Wednesday, July 09, 2008

Flashback to the 1970s: Pessimism and Doom Watching Have Become Our National Pastimes

Doom watching has of late become too much of a national pastime. It has afflicted far too many aspects of national policy: international relations, defense, natural resources, the economy, the environment, energy, etc. There has been pessimism, talk of inevitable decline, and of the twilight of democracy.

It is heady stuff. Entrapped by extrapolations and by rhetorical flourishes, it has too much affected the national mood. Yet, it too will be superseded. It is reminiscent of other periods of disenchantment. Yet, successfully to grapple with our problems, we shall have to diagnose them. Like Edmund Burke, two centuries ago, we are obliged to seek the sources of our present discontents. Yet we must avoid being swept up by the delights of diagnosis. We must assiduously avoid the seductive pleasures of making too much of our present discontents.

Our failures have indeed shaken self-confidence and prior assumptions. It has led not only to a well-advertised self-flagellation but also to a new style of moral imperialism, which combines a high degree of self.righteousness with a convenient way of evading responsibility.

The media did not originate but certainly reflect these national predilections. The media, reflecting the market and the free enterprise system, are quite ingenious in serving up just what the public wants to hear. In another period, this may have been cold war truculence, but recently it has been a steady diet of faults and flaws, real or imagined. I am a great believer in muckraking, when there is authentic muck to be raked. But one regrets seeing muck artilfcially created or embellished simply to satisfy current tastes.

MP: Although that could easily have been written today, it was actually written more than 30 years ago by James R. Schlesinger, in his 1976 Foreign Affairs article "On Making Too Much Of Our Present Discontents," available here.

As Larry Kudlow reminds us often, the media today is trying to make pessimism our national pastime, reminiscent of the period in the 1970s discussed above. But before we buy into all of the media's "gloom and doom," consider the chart above, showing the U.S. unemployment rate over the last 50 years.

Put into a broad historical perspective, our current 5.5% jobless rate is: a) below the 50-year average unemployment rate of 5.85%, and b) way below the 7% average jobless rate during the 20-year period from 1975 to 1995 that included 4 official recessions. Sure, it would be great if unemployment got down to 4% again, but it could also be a lot worse - we could have Canada's 6.1% jobless rate or Europe's 6.6% rate.


At 7/09/2008 8:15 AM, Anonymous Anonymous said...

If the way the unemployment rate has been calculated hadn't been mucked with, if the unemployment rate of Canada and Europe was calculated the same way as the U.S. rate you wouldn't be comparing apples to corn.

At 7/09/2008 8:28 AM, Anonymous Anonymous said...

And the first comment exactly proves the point of the article!

Well timed sir.

At 7/09/2008 10:22 AM, Blogger the buggy professor said...

Another illuminating and very stimulating post, Mark: thank you.

1) To the first anonymous: employment rates were calculated differently across the two sides of the Atlantic in several decades after WWII: the Economist always added 1 to 2% unemployment to the West Europeans' rates to bring them into line with the US's (not the opposite!). For several years now, all advanced industrial countries use a standardized procedure recommended by the International Labor Organization, so comparisons across countries are generally sounder.

2) If there's any difference these days, it usually concerns the lumping of (involuntary) part-time job-holders with full-time ones . . . a problem that besets West Europe,as a general thing, much more than the US.

3) The biggest data-doubts fasten, as they have for a long time, on Japanese official reports: they tend to count people who have been employed, say, only a day in a recent period (more than a month, I believe).

4) On a different plane, I agree with Mark that pessimism is overdone for a variety of reasons --- but one of them is just part of normal everyday life. Namely? Peoples' self-reports of their satisfaction (happiness) with things are relative --- dependent on how they frame the status quo and with which reference groups they compare themselves.

As, say, living standards have improved enormously over the last few generations, people take the existing living standard, for instance, as a given, using it as the basis of how they frame the status quo. Downward movements from it, or even stagnation, are thus regarded as more deplorable than the enjoyment gained from an equal percentage of upward movement.

The same is true of unemployment or almost anything else that attaches to our economy.

5) Despite a recent study that questions it, the same is true of reported happiness within countries. The rich and well-to-do within any country report more happiness in general than the less well-off or poor, but there is no clear correlation across countries between happiness and levels of real per capita income.

In fact, in Japan, despite a much higher living standard today than in the 1970s, people report less happiness in several surveys.

And yet our economy is based on constantly stimulating consumption as one of the measures of a good life.

6) Two other comments.

* The media in general do tend to emphasize pessimistic news . . . partly because it's more sensational, partly because of the biases of journalists in the main.

* And though there is no good survey evidence to back up this claim, it appears that three generations or so of considerable affluence and a stress in TV, movies, blogging, pop music, and what have you --- reinforced by all the other cultural changes since the late 1960s --- have tended to emphasize more instant gratification than was the case for Americans (and others) for a century and a half before WWII. If this is so, then people react even more pessimistically to temporary setbacks. Daniel Bell, a Harvard sociologist who was listed as the US's no. 1 public intellectual in the 1960s and 1970s once wrote a good book on how the two sides of capitalism --- hard work, savings and investment for production, more and more instant gratification (fueled if need be by loose credit) on the consumption side --- have diverged with modern advertising, modern credit cards, modern media, and the like.

Michael Gordon, AKA, the buggy professor,

At 7/09/2008 11:51 AM, Blogger SoldAtTheTop said...

Mark, That's brilliant BUT it's a lot of Bull$oot!

Just ignore the trend why don't you... that's sensible.

Yes, the unemployment rate is 5.5% now ... will you hold the same sentiment next year when it's 6.5%-7%?

Are you really an economist or like Jerry Bowyer an evangelist?

At 7/09/2008 2:14 PM, Anonymous Anonymous said...

Buggy Professor,

Thank you for a most interesting and erudite post.

Possibly, there is an additional element underpining our pessimism, namely, the idea that the economy must be "managed" by government which seems to take us from one crisis to the next. The possibility that a 14 trillion dollar economy might actually work via the invisible hand seems as incredible today as it did in the time of Adam Smith.

Accepting the invisible hand would necessitate giving up control and perhaps, that is a concept that we generally find difficult to accept. Dr. Jonathan Miller once said that people had to decide to be sick because accepting illness meant giving up control to a health care professional.

Thank you for a most interesting post. If you are an entymologist, must also say that I love bugs.

At 7/09/2008 2:50 PM, Blogger the buggy professor said...


1) Just wanted to add how impressive your data-driven posts --- the data almost always set out in easy-to-read diagrams --- happen to be . . . nothing else like it anywhere else on the Internet. And I say this as a moderate independent, not (like you) a libertarian.

Even when I disagree with some of your analysis, it is always a disagreement of a scholarly sort based on respect for your intelligence and your commendable background work.

2) To the earlier 6 buggy comments, I should have added a 7th:

Namely? The upswing in the business cycle since the end of September 2001 --- almost 7 years ago --- has been a highly unusual one . . . the first since the mid-1930s, when there was a very brief upswing in the midst of the Great Depression, when average income hasn't risen.

True, as you noted in an earlier and thought-provoking post, the continued decline in the prices of certain staples and even minor luxuries (say, big-screen HDTV and I-pod imitations)--- thanks to globalizing trade and the growing efficiency of retail outlets like Walmart --- has helped keep poor and low-income families from being hurt as much by the drag on income as it might otherwise have been.

Still . . . however much the overall US economy has benefitted from both globalizing trends and revolutionary technological breakthroughs in ICT (information-communication technologies), the Samuelson-Stolper theorem has proved robust for 65 years now in study after study, with its original restrictive conditions continually relaxed.

Meaning? The growing beneficiaries of increased trade-openess and specialization in the US economy since 1975 have been the holders of material and human-capital (the latter referring to university-educated Americans). The losers, as predicted by Samuelson-Stolper, have been low-skill Americans . . . through no fault of their own.


What follows?

In effect, this: even in neo-classical economics, this is a situation of a Pareto-impairment: the gains in the overall economy and for large numbers of Americans have come at the expense of low-skilled Americans. And in principle they should be compensated by the winners, who would have still be left with gains, probably noticeably so, compared to the status-quo in 1975.

Or is there some other measure of overall economic welfare other than the Pareto-optimum that economists can agree on?


3)Actually, more thought just leapt to mind: what, it seems, more and more Americans are worried about is certain insecurities: health care (and its rising costs), rising energy prices, and concerns (no doubt overdone, and even overdone by the media) about the direction of the country in the Bush-W era.

The election in November will take care of the last concern, though I myself (who never voted for George W ever) have recently posted at my web site a lengthy analysis of why his foreign and security policies will likely be seen as a general success in 10-20 years . . . all this, despite the horrible blunders that marked the 3.75 years of the Iraqi occupation.

There is, of course, little that the government can do about rising energy costs, except for politicians to bluster and blame hobgoblin speculators. The fact is, though, that the US economy has shown itself to be remarkably efficient so far in dealing with the financial, housing, and energy problems, all heaped together.

The first problem, health care, does need a better set of insurance schemes and somehow better cost-controls, and here, I believe, something like Obama's scheme is fairly promising . . . always provided that we can get some specific cost-projections that can be openly debated during (and most likely) after the electoral campaign.

--- Michael Gordon, AKA, the buggy professor:

P.S. Soldatthetop: thank you for the kind comments. It's always a pleasure to encounter people with decent manners in this and in other blogs. -- Michael

At 7/09/2008 3:41 PM, Anonymous Anonymous said...

Buggy prof,

While I can agree that low skilled, workers with high school education or less have not faired as well as university educated, and highly skilled workers, you have suggested that latter have profited at the expense of the former. Does this assertion not present a zero-sum analysis without providing tangible evidence to support such a view?

Several days ago, MP posted "How are we doing?" by W. Michael Cox, Sr. V.P & Chief Economist of the Federal Reserve Bank of Dallas & Richard Alm, senior economics writer, Federal Reserve Bank of Dallas which offered compelling data to suggest that the poor have benefitted.

There is certainly a great challenge to ensure that the benefits of the globalized economy are felt by all segments of society particularly in helping low skilled workers to develop marketable skills.

At 7/09/2008 6:44 PM, Blogger the buggy professor said...

Anonymous (just above this post):

1) No, a Pareto-impairment or loss does not mean that the group(s) that have gained in income or wealth have derived their gains directly at the expense of the group(s) that have seen their wages fall.

That could happen, but that is not what’s at stake here. Instead, the economy has changed dramatically in the last 40 years or so, shifting from a industrial manufacturing economy with limited integration into the global economy to one that is far more integrated financially and trade-wise as well as transformed markedly as we’ve shifted toward a knowledge-based economy, overwhelmingly service-oriented.

In technical terms, the combination of trade and financial opening and a technological revolution in information-communications has reallocated the production nature of our economy.

In the process, the economy has become far more efficient and wealthier. But in doing so, there have been big winners, winners, and losers compared to the status quo in say, 1973 . . . at least in terms of real income.

2) This can best be explained by the more familiar use of a Pareto-gain, a concept that goes back to the start of the 20th century and that --- along with the overall welfare of a national economy, represented by the Pareto-frontier or Pareto-optimalum --- and was invented by an Italian economist and sociologist, Vilfredo Pareto: click here for a good overview ---

I can't improve on the definition of Pareto gain (or improvement) and optimality that appears in another article at wikipedia: :

"Given a set of alternative allocations of, say, goods or income for a set of individuals, a movement from one allocation to another that can make at least one individual better off without making any other individual worse off is called a Pareto improvement. An allocation is Pareto efficient or Pareto optimal when no further Pareto improvements can be made. This is often called a strong Pareto optimum (SPO)."

3. Note that if an economy is operating inside the Pareto frontier (optimality), it can be made more efficient by reallocating resources (including investment, production techniques, goods produced etc) to move toward the frontier or to it with, in principle, no changes in the distribution of income or goods produced --- that is, by a series of Pareto improvements in which at least one individual or group of individuals (say, capital investors or highly educated workers)gains in income without any other individual or group (say, unskilled workers) suffering any loss in income.

When the Pareto frontier is reached, to repeat, nobody in the economy can be made better off by reallocating production resources without hurting someone else.

Technically, if you envisage a Pareto frontier as a convex curve looking out from the origin on a graph, such Pareto gains or improvements would have to follow a 45 degree line from any point where the economy is inside the frontier and moves toward or onto it. (See the nice colored chart in the last wikipedia article.)

3) Free trade is regarded as such a desirable reallocation of resources in line with comparative advantage that involves movements toward the Pareto frontier.

A country opening up to trade tends to reallocate its production in ways that reinforce specialization and hence allows the population to consume beyond the production possibility function (or curve). In doing so, the economy moves in a series of Pareto-improvements or gains to the welfare-frontier.

In this way, it's claimed, the increased efficiency in production and consumption entailed by ever freer trade will increase the efficiency of the economy in which no one individual or group is disadvantaged by the reallocation of resources: investment capital, production techniques, the work force (divided, we now know, into various levels of educational and other skills).


4) What Paul Samuelson --- one of the four or five greatest economists of the last century --- did as a young scholar in 1941 with Wolfgang Stolper was show that if countries tend, under free trade, to specialize in line with the neo-classical Ohlin-Heckscher theory of comparative advantage, then a country rich in material and human capital (as we now call it) will have a comparative advantage in industries that use such capital, and by contrast low-skilled, low-capital intensive industries will lose out to foreign competition.

No need to go into the Samuelson-Stolper theory: it's original restrictive conditions have been relaxed in dozens of studies (maybe more) over the decades, and the studies conclude that low-skilled workers will in fact gain from some kind of trade protection.

Click here for a good Wikipedia summary: And for a somewhat deeper but brief analysis, click here:
54) The clear policy implication?

Since the national economy clearly benefits from ever greater free trade along lines of comparative advantage --- taking into account all sorts of anomalies like intra-industry trade (as in autos) or intra-firm or multinational internal trade --- then the winners from ever freer trade should, in principle, compensate the losers. In doing so, the winners would still be better off than the original status quo before trade opened up (or each status quo where trade is opened up more and more), even after they've compensated the losers.

The logic here? The economy, you see, has moved closer to the Pareto-frontier, but at the expense of low-skilled and probably some semi-skilled workers being disadvantaged and suffering income losses.


6) Note that Pareto developed his scheme for measuring both the well-being and efficiency of a market economy in response to the growing criticisms of the original and alternative measure: the utilitarian calculus developed by Jeremy Bentham, John Stuart Mill (until he changed his mind), and others in Britain in the 18th and 19th century.

Such a utilitarian calculus --- the happiness principle, Bentham called it --- entailed the need to maximize the population's pleasures (happiness)and minimize its pains.

The utilitarian calculus entailed, further, the need to make inter-personal comparisons of the state of minds between, say, an individual who gains in income from the change in economy and an individual who loses income. And that meant a strict cardinal numeral comparisons: so that we could say, for instance, that redistributing a $1000 from a millionaire to a pauper would add so many utils of gain to the pauper that far outweighed the calculated number of util-losses of a minor mental sort for the millionaire.

Such inter-personal comparisons seemed and still seem subjective, not objective; and certainly can't be reduced to a cardinal (strict numeral) calculus, with a 0 and in which $2 is twice as great as $1 and $8 is four times as great as $2 etc.

Pareto, a conservative --- he later became a supporter of Mussolini and was one of three most famous elitist theorists of sociology in the 20th century (all societies, he and others said, even socialist ones, would have a hierarchy of prestige, income, and power) --- sought to remedy both the technical problems of utilitarianism and establish at least a very minimal sort of safeguard in terms of justice or equity for a market economy. And note finally here that the use of Pareto optimality and a Pareto gain or improvement as a measure of moving toward the welfare (well-being) and efficiency frontier of the economy says nothing about the original distribution of income.

It's worth noting that market-failures can be analyzed effectively with the Pareto-approach to optimality. Markets can't provide public goods easily (if at all). There may be information-imperfections, and hence regulatory agencies like the FDA. There may be externalities --- negative like pollution, and positive like education --- that markets can't fully deal with, even under Coasian bargaining conditions. And though anti-trust laws may not easily apply to ICT industries as they once did --- and though international competition further reduces the problems of monopoly in the US or any home market ---- something like anti-trust agencies still seem desirable on balance.


Of course, public-choice theory --- developed by James Buchanan and Gordon Tullock (and two or three other pioneers) --- also shows that there can be government-failures too . . . what with the monopoly position of governments in delivering certain public goods, or taxing in certain ways, or regulating excessively and so on.

It seems, despite radical-liberals on the left and libertarian enthusiasts on the free-market side, that no effective balance can be inferred by fundamental theoretical (or ideological) assumptions and deductive logic.

7) Enter the public policy implications.

Those like libertarians who balk at all this logic have a problem, at least of a practical sort: globalization, along with revolutionary technologies in ICT --- and the two trends reinforce one another --- is now being rejected more and more by the electorate in the US (and in the large countries of West Europe), for a variety of reasons.

The pessimism may be overdone. We've talked about this before. But unless public policy can a) slow down or stop low-wage, low-skilled immigration, b) develop better trade-adjustment programs for laid-off workers owing to more and more trade, including support for retraining with business firms and educational institutions, and c) find ways to make health insurance both more certain and portable, then it's likely that the Republican party will not only lose the forthcoming presidential election, but Congressional elections in later years too.

That may also d) entail better regulation of financial institutions to make their actions far more transparent and accountable to investors and borrowers.

The first three policy changes add up, it seems, to some sort of compensation under the Pareto-optimality approach, but to repeat --- they, along with d), add up even more to a series of pragmatic moves that may be the only feasible way for the US economy to continue to integrate more and more into the global economy. And yes, globalization has been accelerated by ICT innovations, but as the innovations have been speeded up and diffused under the ever more intense pressure of international competition in the US home market and for US exports to third-country markets.


Hope this sets out some food for thought. I

Thanks again, Mark, for this and other stimulating posts. And thanks for indulging me in these lengthy posts: when I have time, I always enjoy exchanges like these.

Michael Gordon, AKA, the buggy professor: http:/

At 7/10/2008 10:17 AM, Blogger OBloodyHell said...

> The losers, as predicted by Samuelson-Stolper, have been low-skill Americans . . . through no fault of their own.

I will grant you, sir, that about 10-20% of such "low-skill Americans" are such "through no fault of their own" -- they have natural limitations ... but there's another 80-90% who are most definitely at fault for a large part of that -- bad schools only means that people (and parents) need to take it on themselves to do the job.

Just about everyone has a useful ability which is not widely shared. The point of our society is that you need to take responsibility for yourself for developing and applying that ability. Society is not obligated to do it for you, nor to reward you as though you had done so.

> the gains in the overall economy and for large numbers of Americans have come at the expense of low-skilled Americans.

I disagree with your thesis here, as well, partly justified by the previous observation I just made. Secondarily, it's justified by the fact that I'd argue that numbers provided by Dr. Perry have shown that, while there are people who are being left behind, it's mainly ones who are not getting an education.

I constantly see ads for Welders which claim that they are making, on average, more than 40k a year (here in FL, that is usually a lot of money -- an individual can live quite comfortably on 25k a year in most areas). So even for people who aren't "college capable", there are certainly lucrative skills which are available to them.

I'd argue that it is a lack of self-motivation and self-discipline, and only that, which prevents most people from joining the "upward movement".

Society has no direct obligation to its grasshoppers

> something like Obama's scheme is fairly promising

Without (I ack) any study of it, I doubt if ANYTHING proposed by Obama cannot be performed in a far better way.

Hint: If it involves the government doing ANYTHING directly, beyond requiring that people place a fixed percentage of their income into a healthcare deal (i.e., insurance) then it's not likely to be very effective. The government LOVES Ponzi schemes, and "healthcare" is a particularly GREAT place to put one, in their minds. My bet is that somehow, whatever Obama suggests will be implemented as one, in the end, even if it is not described as one NOW.

Assuming you mean the wiki article on "Pareto efficiency", I note the entry in the criticism, which points out that there are many Pareto optimums which are localized and dependent on the items used to define the Pareto Set. The true global optimum can be far greater than anything identified by the Pareto Set. I'd argue that this is blatantly true with anything as vast as even a national economy. PE has some value, I have no doubt, but it seems (to my limited training in this regard) that the criticism is particularly valid -- it appears to treat the economy, to me, as a zero-sum game, which it most certainly is not. The addition of a new form of wealth (oh, "electronics", say) breaks the PE optimum entirely by adding new wealth which was not part of the Pareto Optimum at all. And when you start dealing with something as ephemeral (to say nothing of ill-understood) as IP, I'd argue that it's even more the case: IP is not like Real Property in so many ways that it's like Ice vs. Water -- yeah, they're both "property", but their "properties" are radically different. Comparing them closely is like comparing sofas with benches. Similar in function, but very different to sit on for hours.

Wealth will not come from being "Big" in the future. It will come from being nimble and fast and good at what you do, which need not directly be a measure of university-level education. A company can succeed by having charm, concern for service, and devotion to customers, which does not require educational knowledge. It comes from having A Good Idea, not CPA skills. You can HIRE that.

Big is inherently slow, lumbering, and slow to change. That's one of the differences between the IP&S economy and the former two types. An IP&SE is inherently highly segmented and heavily networked, unlike Industrial and Ag, which were monolithic and heirarchical.

It's raining soup. You just need to make your own bucket.

At 7/10/2008 10:31 AM, Blogger OBloodyHell said...

BTW, sorry:

before the segment which begins:

Assuming you mean the wiki article on "Pareto efficiency"

was meant to follow a cut-and-paste more like so (I hate Blogger's damned small edit boxes):

> The economy, you see, has moved closer to the Pareto-frontier, but at the expense of low-skilled and probably some semi-skilled workers being disadvantaged and suffering income losses.

Assuming you mean the wiki article on "Pareto efficiency"...

At 7/10/2008 12:26 PM, Anonymous Anonymous said...


Must confess to also having a problem with the idea of compensating the losers. Retraining and education I can see.

The transformation from industrial to knowledge based economy is no less radical than the movement from an agricultural to an industrial society. Compensation does not encourage low skilled workers to change industries or develop new skills. Many high skilled blue collar jobs such as welding, tool & die, have a shortage of skilled workers.

Like many government approaches, compensation looks backward rather than focusing on the new economic opportunities that have been created or even promoting the development of such opportunities.

Even knowledge workers are not exempt from the need to develop marketable skills, keep pace with technological changes in their industries, and change careers in response to creative destruction.

At 7/10/2008 5:06 PM, Blogger the buggy professor said...

ObloodyHell and Anonymous

1) Thank you for your stimulating comments.

The major problem I have with your policy views is that, right or wrong, they lack political pragmatism: In particular, if something isn't done about the growing insecurities and backlashes of the US electorate over disruptive globalizing influences, then some of the major benefits of such globalizing influences for the overall efficiency and improved rates of growth in GDP, per capita income, and productivity risk being jeopardized by the continued election in the future of liberal candidates like Barack Obama.

These prospects can't be finessed by repeating ideological or philosophical preferences --- or so it seems.

2) One clarification is needed in my previous post about Pareto-improvements brought about by market forces such as ever freer international trade.

I wrongly stated, as I just spotted looking over my comments, that only a movement from a point inside the Pareto welfare (efficiency) frontier that followed a straight 45% line from that status-quo (say, no trade at all) to the frontier would ensure that all such moves were Pareto-improvements: that is, the income (or consumption of goods) of no one individual or group would be harmed in the process.

That's simply wrongheaded, a dumb mistake made, alas, by my writing these comments lickety-split.

To clarify briefly, imagine a Pareto frontier that is a concave curve looking out at it from the origin of a graph (or chart if you want). The horizontal axis would, say, represent all low-skilled workers. The vertical axis would represent, to continue the example, all high-skilled workers and owners of material capital (including financial investors). If you want, add semi-skilled workers like car mechanics in non-traded sectors too, though the example is more accurate if we just look at traded sectors of the economy.

Then imagine a point short of the frontier. It shows that, say, free trade could reallocate production inputs in ways that made the economy more efficient by moving you toward the frontier.

Further imagine a vertical line going straight up from that point to the frontier, and then a horizontal line that moved straight across to the frontier.

3) What follows?

Any reallocation of production thanks to free trade that occurs inside the semi-trianguolar area --- marked by the vertical and horizontal lines on two side and a curved frontier(or jagged curve) linking the two lines --- would indicate hypothetically a Pareto-improvement . . . in this case, any vertical movement (the likelier change in improved income according to the Ohlin-Heckscher theory of comparative advantage for the US economy. Such gains could occur until you reached the frontier, say directly above the starting point of inefficiency (the original status quo).

The improved income of highly skilled workers and investors and owners of physical capital would have improved, perhaps considerably, but at no cost in existing income to the low-skilled workers in the trade sectors.


4) However: given the Samuelson-Stolper theory, that kind of cost-free move to the Pareto frontier is highly unlikely, and quite simply because as trade opened up, some low-skilled workers in uncompetitive industries would be laid off, others who remain --- assuming the industries don't quickly go out of business under pressure of trade competition --- will find their wages gradually cut if the firms seek to stay afloat by price-cutting.

Over time, some of the firms in these less competitive industries will possibly find ways to improve their productivity enough, say by a combination of new upgraded production-technologies and less and less work force, to remain competitive in a situation of free trade. Even then, though, as has been the case say with American car-assembly workers (in a very capital-intensive industry, physically speaking), these renewed competitive firms will likely reorganize their labor forces and hire more educated workers . . . say, for working not in strict Ford-like assembly production of the sort that goes back to the 1920s, but in small teams with some shared knowledge of basic statistics and responsibility for the quality inputs of their team in the production lines of vehicles.

Either way, low-skilled workers have been laid off and those who remain will find their wages likely cut back.


Hence a series of movements toward the Pareto frontier thanks to full free trade will not entail just a series of Pareto-gains: it will involve some mix perhaps of gains and losses (or disadvantages) for the low-skilled workers.

In the process, the supply of low-skilled workers looking for new jobs increases, and that will likely rebound through the various non-traded sectors of the US economy and hold back or reduce wages there too. Any immigration of low-skilled workers, legal or otherwise, will accentuate this problem (unless, as is claimed, Americans won't take such jobs as in certain labor-intensive agriculture or labor-intensive construction businesses even at higher wage rates.)

5) The 45 degree line moving from the semi-triangle's origin to the frontier reflects another hypothetical matter: full compensation for each Pareto-loss for the low-wage workers, ultimately in the non-traded sectors too.

I myself certainly don't want such full compensation, just the contrary. But we're back to a pragmatic problem, or set of such problems, and these are increasingly political in nature. No need, though, to say more here about them except to note in passing one more key point worth pondering: the American labor force is, world-wide, by far the most flexible, mobile, and good-natured about change. Since the early 1970’s, tens of millions of workers have lost and switched occupations or founded entirely new businesses --- even if just a one-man E-Bay business --- and in the process have picked up, moved to new communities, gone back to school, found other ways to be retrained, and continue in the large to proceed with their lives despite the disruptions and without marked complaints or strikes or what have you. And similarly, in the same period, average workers have seen at most a slow increase in real incomes --- partly take-home wages, partly cheaper prices in many staples and luxuries, partly in higher benefits t cover ever increasing costs of health care --- and not voted into a office the libertarian bogeyman of a Nanny-State overseer. The same is true about average Americans --- the vast majority in more and more states --- when it has come to ever greater social strains brought about in their communities by a huge influx of hard-working but poorly educated immigrants from Mexico and Central America, whether legal or illegal. (And of course something like 15 million formerly middle-class Americans now hold jobs that put them in the upper quintile of income, compared to 30 to 35 years ago.)
But for three or four years now, as survey data show, a mental rebellion has been occurring in the electorate about all these disruptive events, aggravated by all sorts of trends since 2000 and more specifically 2004, that amounts to a large abandonment, it seems, of tolerance for the existing political-and-economic trends that have been going on over nearly three decades now. What, pragmatically, do you propose to do about this snowballing backlash?

(6) Hope this last post here clarifies matters.

And it's all I will say on such a complicated subject, having said a great deal already on Mark’s web site (not mine). Except to add that one of my former students, Clifford Winston of the Brookings Institution --- a very good researcher, I should add --- has written a good book (2006) that he sent me in ms. and on which I commented that deals with such matters.

He is far more skeptical than me, I add --- essentially libertarian if you want --- when it comes to his very carefully researched and closely analyzed arguments that show how government regulations never really do increase overall market efficiencies, and often reduce them, in trying to correct market failures . . . a matter of government failures, which certainly do occur.

For a very good review of his book, along with another book by a group of other specialists, click here:

The long, very readable review of the two books is by a law professor and former FCC high-level official. And he notes that both books tend to slight the kinds of distributional matters that I have tried to deal with in these comments. Those matters, remember --- plus the political and pragmatic policy matters that can't in my view be finessed by repeating basic philosophical or theoretical or ideological positions. For me, a retired political science professor (UC Santa Barbara), with a Ph.D. in economics as well, politics is in truth an art of compromise . . . just as the platitude holds.

Michael Gordon, AKA, the buggy professor,

At 7/11/2008 8:25 AM, Blogger OBloodyHell said...

> These prospects can't be finessed by repeating ideological or philosophical preferences --- or so it seems.

These problems are caused by an idiot media picking up on what the public wants to hear and feeding it back to them in a positive feedback loop. Anyone with a clue can tell you what that leads to... usually it's spelled "a major f***-up".

The problem isn't in the functioning of the system, it's in the public wanting Bread and Circuses and voting for them.

You aren't going to fix this by giving them what they "want", because it does not exist. You need to slap the stupid out of them.

> If you want, add semi-skilled workers like car mechanics in non-traded sectors too, though the example is more accurate if we just look at traded sectors of the economy.

But this is my problem. Have you actually tried to find a good mechanic? In the real world, "semi-skilled" would and should be rewarded. And is, if the system is set up correctly. And will be, before long, because the system will shift from the current one, favoring large, heirarchical bureaucratic institutions to smaller, nimbler collectives with a specific purpose and a set of well-defined roles.

The great auto mechanic should be running his own shop. If he doesn't have the business acumen, then he and someone who does should be getting together to meld both their skills into a good auto service organization. As they get more business, they find and hire other good, but less experienced mechanics which they supervise. As the mechanics develop, perhaps some of them rent bays and recruit their own customer base, and, if they are so inclined, they eventually split off and form their own shop. In the internet world, word of mouth can and should do a lot. We probably don't have the systems in place to do all of that, but you can see how it can easily derive from the existing infrastructure. Take it further, even, and get rid of the in-house "service shops" of auto dealerships. They almost always suck, as it is. They should make arrangements to cover the expenses of any work done at accredited shops (some used cars are already covered this way, and have been for decades).

There is little reason why education level itself is a problem -- specialist knowledge, all around, is valuable -- and if you think you can just pick up a wrench and go work on your car, you haven't looked under your hood recently, even if you were an auto whiz two decades ago (cars stopped lending themselves to the shade-tree mechanic around the time emissions systems became standard) -- and the source of most unobvious problems in cars these days is the electrical system, which most certainly takes specialist knowledge to diagnose.

> However: given the Samuelson-Stolper theory, that kind of cost-free move to the Pareto frontier is highly unlikely, and quite simply because as trade opened up, some low-skilled workers in uncompetitive industries would be laid off

I can't really argue for or against this as I'm not familiar with the background of the theory you apply (I ack) -- however, the whole system, as you describe it, seems to require that the economy be treated as a zero-sum game, when it most utterly is not. The actual amount of wealth in the game is fairly constantly going up. Which means that there is no such thing as "most efficient use", because at any given time the whole system can be radically altered by a small change in the nature of the business in question. Imagine the change in the auto industry if one thing happened -- the development of a small, lightweight, inexpensive, and highly efficient battery (very possible).

Almost overnight, the whole design of automobiles changes. Within five years, the internal combustion engine disappears, electrical motors become the driving force of most wheels (first through a central powerplant, but probably eventually located inside the wheels themselves). Electricity demand skyrockets. Filling stations probably go out of business (but some smart owners may put this off by setting themselves up with generators for quick-charging the batteries). Mechanics of all stripes will need to be substantially retrained. Ones which already understand electric motors will have a major advantage over others. People will be installing metered electrical outlets at each parking spot.

The price of oil plummets, but not as much as you might think -- because it's still critical as a feedstock for many chemical processes.

In short, a radical shift in the economy, in how money and wealth are derived from it, occur overnight.

But "the educated" aren't the ones most positioned to take advantage of that shift -- the ones who own and operate businesses (often semi-skilled) will be, because they will be the ones to figure out the new niches where money is to be made (recharging stations at highway exits survive, but casual ones may not, since people will recharge at home).

"That's just a hypothetical example".

Yes, so let's point out the similarities between that suggestion and the development through the 90s up to now of The Internet. How much education did this take? It was flinkin' brilliant. And *anyone* could have done it (I predict it might even work again in 10-15 years). The whole internet has been a place where literally anyone could implement an idea and see it take off to the point where they made more money than a lifetime of "educated work" would have made them (and I don't mean using scams or ideas dependent on absurd valuations of anything associated with the internet. Real money, real income, from real people making real use of what you created).

The system is not only not a zero-sum game, it's a chaotic one which can see radical changes in a matter of a couple years. Which means that no one is "stuck" poor. That's one of the beauties of it, and one of the reasons why only an idiot would want to screw with it to "improve their chances" -- because the Rich Bastards are the ones who are going to wind up dictating the changes and they aren't going to change them to increase YOUR chances but THEIRS.

And if we taught people THAT rather than victimhood, it would go a long way from stopping people from trying to game the system.

At 7/11/2008 4:50 PM, Blogger the buggy professor said...


Again, thank you for your informative comments.

Just one clarification: I wasn't describing a zero-sum game: rather, what's called a positive-sum game. The gains to the US economy thanks to growing globalization --- and hence to the winning groups (owners of physical and high-quality human capital) more than equal the losses for the unskilled and low-skilled workers.

Here's a good link that clarifies various kinds of games: zero-sum, positive-sum, negative-sum . . . all terms that refer to the outcomes of various games. In the example I used with Pareto criteria --- ever greater free trade compared to the status quo of, say, 35-40 years ago --- the outcomes would be measured in income (in constant dollars) or, alternatively, in goods consumed measured the same way. The link:

Not that these two alternative kinds of outcomes would not necessarily be judged equivalent in total satisfaction by the losing unskilled and low-skilled members of the US workforce over the decades.

-- Michael Gordon

At 7/12/2008 7:14 AM, Blogger OBloodyHell said...

> Just one clarification: I wasn't describing a zero-sum game: rather, what's called a positive-sum game. The gains to the US economy thanks to growing globalization --- and hence to the winning groups (owners of physical and high-quality human capital) more than equal the losses for the unskilled and low-skilled workers.

Yes, but I'm saying it's not even close to that limited. The system is subject to radical changes by innovations in both technology and ideas. I don't believe those changes are bounded in any way, shape, or form by your Pareto limitations (I'm open to the idea I'm wrong by all means) -- in fact, it seems to me that they essentially mock them by rendering them irrelevant whenever they (the forces for radical change) may apply.

A technology example of how this change and shift can be relevant is when M$ almost lost its hegemony by missing the significance of the internet to its business. It had to play "catchup" to surpass Netscape, and even there, it took stupid mismanagement by Netscape ("Can't we all just get along?") to let them win the IE-v-Netscape wars. Netscape should have readily won that. If it weren't being managed by New Age liberal twits, they would have realized Gates planned to win that battle by hook or by crook, and realized it was a battle to the death.

The idea end of things is exemplified by the demonstrated case of the million dollar web page.

Things can change radically overnight, in big ways as well as small, in unpredictable ways and by leaps and bounds, which, I believe, negates the relevance of those Pareto boundaries.


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