There are some US companies that are doing extremely well. In 2002, Apples market capitalization was a couple of billion dollars. Now a couple of billion dollars is a round off error in its over $300B market capitalization. In the consumer market, Apple has such cachet that it can ask for an receive a premium for the Apple logo. Bloomberg predicts that Apple revenue may grow by 50% next year.
On the other hand, most companies are not doing as well. As unemployment hovers at about 9%, the typical response is to erect barriers to keep jobs in the US. That was certainly the motivation of the Smoot-Hawley Act of 1930 that exacerbated and prolonged the Great Depression by curtailing international trade with high tariffs.
Since that experience it has been conventional economic wisdom that free trade increases the wealth of both trading partners. Nonetheless, there is concern about how many jobs are being out-sourced overseas. A recent study published in the International Journal of Commerce and Economics by Linden et al.
carefully traced the jobs and their valued added for Apples Ipod.
The study found that the production of the Ipod yielded nearly twice as many jobs overseas as in the US. However, the bulk of the value-added and consequently the wages went to Americans. Moreover, the bulk of the salaries in the US went to engineers and managers. This does not count the value to US investors and to US consumers.
In other words, the jobs that went overseas where largely low-skilled manufacturing jobs that could not support an American worker salary. Moreover, many of these low-skilled jobs will soon be automated. The out sourcing of jobs to low-wage countries is typically the step right before automation.
As production becomes more efficient, fewer more highly skilled workers are used. It takes far fewer workers to produce a car than it used to. Indeed, since 1950 manufacturing production has accounted for a nearly constant 15% of the gross domestic product, while the number of workers in manufacturing has decreased by half from over 30% to less than 15%.
The problem is not out sourcing of jobs to other countries, the problem is that we do not have enough companies like Apple who make high quality products with Americans adding the highest value to the products.
It would be impossible to legislate more companies like Apple, but it would be foolish and all too easy to create trade barriers that would hobble such companies.
It’s Not the Stimulus It’s the Regulation
Saturday, August 13th, 2011Marco economics is an observational science. It is difficult to construct controlled experiments. There always seems to be enough differences from situation to situation to introduce doubt. Nonetheless, sometimes unfair, or at least unsupported, conclusions can enter the conventional wisdom. The concept of a Keynesian stimulus may suffer this fate.
The Keynesian approach suggests that during a recession the government can stimulate the economy via spending to replace economic demand from private markets. An alternative approach championed by Milton Friedman suggests that monetary policy is more important than fiscal policy.
Democrats have traditionally favored a Keynesian approach, in no small part because it provides an additional excuse for the government to initiate spending programs to address Democratic priorities.
When President Barack Obama came into office, it was natural for the progressive to institute a massive, nearly trillion-dollar stimulus. So confident were Democrats in the efficacy of the stimulus that they promised that unemployment would not exceed 8%. We were warned that if no stimulus were instituted, unemployment would reach 9%. We now know that following the stimulus, unemployment blasted past 10%. Moreover, growth remains anemic and unemployment two-and-half years after the stimulus still exceeds 9%. More disappointing is that the officialunemployment value would be far higher if so many people had not given up hope of finding a job. The lack of growth and employment has reduced revenues exacerbating the deficit.
It is rhetorically convenient to declare in the face of these facts that Keynesism is dead, believe by only those immune to the evidence. I lend far more weight to the Friedman approach and would love to offer our current situation as definitive proof.
However, let me offer a slightly heretical view. While the current situation lends no support to the Keynesian idea of stimulus, the regulatory anchor on growth makes it impossible to tell whether the stimulus has indeed failed. Perhaps It is economic uncertainty that is restraining the economy irrespective of the stimulus.
Companies are uncertain because of a massive influx of regulations. Obamacare has passed, and mountains of rules based on the legislation are still being written. Companies, particularly small ones, are reluctant to hire uncertain of what Obamacare would require of them. The Dodd-Frank bill to regulate financial markets has introduced new banking regulations. Until these are finalized and better understood, there will be a backward tug restraining lending. This is not to mention the new regulatory aggressiveness of the the EPA anxious to implement policies bureaucratically that could never be passed legislatively. The EPA has more regulatory actions pending that the Department of Human Services which is responsible for implementing Obamacare.
Imagine the metaphor of the stimulus package being a foot on the accelerator of the economic car, with a chain of regulations strapped to the bumper. The stimulus accelerator may or may not work, but the regulatory chains make it impossible to diagnose whether the accelerator is functioning properly. The Keynesian approach may deserve death, but the current situation cannot be said to have inflicted the true final blow.
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