Posted on 11/06/2004 2:45:55 PM PST by Willie Green
For education and discussion only. Not for commercial use.
A battle royale has just been initiated in the rarefied world of economic theory, although the rumblings have not yet reached these shores. The first salvo has been fired by no less a person than Paul Samuelson, and the targets he has chosen include some of his most prominent acolytes and disciples.
The MIT professor, winner of the Nobel Prize in 1970 and research mentor of countless economists, who later became major scholars in their own right, has re-assessed his entire stand on globalisation and the benefits that accrue from the process. In doing so, Samuelson has been scathing in his critique of some of his students, including Jagdish Bhagwati, once a member of his innermost circle.
In an article in the Journal of Economic Perspectives, Samuelson has postulated that free trade, far from being an unqualified blessing, may prove to be a major drawback under certain circumstances. The major cult figures who are sought to be chastised by the guru on this issue are Gregory Mankiw, Bhagwati and countless other `globalists'. The first two have been mentioned by name in the article's opening paragraphs as purveyors of `polemical untruth'. In the corridors of theoretical economics, you cannot get more direct than this.
The thrust of Samuelson's analysis is that a country like China, basically a low-wage economy, will create a net negative impact on the American people, when it manages a substantial rise in productivity in an industry in which the United States was earlier a leader. Initially, American consumers may benefit from low-priced goods in their supermarket chains, but their gains may be more than neutralised by large losses sustained by American workers who lose their jobs. This thesis, from the erstwhile mastermind of the neoclassical school of economic thought, has led to tumult in the profession even before its official publication.
Among Samuelson's fellow liberals, this revisionism has been a welcome development and could not have come a day sooner. Many American commentators are saying this is a clarion call for the US to launch serious programmes for supporting workers displaced by globalisation. American workers need a much stronger and a viable safety net, on the lines of their European counterparts or even those in Canada, the immediate northern neighbour. Some American economists are even saying empirical research on the subject in the past was skewed, because of the in-built biases of the free-trade proponents.
Claims of substantial gains from free-trade were based on `extraordinarily poor studies', according to one commentator, Jeff Madrick, who goes on to add there is now hope for a more balanced perspective in future research in international trade theory. Policymakers in Washington are now being urged to move away from their high perches and to take a hard look at ground realities. When one of the most respected contemporary economists has stepped out of the shadows and said things are not as simple as they were earlier made out to be, it is a development that cannot be ignored. Another observer, Pat Choate, feels this paper is the correction of `an embarrassing mistake'.
Samuelson, at the age of 89, is signalling to his disciples that they should think about the real world rather than `postulate assumptions and develop elegant models which ultimately are irrelevant'. More critical economists, like Paul Roberts, feel the maestro's attempt to patch a leaking vessel that is ultimately doomed will just not work. Roberts suggests the paper responds to an insightful critique by Ralph Gomory and William Baumol, another economist familiar to all Indian students of economics.
In their publication, Global Trade and Conflicting National Interests, Gomory and Baumol launched a powerful attack on orthodox international trade theory. They showed free trade is characterised by conflicting interests and not by mutual benefit, as neoclassical economists assume. Roberts, in fact, lambasts Samuelson for not taking on the issue of outsourcing in any depth.
While the friendly fire in this debate is clearly sympathetic to the overall theme, the globalists are clearly worried. The damage-control effort of this brigade is led by none other than Jagdish Bhagwati, the former Samuelson disciple, singled out in the paper for reprobation. The Columbia don has reportedly prepared a response to Samuelson, which will be published in the same journal.
Bhagwati, of course, got a lot of media attention recently when he described John Kerry's trade policies as `voodoo economics'. He has been one of the most committed globalists for many years and was a defender in the 1980s for the Japanese trade lobby, which he exonerated from charges of protectionism, while reserving his blame for `bullying' American policy-makers. He dismissed the argument that non-tariff barriers significantly reduced Japan's appetite for imports from America. There is now sufficient evidence (and semi-official admission) that Japan was a major protectionist country throughout its period of growth in the 1960s and much later on.
Most of us who have worked in this country's corporate sector and interacted with Japanese companies will vouchsafe for the enormous clout of these organisations and the seamless interlinking between the much-vaunted MITI and Japan's private business. In any case, Japan's continuing trade surpluses are likely, once again, to become a controversial issue in Washington very soon.Bhagwati will have his work cut out, as he takes on his former guru in a no-holds-barred fight to defend orthodox economics.
In these shores, North Block and Raisina Hill would do well to ask their think-tanks to introspect on the complex subject. Else, they can be taken to task for swallowing the globalisation mantra a tad too uncritically.
The writer is a financial-corporate analyst and a member of the Delhi Stock Exchange.
These days it's technology and superior logistics that win wars. China could have an extra billion soldiers and it wouldn't matter since they'd be unable to feed, equip, or coordinate them.
Your comment about "helping" the US is not even deserving of riposte.
Yeah, I just hate it when someone supplies me with the goods I want at lower cost.
Chinese total indifference to patents and copyrights makes quite clear that they do not care a fig about the "rule of law" and have no respect for rules that are not backed up by coercion. It is naive to believe that thieves will play nice.
Your fundamental failure is to pretend that only a communist China could ever wish to be America's enemy. Basic great power hyper nationalism (and there was plenty of "place in the sun" hyper nationalism in Wilhelmine Germany, well before Hitler) of the sort we are already seeing stimulated by the Chinese government to deflect internal tensions will place it on an inevitable collision course with American geopolitical interests.
Destroying our own manufacturing base to "buy China off" is ridiculous. In the long run it will fail as weakness is perceived and then exploited.
http://www.federalreserve.gov/pubs/oss/oss2/2001/scf2001home.html#summary
Scroll down a bit and you'll find an Excel download with some good numbers. (Unfortunately, the most recent survey is for 2001, which has a "skew.")
At any rate, in 2001, "home-secured" and "other residential" debt was 81.5% of debt; the rest was cars, leases, credit cards, etc.
At that time, debt/total assets was 12%, a decrease from the 14+% of 1995 and 1998. Of course, 'total assets' in 2001 reflected the pre-bust stock market, as well as a runup in housing value which had begun in the early 1990's.
In another Googled item, it is reported that "Household debt as a percentage of assets reached the historic high of 22.6 percent in the first quarter of 2003."--which would be a LARGE jump from the number that FRB reported for 2001.
In the end, though, the question is hot "housing"- or "not-housing"- related debt. It is the VALUE of housing on which the debt depends.
There are nationalists in the US and every other country you can think of. If the conditions aren't right they won't come to power. Provided that China has a peaceful path to increase their standard of living, odds are that's the path they'll take. Like I said, Taiwan is dominated by nationalists, yet they haven't been a problem, probably because of their prosperity.
Destroying our own manufacturing base to "buy China off" is ridiculous. In the long run it will fail as weakness is perceived and then exploited.
The US manufactures more goods in dollar terms and as a percentage of GDP than ever before. Since it doesn't require as much labor as before, some people don't recognize it.
More, from http://www.federalreserve.gov/releases/G19/current/
It appears that "consumer credit" has increased from $1.7 trillion in 2000 to $2.05 trillion as of 3Q04, or about 18%. This increase would approximately equal the increase in value of one's house during the same period--but "consumer debt" is generally higher-interest debt than 1st or 2nd mortgage-debt.
You are distorting the argument by confusing big-N nationalism (The Kuomintang Party of Taiwan) with small-n nationalism (the inevitable drive on China's part to challenge American superpower status). Of course we have no trouble with Taiwan because it is our ally. China emphatically is not.
And what does this do with "increasing the standard of living" ? Why do you assume that that is the only or even the primary goal of a nation state ? I kinda recall "glory" or "honor" or "prestige" being national goals. And goals which the Chinese people patriotically support and have nothing in the least to do with communism.
We are already one of the top productive nations on earth. We can't compete with China for wages and labor supply. Once we have stopped manufacturing here in the U.S. and millions of workers are out of work, how will they afford cheap goods at any price?
Because it's the only way to keep a billion people happy. Using oppressive government is just too inefficient and can't be sustained forever. Happy people with a rising standard of living don't start wars.
Well of course --- a freetrader would not like regulation of filthy foods --- that gets in the way of someone making a profit which is the only goal of free trade.
To free-traders that doesn't matter because the government can provide housing subsidies to those on welfare and who earn minimum wage -- and quite a bit more. With housing subsidies averaging $500 to $700 a month --- housing isn't a problem --- we can live easily with minimum wage paying jobs now --- the government takes care of everything you see.
The fallacy to that statistic is that full credit is taken for finished product despite the increasing proportion of foreign materials and components. (IOW, a product may be 95% foreign made and 5% finishing touches here in the U.S., yet they take full credit for doing 100%)
Do you have a source for that? I'm using Bartlett at the NCPA for mine.
That article is a bit sparse. I'm interested in how the foreign parts are accounted for in our GDP calculations. Don't feel that you need to rush. Quality is better than speed. Thanks.
Oh, yes they most assuredly do. To be savagely blunt it was we who started the Mexican and Spanish wars.
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