Archive for July, 2009
Is Buying an iPod Un-American?
We own three iPods at my house, including a recently purchased iPod Touch. Since many of the iPod parts are made abroad, is my family guilty of allowing our consumer spending to “leak” abroad, depriving the American economy of the consumer stimulus we are told it so desperately needs? If you believe the “Buy American” lectures and legislation coming out of Washington, the answer must be yes.
Our friends at ReasonTV have just posted a brilliant video short, “Is Your iPod Unpatriotic?” With government requiring its contractors to buy American-made steel, iron, and manufactured products, is it only a matter of time before the iPod—“Assembled in China,” of all places—comes under scrutiny? You can view the video here:
In my upcoming Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, I talk about how American companies are moving to the upper regions of the “smiley curve.” The smiley curve is a way of thinking about global supply chains where Americans reap the most value at the beginning and the end of the production process while China and other low-wage countries perform the low-value assembly in the middle. In the book, I hold up our family’s iPods as an example of the unappreciated benefits of a more globalized American economy:
The lesson of the smiley curve was brought home to me after a recent Christmas when I was admiring my two teen-age sons’ new iPod Nanos. Inscribed on the back was the telling label, “Designed by Apple in California. Assembled in China.” To the skeptics of trade, an imported Nano only adds to our disturbingly large bilateral trade deficit with China in “advanced technology products,” but here in the palm of a teenager’s hand was a perfect symbol of the win-win nature of our trade with China.
Assembling iPods obviously creates jobs for Chinese workers, jobs that probably pay higher-than-average wages in that country even though they labor in the lowest regions of the smiley curve. But Americans benefit even more from the deal. A team of economists from the Paul Merage School of Business at the University of California-Irvine applied the smiley curve to a typical $299 iPod and found just what you might suspect: Americans reap most of the value from its production. Although assembled in China, an American company supplies the processing chips, a Korean company the memory chip, and Japanese companies the hard drive and display screen. According to the authors, “The value added to the product through assembly in China is probably a few dollars at most.”
The biggest winner? Apple and its distributors. Standing atop the value chain, Apple reaps $80 in profit for each unit sold—an amount higher than the cost of any single component. Its distributors, on the opposite high end of the smiley curve, make another $75. And of course, American owners of the more than 100 million iPods sold since 2001—my teen-age sons included—pocket far more enjoyment from the devices than the Chinese workers who assembled them.
To learn a whole lot more about how American middle-class families benefit from trade and globalization, you can now pre-order the book at Amazon.com.
Lowry on the “Mad Dash” to Pass ObamaCare
From National Review editor Rich Lowry’s column for King Features Syndicate:
As with the stimulus package, Obama’s health-care plan depends on speed. More important than any given provision, more important than any principle, more important than sound legislating is the urgent imperative to Do It Now.
Do it now, before anyone can grasp what exactly it is that Congress is passing. Do it now, before the overpromising and the dishonest justifications can be exposed. Do it now, before Obama’s poll numbers return to Earth and make it impossible to slam through ramshackle government programs concocted on the run. Do it now, because simply growing government is more important than the practicalities of any new program…
Obama cultivated an image of cool during the campaign. Unrattled. Deliberate. Cerebral to a fault. Who knew he’d be in a panic to remake one-sixth of the economy by the first week of August of his first year in office?
Normally, the larger and more complicated a bill is, the longer Congress takes to consider it. With the stimulus and cap-and-trade, Obama and the Democrats upended this rule of thumb by passing byzantine, 1,000-page bills that no one had the time to read. When the work product is indefensible, deliberation is dangerous.
There’s a touch of the guilty conscience about Obama’s terrible rush. As if he knows he was elected as a moderate-sounding deficit hawk last year, and if he’s going to pass an ambitious left-wing program, he must do it before the opposition builds.
The Play Is Not the Thing
I’ve already started receiving e-mails in response to my earlier blog challenge: name a field that has suffered a productivity collapse like education (stagnating or declining performance with massive increase in cost). The leader so far: live theater.
Except it just doesn’t measure up. The NYT reported in 1968 the advent of $15 Broadway tickets. That’s equivalent to $93 today. But you can go see revivals of Chicago for as little as $63 and Hair for as little $35. Mama Mia starts at $60. Those are the three most popular plays on Broadway. You can pay more for the best seats, but you can get a good seat for the same or less money than was the case 40 years ago.
So while there has not been a dramatic improvement in the productivity of live theater, there is also no obvious decline.
What’s more, the analogy is not entirely apt. The market for live theater, such as it exists, is a market for a very specific service: people on stage in front of you acting out some bit of dramatic entertainment. The market for education is not, at least in principle, so closely bound to a particular delivery mechanism. Parents want their children prepared for good, happy and successful lives, but if they had a diverse range of options available to them that would secure those ends (as they would if education weren’t a government monopoly), they would not necessarily insist that it be delivered in exactly the same way that it was 100 years ago — a full day of kids sitting in rooms with their age-mates listening to teachers lecture.
Any other candidates for fields suffering calamitous productivity declines like education?
Weekly Standard Wants to Use F-22s in Afghanistan
The Weekly Standard’s Michael Goldfarb is particularly set off by the fact that the Senate has declined to continue funding the F-22 program for which SecDef Gates and President Obama requested no more funds. He laments that Obama and Gates are representing their decision to expand the Army by 22,000 soldiers as being paid for by cuts in the F-22 budget. Goldfarb remarks that this leaves us in a situation where
We may have more troops to patrol Afghanistan, but they’ll be patrolling on bicycles — because it’s a zero-sum game.
Is it impolitic to observe that “The F-22 has never been flown over Iraq or Afghanistan“?
Moreover, it’s my understanding that the Weekly Standard folks, Goldfarb included, believe in the importance of fighting a series of labor-intensive counterinsurgency wars across the Islamic world. Based on Goldfarb’s remarks, he does not wish to support this objective by making cuts in capital to fund more labor. What would be good to know, then, just to set up the debate, is how much he thinks we ought to be spending on defense. We spend roughly (depending on how you count and whether you include the two wars we’re fighting) the same as the entire rest of the world combined. Based on my consumption of the Weekly Standard’s foreign-policy output over the past several years, you could easily convince me that the between $600,000,000,000 and $800,000,000,000 American taxpayers spend each year on defense is insufficient to support the Weekly Standard’s foreign-policy aims. But if there should not be a tradeoff like the one Gates pointed to in this discussion, how much is enough? Inquiring minds want to know.
Why War in Afghanistan Is Futile
A couple weeks ago, my Cato colleague, Justin Logan, wrote a post on Rory Stewart’s brilliant article that appeared in the London Review of Books. Justin offered compelling reasons why arguments for nation building, and the concomitant “state failure is a threat to humanity,” are deeply flawed. But I think Stewart’s piece offers arguments that bears emphasis.
Stewart is Chief Executive of The Turquoise Mountain Foundation, a not-for-profit, non-governmental organization based in Kabul. According to Stewart, many policymakers and prominent opinion leaders are prone to:
minimizing differences between cultures, exaggerating our fears, aggrandizing our ambitions, inflating a sense of moral obligations and power, and confusing our goals… [these irresistible illusions] papers over the weakness of the international community: our lack of knowledge, power and legitimacy… It assumes that Afghanistan is predictable. It is a language that exploits tautologies and negations to suggest inexorable solutions. It makes our policy seem a moral obligation, makes failure unacceptable, and alternatives inconceivable.
Perhaps Stewart’s most important point:
But Osama bin Laden is still in Pakistan, not Afghanistan. He chooses to be there precisely because Pakistan can be more assertive in its state sovereignty than Afghanistan and restricts US operations. From a narrow (and harsh) US national security perspective, a poor failed state could be easier to handle than a more developed one: Yemen is less threatening than Iran, Somalia than Saudi Arabia, Afghanistan than Pakistan.
The argument that America’s security depends on rebuilding failed states, like Afghanistan, fails partly since terrorists can move to governed spaces. Rather than setting up in weak, ungoverned states, enemies can flourish in strong states because these countries have formally recognized governments with the sovereignty to reject interference in their internal affairs.
Insurgents know they can’t fight a conventional army directly. With a protracted war of attrition, however, they can gradually expand their political and economic influence.
Thus, as we’ve seen in Vietnam, Iraq, and today in Afghanistan, insurgents leave areas where American troops concentrate and then return when those troops deploy elsewhere. And Afghan militants find sanctuary in neighboring, nuclear-armed Pakistan, which is not targeting the original Afghan Taliban.
In fact, Islamabad still supports the original Afghan Taliban that at one time controlled most of Afghanistan. The Swat valley offensives we keep hearing about feature the Pakistanis fighting indigenous Pakistani Taliban groups that have proliferated in response to Islamabad’s alignment with the United States in the so-called “war on terror.”
Honestly, America has no business stopping Pakistan from influencing Afghanistan. Let them have it! As I argue here, “the war’s strategic rationale still remains tenuous. Central Asia holds little intrinsic strategic value to the United States, and America’s security will not necessarily be endangered even if an oppressive regime takes over a contiguous fraction of Afghan territory.”
Sadly, however, bureaucratic inertia and misconceptions of Washington’s moral obligations could trap the United States in Afghanistan for decades. Hopefully, some people in the Obama White House will inform the president that Afghanistan is not a winnable war.
Don’t Bail Out Bernanke
Here is the message members of Congress should send to Ben Bernanke during the Fed chief’s annual Capitol Hill testimony this week: He is fighting for his job. With his term up in January of next year, Bernanke needs to be called to account for the Fed’s many questionable actions during the financial turmoil of the past year.
Even while correctly identifying the “global savings glut,” Bernanke sat by and did nothing about the unsustainable build-up of leverage in the housing market—the “bubble” which famously burst in late 2008. Bernanke also used Fed financing to bail out Bear Stearns and AIG—hotly political moves which should rightfully have been left to Congress—and oversaw the massive expansion of the Fed’s balance sheet from about $900 billion to over $2 trillion. Under Bernanke, the Fed has transcended monetary policy and bank supervision into the world of fiscal policy.
While thus politicizing the Fed on one hand, Bernanke has sought to insulate the bank from congressional pressures by appeasing majority Democrats with various new credit regulations. Both the recently proposed credit card and mortgage rules unnecessarily restrict credit and increase the litigation risk facing banks, while doing nothing to roll back some of the irresponsible lending policies that exacerbated the housing bubble.
Bernanke’s pandering to the Left on misguided “consumer protections,” and the absence of any debate over the Fed’s role in the housing bubble, raise serious questions as to whether Bernanke understands the causes of the current financial crisis. We cannot hope to avoid the next financial crisis without a Fed chairman who understands the current one.
Lock It Down, Centralize It, Federalize It
Speaking of the Center for Democracy and Technology, Leslie Harris gave a terrific quote to Forbes.com for an article on cybersecurity:
The Rockefeller-Snowe Bill represents just the sort of heavy-handed regulation that could stifle innovation and hurt the economy, argues Leslie Harris, president and chief executive of the Center for Democracy and Technology. “If you lock things down too tight and try to centralize and federalize all kinds of standards, you’re on a collision course with the innovators who may be making the next great tech product in their backyard,” she says.
The question is why CDT doesn’t apply this thinking to the field of identification and credentialing.
EPIC on PASS ID: a National ID Card
The Electronic Privacy Information Center has produced a very thorough analysis of the PASS ID Act, which would revive the REAL ID national ID program.
The EPIC analysis states flatly, “The bill would establish a national ID card,” and, “The intent of this legislation is to facilitate a National ID system.”
That’s quite a contrast to Ari Schwartz at the Center for Democracy and Technology, who alone believes that PASS ID “prevents the creation of a National ID system.”
As Immigrants Move In, Americans Move Up
Critics warn that immigration reform would bring in its wake rising rates of poverty, higher government welfare expenditures, and a rise in crime.
In a new paper, Cato scholar Daniel Griswold says that Congress should not reject market-oriented immigration reform because of misguided fears about “importing poverty.”
Griswold argues that “Comprehensive immigration reform that included a robust temporary worker program would boost economic output and create new middle class job opportunities for native-born Americans.”
For more, read the whole thing.
Has Any Other Field Suffered a Productivity Collapse like Education?
I’ve repeatedly claimed that public schools are alone in having suffered a productivity collapse over the past 40 years: their outcomes stagnating or even declining while per pupil costs have skyrocketed. Is that really true?
Dr. Stephen Bohrer, who appears to work in Colorado’s public school system, begs to differ. Responding to a recent op-ed of mine, he writes that: “The price of a Baby Ruth is up 2,000% since 1970. It doesn’t taste any better and is smaller.”
Though historical prices on Baby Ruths are hard to find, there’s a nice suite of data on the Hershey bar, which seems a fair enough test of the good Dr.’s claim. According to FoodTimeline, the price of a 1.375 oz Hershey bar in 1970 was 10 c, and the price of a 1.55 oz bar in 2008 was 59 c. Adjusting the first price to 2008 dollars puts it at 55.5 c.
So the real price-per-oz of a Hershey bar FELL from 40.4 c to 38.1 c over the past 40 years. And it didn’t get any smaller. No gold star for Dr. Bohrer.
So, who else wants to play Stump the Chump? If you think you know a field that has suffered a productivity collapse like education over the past 40 years, send me an e-mail with your claim and the data on which it’s based (ACoulson |at| cato.org). If anybody comes up with a winner, I’ll report it here.
Economics Bloggers Weigh in on Income Inequality
The economics blogosphere has been buzzing about Will Wilkinson’s new paper on income inequality.
George Mason University economist Tyler Cowen discusses why social inequality has been falling for some time in the United States:
I agree with Will Wilkinson’s point that real social inequality has (mostly) been falling for some time in the United States. Today many an upper middle class person is plausibly happier than many a billionaire. Yet most self-made billionaires work very hard to get to that position, which creates a possible tension between cardinal and “observed choice” or “ordinal” metrics of welfare. Why work so hard for so little? Presumably many of these billionaires really want to “be there,” even if they are only marginally better off or in some cases worse off.
The Atlantic‘s Megan McArdle offers her initial thoughts, and promises more analysis soon:
I broadly agree with Will that consumption inequality, not income inequality, is what matters. If the rich have access to broad classes of goods that the poor can’t have, I find this worrying. On the other hand, if the problem is that Bill Gates has a really awesome 80 inch flat panel television, while the poor have to be content with a 32 inch CRT, well, I can’t say my heartstrings are plucked very tight by this injustice. So it’s important to know what the real differences are.
Ezra Klein parses some of Wilkinson’s arguments at WashingtonPost.com:
One of Will’s first arguments is that income inequality is not a good way to think about the issue. The real key is consumption inequality. It’s not, in other words, how much money people make, but how much stuff they buy. And “the weight of the evidence shows that the run-up in consumption inequality has been considerably less dramatic than the rise in income inequality.”
The Economist Free Exchange blog has mixed reactions to the study:
Inequality, in and of itself, is no bad thing, and inequality in America has co-existed right alongside significant improvements in welfare across the income spectrum—and contributed directly to them, in many cases. Redistribution for its own sake is bad policy, and as Mr Wilkinson notes, it’s often bad policy pursued to cover up for still more bad policy elsewhere. But America’s society is a very unequal one, by developed nation standards, and it’s not always clear that that inequality is justified or advantageous. And any good student of human behaviour can tell you that wealth will seek to protect wealth, and will often succeed.
Matt Yglesias from Think Progress has posted twice on Wilkinson’s study:
I’m not in agreement with the overall thrust of Will Wilkinson’s paper on inequality for the Cato Institute, but one point that I think is in the spirit of what he’s saying was brought to mind by a question at last night’s event. The way I would put the point is that it’s a mistake to think of the world as composed of, on the one hand, “economic issues” in which we worry about wealth or income inequality and then on the other hand, “social issues” in which we worry about racism or sexism. Progressives ought to be concerned with a general issue of justice and social inequality, of which gaps in money income or wealth may be part.
Bernanke Rules?
In today’s Wall Street Journal, Fed Chairman Ben Bernanke has outlined “The Fed’s Exit Strategy.” He tells the reader how the central bank will avoid an inflation of historic proportions resulting from all the money and credit it has injected into the economy. All of the strategies he outlines are technically feasible ways for the Fed to implement monetary restraint.
The op-ed has an air of a classroom exercise, however, rather than a practical central-bank strategy. Much of the article is devoted to explaining how the Fed can now pay interest on reserves, and how it could raise that interest rate so as to dissuade commercial banks from lending the reserves out. It could do that, but what would that rate need to be in order to meet a private bank’s threshold rate of return in normal economic times?
More importantly, the Fed has never lacked the technical tools to combat inflation. What it has so often lacked is the will to make tough decisions. And, quite frankly, it does not possess the information needed to fine-tune the economy in the way Chairman Bernanke imagines (a point made by Milton Friedman many years ago). Lack of will and lack of information combine to keep the Fed behind the curve. Its policy was too easy after 2001, and so it fueled the housing boom. It was late to recognize the turn in housing and the economy, and its policy was then too tight. If past is prologue, it will be late to implement its exit strategy.
The Fed Chairman has presented a laundry list of policy tools. What investors need is some assurance that the right tools will be used at the right moment. The mere promise of a policymaker to do the right thing has little credibility. There is no monetary rule in place, only the rule of a man.
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