Archive for August, 2010
China’s Rising Wages and Benefits
“Bashing Beijing Will Not Help Our Trade Deficit” was the admirable title of Robert Pozen’s Wall Street Journal article. Unfortunately, he went on to suggest an alternative from of China bashing. “American politicians should not push so hard for yuan appreciation . . . Instead they should support higher wages and a stronger safety net for Chinese workers.”
“If wages go up in China,” says Pozen, “then the prices of its exports will rise – absent a proportional increase in labor productivity. . . .And if wages rise in China, its workers would have more money to spend.”
A Bureau of Labor Statistics study, in the April 2009 Monthly Labor Review, found that “compensation costs in China’s manufacturing sector . . . increased more than 40 percent” from 2002 to 2006 − more than 10 % a year. The figure includes “employer payments for social benefits such as workers’ compensation, unemployment insurance, medical insurance, and old-age pension funds.”
Pozen urges American politicians to tell the Chinese government to somehow cause compensation costs to rise even faster than the gains in productivity. That is, he advocates a government-mandated increase in unit labor costs, which would be quite impossible. It would also be hypocritical advice, since unit labor costs in U.S. manufacturing fell steadily from 1992 to 2007 – by 16.4%.
By contrast, U.S. unit labor costs in manufacturing rose 4.6% in 2008 and 3.2% in 2009 (with a 5.6% rise in real hourly pay), which explains why so many manufacturing workers were fired. For China, like the U.S., rising unit labor costs with stable or falling prices would squeeze profit margins to zero or less and result in mass layoffs.
Pozen rightly notes that assembly of goods in China “constitutes no more than 10%” of the value-added in many exports labeled “made in China.” Prices of such multinational products cannot be arbitrarily increased to please American politicians, because higher prices would encourage more multinationals to do what many are already doing – namely, to move labor-intensive work on low-end products from China to cheaper places like Vietnam or Bangladesh.
Pozen also proposes that, “American politicians . . . should support higher wages and a stronger safety net for Chinese workers.” If only China had Social Security, Medicare and Medicaid, he argues, then Chinese people could become as profligate as Americans, lulled by the increasingly naïve belief that government will take care of them.
Lacking the equivalent of Social Security or Medicare/Medicaid, China has no payroll taxes at all, no capital gains tax, and only a 15-25% tax on corporate profits. It is not such a bad thing that China does not share America’s looming “safety net” crises in entitlements and public pensions. By ignoring Mr. Pozen’s advice to emulate this country’s runaway spending on transfer payments, the Chinese government has not felt itself obliged to emulate this country’s impulse to tax the stuffing out of corporate profits, capital gains, and employer payrolls.
Imagine what your 401k would be worth with no tax on capital gains. Imagine what U.S. employment would look like with no payroll tax and a 15-25 %tax on corporate profits.
American politicians are giving them advice?
A Birthday Gift from Paul Krugman
I turn 41 this summer (thank you for the condolences). Along with the well wishes of family and friends, I received an unexpected gift from NY Times writer Paul Krugman: this column in which he bashes people who are critical of Social Security in its current form or who worry about its ability to deliver expected benefits.
At first glance, the column hardly seems like a gift: it’s long on pointless insults, short on thoughtful discussion, and misleading. But it offers such a poor defense of the Social Security status quo that I suspect readers will be more skeptical of the program after seeing the column, not less. Hence, Krugman’s gift.
He writes:
Social Security has been running surpluses for the last quarter-century, banking those surpluses in a special account, the so-called trust fund. The program won’t have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted, which the program’s actuaries don’t expect to happen until 2037 — and there’s a significant chance, according to their estimates, that that day will never come.
OK, 2037 — no worries. Except that, as I said, I turn 41 this summer, which means I’ll turn 67 and qualify for full Social Security benefits in mid-2036. The very next year, the Social Security trust fund will be exhausted, according to the “intermediate” scenario contained in the most recent Social Security Trustees Report, available here (see Section IV-B and Appendix E). The program will still pay out some benefits — but less than 3/4s of what it now promises. So what happens then? That’s not a good question if you’re my age or younger.
But suppose you’re not my age or younger. Suppose you’re 10 years older than me, and will have collected 10 years of benefits by 2037. Don’t feel smug — you’ll be asking “So what happens next?” when you’re 77. That’s not a good question at your age, either.
In fairness to Krugman, the Trustees Report considers different Social Security cost scenarios, the most optimistic of which projects that the trust fund will not be fully exhausted over the 75-year period the report considers. Krugman says there’s “a significant chance” this will be the case, but my (admittedly quick) skim of the report suggests it’s more just “a chance.”
One quick aside about the 2037 exhaustion date: when Krugman wrote this column in 2005, the Trustees’ intermediate scenario projected that the trust fund would last until 2042. In five years’ time, that date has grown 10 years closer. Not good.
On the Wisdom Not to Do Wrong
Jim Harper may be “put off by the domestic political ramifications” of the continuing Ground Zero mosque debate — linking to my three POLITICO Arena posts over the weekend, when the story broke, and Chris Preble’s very different Cato@Liberty post on Monday — but that’s what this debate is all about. It’s not about the law or the Constitution, at bottom, because the law is clear: we respect the right to build that mosque there, even if it would not be prudent or wise to do so.
Thus, he misses the point when he cites “conservative icon Ted Olson” who, Jim says, “expresses well how standing by our constitutional values is good counterterrorism signaling.” That may or may not be good counterterrorism signaling, but those of us who oppose this mosque being situated there are standing by our constitutional values, contrary to the implication of Jim’s contention. We’re defending the right the Constitution protects, while engaging in the robust debate it equally protects — arguing that building the mosque there, as Charles Krauthammer put it in this morning’s Washington Post, “is not just insensitive but provocative,” given the facts of the matter.
But that’s not the only non-sequitur in Jim’s argument. He goes on to say:
Islam did not attack the United States on 9/11. It is simple collectivism—the denial of individual agency that libertarians reject—to believe that the tiny band of thugs who perpetrated the 9/11 attacks speak for an entire religion, culture, or creed. Our sympathy to families of 9/11 victims and our vestigial fears should not allow us to indulge gross and wrong generalizations about individuals of any faith.
Who’s saying that? Does Jim believe that those of us on the other side cannot distinguish the 19 long-dead “tiny band of thugs” — and all who supported them and continue to support what they did, as manifest around the world almost daily — from the great majority of Muslims who do not support Islamic terrorism?
There is a problem in the other direction, however, with those who minimize or dismiss “our vestigial fears.” The war against terrorism, which we are likely to be in for some time, requires a sober assessment of the circumstances we’re facing, neither understating nor overstating them. And one aspect of that is public opinion, including opinion, in particular, in the Muslim-American community. This morning’s New York Times has a page-one story about the divide in that community over the mosque issue. It’s those in that community who understand this issue that we need to encourage to come forward and stand for true American principles — including the principle that not everything a person has a right to do is right to do. It’s no more complicated than that.
This Week in Government Failure
Over at Downsizing Government, we focused on the following issues this week:
- The angst over phantom food stamps cuts indicates that those of us who believe the needy aren’t best served by Uncle Sam have our work cut out.
- A response to Office of Personnel Management Director John Berry on federal versus private pay.
- Alaska’s love/hate relationship with the federal government underscores why weaning the states off their addiction to federal dollars would be difficult.
- The debt-burdened Greek government is planning to sell a large share of the state-owned Hellenic Post. The debt-burdened U.S. government is doing nothing with its struggling U.S. Postal Service.
- Symbolic of this unprecedented federal intervention into the housing market is news that the FHA is insuring mortgages on luxury condos in Manhattan.
Mortgage Finance around the World
As the debate on the future of Fannie Mae and Freddie Mac heats up, a useful exercise is to ask how does the U.S. system of mortgage finance compare to other countries, with the obvious caveat that there are a lot of differences to account for.
A good place to start is a recent working paper by Michael Lea at San Diego State University. The first observation from Dr. Lea’s paper is that several countries, with far less government involvement in the mortgage market, have comparable, if not higher, homeownership rates than the United States. These countries include Australia, Ireland, Spain, the United Kingdom and Canada. He also found that countries with less government support of their rental markets also have higher ownership — not surprising since higher rental subsidies would discourage ownership.
Other differences: the United States and Denmark are the only developed countries where the predominate type of mortgage is a long-term, fixed rate. Most countries have variable rate or fixed rate for shorter periods. For instance in Germany, many mortgages offer a fixed term for 10 years, then either adjust or roll-over.
The United States is also almost alone in having no prepayment penalties and no recourse. Where a mortgage is recourse, the lender is not limited to collecting just on the house but can go after a borrowers’ income or other assets. So apparently, in the rest of the World, a borrower is expected to pay his mortgage regardless of the value of his house.
In most other countries, even those with comparable homeownership rates, most funding for mortgages is via bank deposits. That is surprising given how often I’ve heard it claimed that you can’t rely on just deposits to fund the mortgage system. Somehow the rest of the world manages to do so.
That’s just a few of the interesting comparisons in Lea’s paper. It is an easy read and has some great charts and tables.
Does High Unemployment Make Inflation Impossible?
Benn Steil and Paul Swartz wrote a technically brilliant yet readable Wall Street Journal tutorial explaining why “the Fed’s exit strategy is not credible, and that means a serious risk of high inflation down the road.”
They are sure to be ignored by those of the Keynesian faith who have repeatedly assured us that inflation cannot possibly be a problem for many, many years. Why not? Because there is so much “slack” in the economy—a euphemism for high unemployment.
If this “slack theory” of inflation makes you too sanguine about future inflation, recall that it is the same theory that predicted stagflation would be impossible in 1973–75 and 1979–81.
Figures from The Economist, August 21, raise some doubts. The latest unemployment rate in Argentina is 8.3%, but CPI inflation over the past year was 12.2%. Unemployment in Venezuela is 8.2%, but inflation is 13.3%. Unemployment in Egypt is 9.1%, but inflation is 10.7%. Unemployment in India is 10.7%, but inflation is 13.7%. Unemployment in Turkey is 11%, but inflation is 7.6%. Wasn’t high unemployment supposed to make high inflation impossible?
Perhaps Slack Theorists might take comfort from the fact that inflation is “only” 4.2% in South Africa, where unemployment is 25.3%. But that is not exactly solid proof.
Whenever Keynesian dogma proves so completely at odds with the facts, there is a powerful inclination among true believers and their herd of media apostles to cling to the theory and diregard the facts.
Some volatile economists who previously worried about near-term U.S. inflation have switched to assuming (as they did in 2003) that high unemployment will produce deflation. Yet that is obviously not happening in the countries listed above. The only country with falling prices is Japan, with an unemployment rate of 5.3% (and foolishly high tax rates and decades of wasteful ”fiscal stimulus”).
File the Steil-Swartz article away for future reference.
And remember Reynolds’ Second Law: “Inflation is always lower before it moves higher.”
The Strategic Dimension of the Mosque Debate
There are many facets to the debate about the Muslim community center and mosque proposed for the site of a former Burlington Coat Factory near Ground Zero in southern Manhattan. My colleague David Boaz’s observation on the United States pluralist founding tradition was a delight. Important as they are, I’m put off by the domestic political ramifications (1, 2, 3, 4), if only because of the crassness and opportunism that inhabit all politics.
There is a strategic dimension to the story. This episode is signaling to audiences around the world the current relationship between the United States and Islam. These audiences might support or oppose the United States and act accordingly to undermine or support terrorist groups. For these people, knowledge of a Muslim community, active in New York and proximate to Ground Zero, would help put the lie to the “clash of civilizations” narrative sought by al-Qaeda and its franchises, undercutting their support.
The debate itself sends signals: If the United States were predominantly anti-Muslim, this debate wouldn’t be happening. If our political leaders had the power to decide matters of religious observance, this debate wouldn’t be happening. The debate is helping to show Muslim populations around the world—who might not know otherwise—that we think and debate about these things, that we are a functioning democratic republic, and that our country is undecided about the position of Muslims in the United States or, at worst, weakly anti-Muslim.
In the video clip after the jump, conservative icon Ted Olson expresses well, I think, how standing by our constitutional values is good counterterrorist signaling.
Has ObamaCare’s Unpopularity Caused ‘Abject Panic at the White House’?
Politico has obtained and published a confidential messaging-strategy presentation that essentially admits ObamaCare supporters are losing the battle for public opinion. The presentation was delivered to professional leftists by the left-wing Herndon Alliance, based on public opinion research by Democratic pollsters John Anzalone, Celinda Lake, and Stan Greenberg, in a forum organized by the left-wing group Families USA, “one of the central groups in the push for the initial legislation.” It is a stark admission that the public has not warmed to the new health care law, despite predictions that they would do so.
Here’s how Politico describes the presentation and its implications:
Key White House allies are dramatically shifting their attempts to defend health care legislation, abandoning claims that it will reduce costs and deficit, and instead stressing a promise to “improve it.”
…The confidential presentation … suggests that Democrats are acknowledging the failure of their predictions that the health care legislation would grow more popular after its passage, as its benefits became clear and rhetoric cooled. Instead, the presentation is designed to win over a skeptical public, and to defend the legislation — and in particular the individual mandate — from a push for repeal…
The presentation concedes that groups typically supportive of Democratic causes — people under 40, non-college educated women, and Hispanic voters — have not been won over by the plan. Indeed, it stresses repeatedly, many are unaware that the legislation has passed, an astonishing shortcoming in the White House’s all-out communications effort.
“Straightforward ‘policy’ defenses fail to [move] voters’ opinions about the law,” says one slide. “Women in particular are concerned that health care law will mean less provider availability – scarcity an issue.”
The presentation also concedes that the fiscal and economic arguments that were the White House’s first and most aggressive sales pitch have essentially failed.
“Many don’t believe health care reform will help the economy,” says one slide.
The presentation’s final page of “Don’ts” counsels against claiming “the law will reduce costs and deficit.”
Don’t Be Afraid of the Chinese Economic Tiger
The news that China has surpassed Japan as the world’s second-largest economy has generated a lot of attention. It shouldn’t. There are roughly 10 times as many people in China as there are in Japan, so the fact that total gross domestic product in China is now bigger than total gross domestic product in Japan is hardly a sign of Chinese economic supremacy.
Yes, China has been growing in recent decades, but it’s almost impossible not to grow when you start at the bottom — which is where China was in the late 1970s thanks to decades of communist oppression and mismanagement. And the growth they have experienced certainly has not been enough to overtake other nations based on measures that compare living standards. According to the World Bank, per-capita GDP (adjusted for purchasing power parity) was $6,710 for China in 2009, compared to $33,280 for Japan (and $46,730 for the U.S.). If I got to choose where to be a middle-class person, China certainly wouldn’t be my first pick.
This is not to sneer at the positive changes in China. Hundreds of millions of people have experienced big increases in living standards. Better to have $6,710 of per-capita GDP than $3,710. But China still has a long way to go if the goal is a vibrant and rich free-market economy. The country’s nominal communist leadership has allowed economic liberalization, but China is still an economically repressed nation. Scores have improved, but the Economic Freedom of the World report ranks China 82 out of 141 nations, just one spot above Russia, and the Index of Economic Freedom has an even lower score, 140 out of 179 nations.
Hopefully, China will continue to move in the right direction. That would be good for the Chinese people. And since rich neighbors are better than poor neighbors, it also would be good for America.
And Don’t Trust Politicians With Government Either
Senator Al Franken (D-Minn.) sent out an email today suggesting that WiFi is threatened by the Google-Verizon “deal” on ‘net neturality regulation.
The Google-Verizon framework was written so as not to apply to wireless Internet services,” says Franken. “If you use wi-fi or access the Internet on your phone, this is a serious problem.
This doesn’t exhibit a basic understanding of the technologies. WiFi is a wireless technology, but it’s not what they’re talking about when they say “wireless.” They’re talking about the communications services provided by wireless carriers. iPhones switch back and forth between AT&T’s service and WiFi pretty seamlessly, so the error is forgiveable—unless, say, you’re someone who claims authority to regulate these technologies.
But perhaps Senator Franken does not hold himself out as having that authority. What struck me about the missive is Senator Franken’s somewhat inverted take on power arrangements in the federal government:
This evening, I’ll be speaking at an FCC hearing in Minneapolis. I’ll urge the commissioners to reject the Google-Verizon framework, stop the Comcast/NBC merger, and take action to keep the Internet free and open.
Folks, Article I, section 1 of the United States Constitution creates the United States Senate, with section 3 describing the Senate’s makeup and some procedures.
The Federal Communications Commission is not a constitutional body. The best view is that Congress has no authority to establish an FCC like we have today. The better view is that Congress should not maintain the sprawling FCC we have today. And the only correct view is that FCC is a creation of Congress, beneath it in every relevant respect.
Senator Franken is supposed to oversee the FCC, not act as a supplicant, “urging” it to do x, y, and z.
Does it matter a lot? No. Senator Franken is mostly making a symbolic appeal to gin up constituent support. But he’s also symbolizing the abasement of the legislative branch to an independent agency that has no constitutional pedigree.
Cato’s Constitution Day conference is September 16th. Obvious issues like “Senator or Independent Agency: Who is the Boss of Whom?” won’t be on the docket….
Take Off the Blinders: Diversity Demands Educational Freedom
Yesterday, FoxNews.com posted a story on what appears to be a growing problem for public school systems across the country: accommodating Muslim holidays. Unfortunately, the report didn’t contain the solution to the problem. It did, though, contain a very succinct discussion of the root of the problem; an example of the good intent that causes people to ignore the problem; and the kind of “solution” that is ultimately at odds with the most basic of American values.
A quote from New York City mayor Michael Bloomberg captured the essence of the problem:
One of the problems you have with a diverse city is that if you close the schools for every single holiday, there won’t be any school.
There you have the basic conundrum in a nutshell: Whenever you have a diverse population — whether in a hamlet, city, state, or nation — and everyone has to support a single system of government schools, you cannot possibly treat all people – or even most of them — equally. Either there are winners and losers, or nobody gets anything.
Understanding why public schooling can’t handle diversity — why, simply, one size can’t fit all — is really basic common sense. So why isn’t there more outrage over, or even just recognition of, the utter illogic of our education system? Mohamed Elibiary, President and CEO of the Freedom and Justice Foundation, illustrated the attitude that likely causes lots of Americans to wear blinders:
I’m a little torn. I want Muslims to be getting the same recognition as other Americans, but at the same time I don’t want to see public education systems be a battleground between religious identities, because then we’re missing the point of why we have a public education system to begin with.
No doubt many people truly believe as Elibiary does: that a major purpose of public schooling is to bring diverse people together and, by doing so, unify them. It’s a fine intention, but also a classic case of intent not matching reality. Indeed, the reality is often very much the opposite. Rather than unifying people, public schooling has repeatedly forced religious conflict (as well as conflict over race, ethnicity, political philosophy, curriculum, and on and on).
Concerning the End of “Combat Operations” in Iraq
Several of today’s front pages feature iconic images of U.S. troops marching onto troop transports and into the sunset in Iraq. Today’s story by Ernesto Londoño in the Washington Post, features Lt. Col. Mark Bieger of the 4th Stryker Brigade, 2nd Infantry Division, “This is a historic mission!” Beiger bellows as his troops prepared to depart Baghdad for the last time, ”A truly historic end to seven years of war.”
No disrespect to Col. Bieger and his troops, but the war isn’t over, and it won’t be so long as there are significant number of U.S. troops in Iraq at risk of being caught in the cross-fire of a sectarian civil war.
The Iraqi government, more than five months after nationwide elections, remains in limbo. Talks over a power sharing arrangement have broken down. Meanwhile, violence is on the rise. Call it whatever you like, but the 50,000 troops who remain in Iraq are still dealing with a lot of challenges.
Much of the confusion in the media reporting revolves around semantics, words and phrases such as “combat” and “combat units.” It doesn’t help that George W. Bush declared on May 1, 2003 that ”major combat operations in Iraq have ended” under that infamous “Mission Accomplished” banner. But beyond Bush’s irrational exuberance, such terms are increasingly misleading in an era in which conventional, state vs. state organized violence — what we used to think of as war – has been replaced by murky, disorganized violence, perpetrated by disparate militias, or merely disgruntled individuals unhappy with their lot in life, and determined to take it out on anyone who happens to be around at the time.
Unfortunately, I have very little confidence that that state of affairs will change any time soon. And I seriously doubt that our people — our men and women in uniform, and, explains Michael Gordon in the New York Times, soon many more U.S. civilians and contractors — will be able to put everything right, and not for lack of trying. Meanwhile, I am deeply troubled by the rising chorus of voices calling on the Obama administration to ignore the remaining provisions of the status of forces agreement (SOFA) and prepare for an indefinite military presence in Iraq. (On this, see Ted Galen Carpenter’s latest entry at TNI’s The Skeptics blog.)
So, no, the war isn’t over. For better or worse (and chiefly the latter), Americans will remain associated with an unpopular and government in Baghdad as it struggles to hold together the country’s disparate factions. They will be at great risk if the current political paralysis collapses into still wider violence.
Needless to say, I hope that doesn’t happen. But I won’t be striking up the band and declaring the war American in Iraq to be truly over, until all of our troops are back home.
Cato on Facebook
Cato on Twitter
Cato on Google+
Cato on YouTube
