? And just what are these higher paying tasks that Americans are going to perform when manufacturing jobs go overseas?

Mike M said at September 18, 2012 8:38 AM:

MERCER asks why US companies are investing in "communist" China. Wise up, Hondo! These companies invest where there is the most opportunity for it to grow. Over the past several decades, the trend has been that China has become less communist and more free market. On the other hand, the markets in the US have become less free and our government has favored socialist style policies. When it comes to small businesses (the ones too small to conduct operations in China), the ones that hire the vast majority of Americans, the situation is quite clear - government taxation has taken money that they could have used to grow and handed it over for slackers to consume and, under an Obama administration, they recognize that this will continue. Therefore, even if they had the ability to expand, they have no incentive to place their capital at undue risk. Perhaps if you had the gumption to start your own business you would understand.

It's also evident by your comment about rising medical expenses that you favor a communist type system where government sets prices. In a free market, prices of goods and services - including medical services - are allowed to rise or fall based on supply and demand rather than on the government price controls implied in your statement. The price of medical services goes up when people demand more of it relative to its supply. Of course, prices also go up when government interferes with the market and subsidizes these services - which is what you folks on the left started back in LBJ's Great Society days and have been champions of for decades....and now you complain that the price distortions created by interventions you favored are a problem! But, I digress. But when prices go up, more suppliers of medical services enter the field and this competition brings the prices back down - that is, unless government interferes and subsidizes the high prices - which is what it has done for decades and why prices are "high". But in your world, I guess we would place caps on anybody that charges what you deem to be a high price because that's causing your income to be stagnant. You must be a teacher or some other government employee.

The real irony is that you complain about rising medical prices, but you appear completely obtuse to what would happen to prices of other goods if the US companies that produce them were told that they couldn't outsource certain jobs to China and were instead forced to pay higher labor costs here in the US. Wake up and small the coffee, Slick! They would either have to raise their prices or close up shop.

CAMECASEROB asks "what about the many nations that have no comparative advantage at producing anything?" Seriously? Did you really ask that?

A person has a comparative advantage at producing something if he can produce it at lower cost than anyone else.

Having a comparative advantage is not the same as being the best at something. In fact, someone can be completely unskilled at doing something, yet still have a comparative advantage at doing it! How can that happen?

First, let's get some more vocabulary. Someone who is the best at doing something is said to have an absolute advantage. Lance Armstrong has an absolute advantage at cycling. For all I know, Lance Armstrong may also be the fastest typist in the world, giving him an absolute advantage at typing, too. Since he's better at typing than you, can't he type more cheaply than you? That is, if someone has an absolute advantage in something, doesn't he automatically have a comparative advantage in it?

The answer is no! If Lance takes time out from cycling to do all his own typing, he sacrifices the large income he earns from entertaining fans of the Tour de France. If, instead, his secretary does the typing, the secretary gives up an alternative secretarial job—or perhaps a much lower salary as a cyclist. That is, the secretary is the lower-cost typist. The secretary, not Lance Armstrong, has the comparative advantage at typing! The trick to understanding comparative advantage is in the phrase "lower cost." What it costs someone to produce something is the opportunity cost—the value of what is given up. Someone may have an absolute advantage at producing every single thing, but he has a comparative advantage at many fewer things, and probably only one or two things. (In Lance's case, both cycling and also as the entrepreneur behind the yellow LiveStrong wristband.)

Amazingly, everyone always has a comparative advantage at something. Let's look at another example. Suppose you and your roommate want to clean the house and cook a magnificent Chicken Kiev dinner for your friends one night. The easy case is when you are each better at one activity. If you are an accomplished chef, while your roommate doesn't know the range from the oven; and if after you vacuum the carpet the dust bunnies have shifted from under the sofa to under the coffee table, while your roommate can vacuum, dust, and polish the silverware faster than you can unwrap the vacuum-cleaner cord, then you and your roommate will each be better off if you cook and your roommate cleans. It's easy to see that you each have a comparative advantage in one activity because you each have an absolute advantage in one activity.

But what if your roommate is a veritable Martha Stewart, able to cook and clean faster and better than you? How can you earn your keep toward this joint dinner? The answer is to look not at her absolute advantage, but at your opportunity costs. If her ability to cook is much greater than yours but her ability to clean is only a little better than yours, then you will both be better off if she cooks while you clean. That is, if you are the less expensive cleaner, you should clean. Even though she has an absolute advantage at everything, you still each have different comparative advantages.

The moral is this: To find people's comparative advantages, do not compare their absolute advantages. Compare their opportunity costs.

The magic of comparative advantage is that everyone has a comparative advantage at producing something. The upshot is quite extraordinary: Everyone stands to gain from trade. Even those who are disadvantaged at every task still have something valuable to offer. Those who have natural or learned absolute advantages can do even better for themselves by focusing on those skills and buying other goods and services from those who produce them at comparatively low cost. (Even more surprising is that the absolutely disadvantaged may gain more from the resulting trade than the absolutely advantaged; but that's a different topic.)

To produce the wine in Portugal, might require only the labour of 80 men for one year, and to produce the cloth in the same country, might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth. This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England. Though she could make the cloth with the labour of 90 men, she would import it from a country where it required the labour of 100 men to produce it, because it would be advantageous to her rather to employ her capital in the production of wine, for which she would obtain more cloth from England, than she could produce by diverting a portion of her capital from the cultivation of vines to the manufacture of cloth.

Mercer said at September 18, 2012 11:17 AM:

"China has become less communist and more free market"

China still has a government that intervenes much more in the economy than the US.

"more suppliers of medical services enter the field and this competition brings the prices back down"

This does not happen because entry is very restricted. It is not people on the left who are restricting supply. It is doctors and others in the medical field.

Mike M writes several paragraphs about comparative advantage but says nothing about when a country spends hundreds of billions of dollars a year to keep their currency low. He is enthralled with theory and ignores the reality of our trade with China.

Mike M said at September 18, 2012 12:34 PM:

MERCER -

Do you even have a clue what the word "trend" means? The FACT is that while the US may be freer in ABSOLUTE terms, the trend is that China's economy is becoming more free market and less state controlled while the opposite is true of the US. Major corporations building factories don't look at today, they look at trends and anticipate the future. You would know this if you ran a business.

Entry into SOME parts of the medical field is restricted, i.e. the GOVERNMENT says who can and who cannot practice medicine, operate a hospital, sell pharmaceuticals, etc. The GOVERNMENT also restricts competition by requiring hospitals to obtain a "Certificate of Need" so that services in a geographic area are not duplicated, i.e. they guarantee a monopoly for the first guy there. And yes, it's the left wing, government-knows-best types who are doing that. If we take into account the great number of advances that have occurred in the medical field and adjust prices so that we are comparing apples to apples, the biggest cause of the rise in prices form medical care during the past 50 years has been government subsidies and regulations in the form of (a) Medicare, and (b) removing the direct economic link between the patient and the doctor, i.e. the economic link is between the doctor and the patient's employer and the patient has become a third party with less interest in how much care he is getting versus how much money he is paying. These are all LEFT wing policies. OK, the Medicare Part D drug program was a George Bush socialized medicine disaster, but my point stands in regards to the fact that it is GOVERNMENT interventions that have been the greatest factor in the rise of prices if we discount the fact that when you have a particular problem today, you get treatment X as opposed to treatment Y that you would have received 50 years ago.

In regards to China's "manipulation" of it's currency, I have made numerous posts on this forum over he years regarding my feelings on China's freedom to do whatever it wishes with its currency. Indeed, you have read them and disagreed with them! To reiterate: (1) China is a sovereign nation. It has the right to do whatever it wishes with its currency. As an aside, it looks like it's been doing a better job with its economy than we have with ours. (2) If the Chinese want to manipulate their currency such that its citizens sell their goods to me at a discounted rate, I'm happy to take advantage of the opportunity. Perhaps you would rather they make the cost of Chinese goods higher rather than lower because smart folks like you would rather pay $30 for a t-shirt or $1200 for an iPhone. Or perhaps your one of those folks too stupid or too lazy to compete on a global scale. Too bad, Ace, globalization is here to stay! The reality of our trade with China is that they are selling us goods for $20 that if produced in the US (because of trade sanctions placed on China) would cost us $100. This is a great deal - unless, of course, you're an unskilled, non-motivated slacker in the US who refuses to adapt and instead moans and bitches that all his problems are someone else's fault. Life's dynamic, Sport - get with the program and learn to adapt.

Mercer said at September 18, 2012 1:07 PM:

"And yes, it's the left wing, government-knows-best types who are doing that. "

What evidence do have that doctors, drug companies, pharmacists, etc are left wingers?

" It has the right to do whatever it wishes with its currency. "

It does. We have the right to respond but we don't because people think if would be an offense against "comparative advantage" theology. When one country continues to devalue its currency talk of comparative advantage is ignoring reality.

Mike M said at September 18, 2012 3:33 PM:

Sure, we have the right to respond.....just like we did in 1930 with the Smoot-Harley Act. Now, that turned out really well, didn't it?
You didn't pay attention in history class, did you, Einstein?

I guess you didn't pay much attention in English class either or you would realize that the pronoun "who" refers back to the government particularly since it is the government - and not the private folks you mention - that regulates these activities.

"Those who cannot remember the past are condemned to repeat it"
George Santayana

Mercer said at September 18, 2012 4:38 PM:

"You didn't pay attention in history class"

Tariffs did not start in 1930. According to wikipedia they averaged 15 percent in 1792 compared to 1.3 today. In the 1860s:

"The Morrill Tariff as a major source of customs revenue was revised upward twice more between 1861 and 1862. With the low-tariff southerners gone, the Republican-controlled Congress doubled and tripled the rates on imported European goods, which topped out at 49 percent in 1868"

http://en.wikipedia.org/wiki/Tariffs_in_United_States_history#Civil_War_protective_policy.2C_1861-1913

They stayed high for decades. This was the policy under which the US became the wealthiest economy in the world. You are the one ignorant of economic history. You should read actual history instead of theories that have nothing to do with the actual policies of successful economies.

Randall Parker said at September 18, 2012 8:24 PM:

Mike M,

After WWII the US economy grew like a bat out of hell for decades in spite of very high marginal tax rates and regulatory agencies (CAB, ICC, etc) that controlled prices and entry and exit in many industries. I grant you that these agencies and taxes slowed growth. Yet with much lower marginal tax rates and fewer agencies controlling market entry and exit we no longer have economic growth. Why? We had high population growth then too. We also had far more extensive unionization with all the costs in lower efficiency that entailed.

Marginal advantage: What happens when economics becomes more of a zero-sum game? We help China develop with free trade and investment. Then what happens? Their demand for raw materials skyrockets. We pay more for oil and minerals. The rate of depletion of forests and fisheries accelerates.

In theory the rate of innovation ought to have accelerated as more people work as engineers, scientists, and software developers worldwide. The incentives for innovation are larger. The markets are larger. Those effects should have swamped what you see as the negative effects of US government policies. But no. Other things have changed. Resource depletion and a lack of newly discovered physical laws are two biggies.

I do not begrudge the Chinese their economic development. But comparative advantage ignores resource depletion and intellectual property theft.

Randall Parker said at September 18, 2012 8:38 PM:

Tariffs were also much higher in the 1940s, 50s, 60s. That was a time of rising living standards, so unlike today.

Higher tariffs would cause less economic damage today because so much design information can flow across borders instantly. I'm not advocating a return to high tariffs. But why aren't low tariffs causing soaring living standards? Something else has changed.

I think a few big changes account for stagnant living standards:

- Resource depletion. A substantial chunk of our innovation and investment has to go toward compensating for resource depletion.

- We've searched the design space and harvested most of the easy discoveries and innovations. What's left is harder to find and harder to use.

- The rise of the dummies. Smarties aren't having enough kids.

Mike M said at September 18, 2012 10:15 PM:

Hi Randall - I'll address a few of your comments and questions now and others later (I have a meeting in the AM that I'm prepping for).

"Marginal advantage: What happens when economics becomes more of a zero-sum game? We help China develop with free trade and investment. Then what happens? Their demand for raw materials skyrockets. We pay more for oil and minerals. The rate of depletion of forests and fisheries accelerates."

While I understand the knee jerk reaction of many in wanting to blame the Chinese for our difficulties in dealing with a new global competitor, that would be the same as white athletes saying, "Gee, we let these black guys in the league and now they take our jobs and get more of the salary dollars." The answer not to blame the black players for being good or earning higher salaries, but to either get better at the sport or find a new line of work. The benefits (in terms of the entertainment we enjoy) is better because the black athletes have consumed the raw materials (high school and college sports programs, etc.) and developed as players. They also use up more of the salary dollars. Should we tell the Chinese they have no right to use timber or eat fish? If so, maybe the white athletes should tell the black players they should play for less as the dollars are reserved for the white guys.

I'm not sure you're living in the same world that I am - are you here in the US or in some rain forrest? Innovation hasn't slowed down. But I'm not sure of your point in regards to the original discussion of household incomes. with due respect, it seems like you're focused on depletion of natural resources. Please read some of Julian Simon's work on this topic. Resource depletion actually encourages innovation. I assume you'll be able to connect the dots.

I think you have missed the concept of comparative advantage.

As far as the rise of the dummies (which is largely due to de facto government policies that support and encourage uneducated people to have more kids than they can independently support), I agree.

Reading your last post (and putting it together with the previous ones), I think I've picked up a recognizable pattern - you've been reading Tyler Cowen's The Great Stagnation. Probably the most debated book of the last few years.

bbartlog said at September 19, 2012 9:27 AM:

High tariffs can function as a way of encouraging folks with high time preference to invest in their nation's productive capital. Many people who think it perfectly sensible to 'encourage saving' or otherwise push people towards lower time preference and higher investment are nonetheless diehard free trade advocates. As Randall points out, the historical record does not suggest that tariffs (especially on consumption goods) have a negative effect on economic growth over any longer timeframe. It is probably true (on theoretical grounds) that these tariffs were nonetheless not utility-maximizing for the people of their day; we can't measure how much misery they caused for those immediately subject to them. They functioned then as a tax that forced people to invest in the nation's future productive capacity. It would make perfect sense for national greatness conservatives (e.g. McCain) to advocate for certain kinds of protectionism on this basis; slope-headed ignorance of Ricardo is not required. Despite this, protectionism is out of favor, whether for reasons of fashion or political influence by free trade beneficiaries I can't say. The last presidential (pre)candidate I can recall who was actually a protectionist was Duncan Hunter, running in the Republican primary in 2008.

Mike M said at September 19, 2012 12:05 PM:

OK Randall, I'm back.

In response (at least partially) to the dilemma you pose about the US economy growing so vigorously after WWII, we must look back at the conditions then, not only in the US, but in the rest of the world as well, i.e. what problems were facing our competitors? WWII was fought on our economic competitor's turf and it decimated much of their Capital. The US infrastructure was largely unscathed and had a much simpler process of retooling from producing war time goods to peacetime goods, not only for its own citizens, but for the citizens of countries whose infrastructure had been flattened. So, in essence, our economy grew like crazy because we we had very little competition and the demand for our goods had grown not only on a national scale, but on a global scale as well. War destroyed or consumed everybody's consumable goods, i.e. more of what we produced went to fight the war than for personal consumption. This was true for the US and the rest of the world. However, at the end of the war, we still had more capital or means of production, while the means of production in other countries took decades to rebuild.

BBARTLOG: Hogwash! That's the typical Neanderthal drivel expected from the labor union suck ups. High tariffs do NOT encourage investment in the MOST productive capital. Rather, they redirect capital from its most productive uses to those favored by the politicians in power. Perhaps the troglodytes would prefer that we isolate ourselves from the rest of the world and let their glorious leaders determine what it is that Americans should make and how they should make it. After all, wouldn't it be idyllic if instead of letting China supply us with cheap, unskilled labor, we encouraged more Americans to become unskilled garment workers by subsidizing their wages with tariffs? That way, when people finally wake up - like China did - and see that we're competing in a global economy, our largely unskilled population and provide China with cheap labor while their educated and trained workforce live the life of luxury that we previously earned.

Check it out said at September 19, 2012 12:52 PM:

>"Are you a useful idiot for the Marxists or one of those parasitic slackers that wants more than he produces and how far up Obama's ass are your lips?"

Oh Mikey, Mikey. You're yet another idiot that has never read Marx nor do you understand a thing about Socialism, but who are so dogmatically sure that we should all reject it. The only parasites are the big business and corporate owners who continue to jam a big one up the people's ass. You seem to enjoy it, don't you?

J. said at September 19, 2012 1:02 PM:

I think you have missed the concept of comparative advantage.

Gomory and Baumol's work shows that when one permits a small but plausible deviation from the simplest model of trade, unconditional comparative advantage fails. Their work is as idealized as that simplest model, but it's rigorous and enough to nullify the standard argument, which is to utter the phrase "comparative advantage" and leave it at that.

In the real world of slave labor, environmental arbitrage, and mobile factor endowments we're as far from the idealized case as we can be. The value of that work is to show how fragile unconditional comparative advantage is even among idealized models.

High tariffs can function as a way of encouraging folks with high time preference to invest in their nation's productive capital. Many people who think it perfectly sensible to 'encourage saving' or otherwise push people towards lower time preference and higher investment are nonetheless diehard free trade advocates.

It is strange, especially here in the land of Clay's "American System."

Mike M said at September 19, 2012 3:57 PM:

J - Gomory and Baumol didn't refute the principle of comparative advantage. In fact, they agree with Ricardo's original premise. What they disagree with is the misstatement of Ricardo's conclusion when said economists say that country A should produce ONLY X and country B should produce only Y rather than Ricardo's actual wording that rather than country A changing its production from X and Y to only X, it should SHIFT its production to making more of X than it perviously did and less of Y than it previously did. That it should not entirely give up the production of Y is particularly true if Y is a good that is significantly demanded in country A. Now, if one examines there work further, they do indeed conclude that IN A RELATIVE SENSE some nations benefit more than others from free trade, i.e. globalization. Indeed, I believe they state that for some nations, globalization is "harmful."

But let's examine there analysis a bit further. They state that "the development - increased productivity - of an undeveloped trading partner (let's say China) - usually is good for the home country (let's say the US) up to a certain point. After that, further development of the trading partner is harmful to the home country." So, how do we help these trading partners increase their productivity, but shut off their development at some level that is in our - but not their - best interest? Indeed, if we look further at their recommendations for policy changes, their key point (whether they realize it or not) is that businesses should be given incentives to create jobs in the US - they specifically mention LOWER corporate taxes, but as a business owner I will add a reduction in the endless morass of regulations and and taxes/fees that make doing business in the US less or un profitable such as ObamaCare. Now, Gomory and Baumol also go on in namby pamby politically correct fashion to posit that economists should find ways that countries can enhance world output while escaping the NATURAL tendency to enrich themselves at the expense of other nations (more zero sum left wing clap trap), but they never propose how this might happen (and with good reason as expecting people to not act in their own best interest is like expecting cats to bark). So, in the final analysis, what are the only concrete solutions Gomory and Baumol have regarding the problems they see with globalization? Reduce GOVERNMENT'S meddling in terms of making it more costly for companies to do business in the US. Please refer to previous posts where "government" is highlighted as the problem.

Mthson said at September 19, 2012 5:33 PM:

Mike M, people judge our intelligence based on our conciseness (how much we're able to avoid using extra words and insults).

Mike M said at September 19, 2012 6:28 PM:

[Mike M's comment was deleted and ParaPundit would appreciate fewer insults in the comments. Really, stop it. I don't want it]

bbartlog said at September 19, 2012 7:40 PM:

Mike M: I didn't say that tariffs encouraged investment in the MOST productive industries, did I? Only that they would or could (depending on the goods in question) encourage investment rather than consumption. In any case I actually agree with your tangential point about regulatory capture. It is true that in most places and times (including the here and now) we would expect tariff structures to be controlled by rentiers and as such I don't actually favor them. Nonetheless you have not done anything to address the arguments regarding the historical record, which suggests that under the right circumstances they can work to a nation's advantage (you can add late 19th century Germany to the examples Randall and Mercer outlined above). Now, as it happens I am not that interested in 'national greatness', so I actually have *two* very broad reasons to oppose tariffs. But it is still annoying to see someone prattling on about comparative advantage as if that were somehow the only relevant thing. You should try to wrap your head around the fact that it is entirely possible to understand it and still support tariffs under certain assumptions.

Randall Parker said at September 19, 2012 9:19 PM:

Mike M,

Consider your own argument here:

In response (at least partially) to the dilemma you pose about the US economy growing so vigorously after WWII, we must look back at the conditions then, not only in the US, but in the rest of the world as well, i.e. what problems were facing our competitors? WWII was fought on our economic competitor's turf and it decimated much of their Capital. The US infrastructure was largely unscathed and had a much simpler process of retooling from producing war time goods to peacetime goods, not only for its own citizens, but for the citizens of countries whose infrastructure had been flattened. So, in essence, our economy grew like crazy because we we had very little competition and the demand for our goods had grown not only on a national scale, but on a global scale as well. War destroyed or consumed everybody's consumable goods, i.e. more of what we produced went to fight the war than for personal consumption. This was true for the US and the rest of the world. However, at the end of the war, we still had more capital or means of production, while the means of production in other countries took decades to rebuild.

Why should wrecked economies in other countries enable our own economy to grow more rapidly? Why was that an advantage for us if you really believe in comparative advantage? Seems to me if they had lots of capital we'd be able to achieve more specialization of labor between countries where each economy got better at some kind of manufacturing. If materials limitations are not a constraint then the simplest model of comparative advantage would predict higher economic growth if all economies had lots of capital.

Julian Simon's bet against Ehrlich started going against Simon in the 1990s:

If you started the bet any year during the 1980s Simon won eight of the ten decadal start years. During the 1990s things changed, however, with Simon the decadal winners in four start years and Ehrlich winning six – 60% of the time. And if we extend the bet into the current decade, taking Simon at his word that he was happy to bet on any period from a year on up (we don’t have enough data to do a full 21st century decade), then Ehrlich won every start-year bet in the 2000s. He looks like he’ll be a perfect Simon/Ehrlich ten-for-ten.

I think this wrong:

Innovation hasn't slowed down.

By so many measures it has slowed down. Where are our supersonic transport jets? The rate at which we travel has stopped accelerating. Look at CPU power. Moore's law for a single CPU has already greatly decelerated. We are compensating by going parallel. But that doesn't work well for everything and we are running out of atoms to remove between traces. We are investing more of what innovation we get to compensate for higher energy and resource costs.

You've got the order wrong here. Tyler has caught up with me:

I think I've picked up a recognizable pattern - you've been reading Tyler Cowen's The Great Stagnation.

I've been talking about resource limitations for years. I've portrayed a race between innovations and worsening problems. Since Tyler has read me in the past (and we've chatted in real life) maybe I had an influence on his thinking.

I've really read a great deal and if you assume I don't know Ricardo, Mises, Friedman, Hayek, Simon, etc, well you'll be wrong.

Mike M said at September 19, 2012 9:50 PM:

BBARTLOG - Sorry, I understand the ambiguity in the way I phrased that. I was not trying to emphasize the point that when the government employs tariffs, it directs capital away from its most productive use to that purpose favored by the government. As far as Randall's question as why low tariffs haven't caused living standards to soar, I agree that I didn't address that directly. The implication from a number of posts is that since we can still have no improvement in living standards when tariffs are low and improving conditions when tariffs are in place, tariffs must either help the economy or have no effect. But that ignores the host of other factors that determine how our nation does economically. Correlation does not prove causation.

I think we both agree that tariffs function as a tax that discourages people from purchasing whatever good it is that is "taxed" by the tariff and to do something else with their money, whether that is to consume something else (the domestic version of the "taxed" item or an alternative good) or to save/invest in future productivity. The argument that I have against this is that it supposes that even if there is some genius in the government who can get the direction and the timing correct, it infringes on the individual freedoms of many to reward the few in the protected industry.

As far as the high German tariffs in the late 19th century, they were instituted by Bismark under the guise of helping the working class by creating the beginnings of the modern European welfare system. But Bismark's real goal was to the government coffers and to help the landed gentry. It is more likely that in the larger scheme, the tariffs hurt the average German citizen who largely opposed them. Ironically, Hitler claimed that if the agricultural sector had not been protected by tariffs resulting in a large (in terms of population) agricultural work force, he would likely not have been able to come to power.

As far as high US tariffs during this period, it is far more likely that late nineteenth century growth hinged more on population expansion and capital accumulation than on productivity growth. Tariffs may have actually discouraged capital accumulation by raising the price of imported capital good. Furthermore, productivity growth was most rapid in non-traded sectors (such as utilities and services) whose performance was not directly related to the tariff.

B.Alter said at September 20, 2012 2:00 AM:

Randall said: "By so many measures it has slowed down. Where are our supersonic transport jets? ..."


This is often true, but some of the measures that have plateaued might advance by jumps instead of gradually. Elon Musk's hints about vacuum tube travel are early-stage, but he's the one person alive who would have the best chances of actually getting it done. That would be better than any form of air travel.

And Silicon Valley is getting around to revolutionizing stodgy old industries, like obsolescing the meat industry with lab-grown meat (and cheese, salt, and candy).


There seem to be countless measures by which innovation has been increasing. As recently as 2000, we didn't have many of the most important features of modern life: Google search, Facebook, Google maps, smart phones, YouTube, etc. The smart fraction has benefited even more from these than the masses have. As a new example that I've started using, BitCasa is like DropBox but with free infinite storage (a new paradigm in how we manage our digital lives).

Mike M said at September 20, 2012 10:21 AM:

Randall:

Regarding "Why should wrecked economies in other countries enable our own economy to grow more rapidly?":

Think about it like this. You have two new comers to town. They are poor, but work hard and save for many years in order to buy and operate a fast food franchise. Eventually, one has a McDonalds on one side of the street and the other has a Burger King on the other side of the street and there's a town full of people who like fast food. And each of the franchise owners, being forward looking gents, also has expanded his capacity by enlarging his store in anticipation of eventually growing into it as the town grows. Of course, neither has trained employees beyond what his business currently needs, but the building structure and extra equipment is there. Now, one day a tornado touches down at the Burger King site and wipes it out. Sadly, the owner had no insurance and to rebuild his franchise, he must take menial low paying jobs and slowly rebuild his store over a period of decades and he can do that only after he spends a few years picking up the rubble. But the town folk still demand their fast food, i.e. the DEMAND is the same, but the SUPPLY has been cut in half. So, the McDonald's owner - who already has the infrastructure in place - sees the opportunity to rapidly increase the quantity of food he supplies to fill this demand. So, he rapidly doubles the number of employees - hey, he even hires some of the former Burger King employees who migrate over to his shop - and his business grows like crazy. The Burger King owner has the problem that a great deal of his capital has been destroyed and just as it took him years of savings to build the franchise initially, it will take him years to rebuild it. In the meantime, his Mickey D counterpart has grown like crazy.

bbartlog said at September 20, 2012 8:02 PM:

Weirdly, you seem to have completely missed Randall's point. I don't see how restating his analogy (verbosely) is a counterargument to it. I think a stronger argument could be made that *if* Germany had actually retained all of its tech and industry while still somehow being brought to heel, the world would have seen an even greater technological boom and we would have had the internet five years earlier and maybe we'd already have flying cars. In this case the postwar boom is ascribed more to all that forced investment in productive capital rather than to our uncontested position after the war... but counterfactuals are always tricky, I'd basically be playing devil's advocate here.

Randall Parker said at September 20, 2012 8:51 PM:

Mike,

How can demand be the same while supply has been cut in half? The people with the destroyed factories have far less buying power. So their demand has been slashed.

The destroyed factories cut the demand for raw materials and they cut buying power of workers and so they cut aggregate demand.

My point about tariffs: If lower tariffs help then either they don't help a large economy very much or other things going wrong have canceled out their benefit. We've got some measurable things going wrong such as higher commodities prices.

B.Alter,

Computers and communications have made great strides. But they haven't canceled out the effect of so many other factors that have caused living standards to stagnate. So those other factors must be pulling down pretty hard to cancel out the effects of computer advances.

Online automated bill paying saves me time. But it does not save me that much time. What's amazing is just how small the net benefit has been in the physical economy. Did computers make gasoline or steak or fruit much cheaper? How about housing? Likely the efficiency gains have been offset by losses in other areas.

McNeil said at September 23, 2012 3:16 PM:

Karl Marx despised capitalism because he believed it created prosperity for only a few and poverty for many.

He was right on that one.

dick said at October 25, 2012 5:05 PM:

@
Mike M :

"Because foreign nations have a comparative advantage at producing the goods or services that we outsource to them, i.e. they can produce them at a lower cost that we can, we can produce other goods or services where we have a comparative advantage. It makes no sense for American workers - who should have more education and skills than third world peoples - to sew garments when they can be engaged in higher paying tasks."
_____

1."we can produce other goods or services". Like what? Banks? Insurance companies?
2."who should have more education and skills than third world people". You mean third world slaves? IMO USA is a third world country already.
3.You ignorant fuck. You behave like you're something more on this Planet than everybody else.


Soleman said at October 28, 2012 3:21 PM:

To Mike M:

The production of too many useful things results in too many useless people.

History calls those men the greatest who have ennobled themselves by working for the common good; experience acclaims as happiest the man who has made the greatest number of people happy.


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