Some Much-Needed Global Perspective on American Income Inequality

An excellent video from Matt Mitchell at Mercatus visualizes just how amazingly wealthy (and relatively equal) Americans are, as compared to the rest of the world:



In short, if you're reading this blog post, you're very likely a "1 percenter" - just like the rest of your fellow Americans.  Congratulations.

Sure, You Can't Afford Food, But At Least You're Buying Local

From the New York Times travel blog comes a humorous - and totally unintentional - economics lesson in a routine story about traveling in Scandinavia on a budget:

WHY IS NORWAY SO EXPENSIVE?

Most people assume Norway costs so much because of its high tax rates. Not so, said Nils Henrik von der Fehr, chairman of the economics department at the University of Oslo. Taxes play a supporting role — there is a 25 percent value-added tax on most products, for example — but the real reasons are labor costs and agricultural protectionism.

“The most important factor is the way our labor market works: centralized bargaining,” Mr. von der Fehr said. “One has made an effort to have an egalitarian wage structure. While people like me are not well paid compared to our colleagues in other countries, people at the lower end earn much more. You don’t have cheap labor in Norway.

“All the things you want as a tourist — hotels, restaurants — are labor-intensive,” he said. “That’s why it’s nice for us to be a tourist in the U.S.: everything you want is cheap because of the abundance of cheap labor.”

Another factor is the high tariffs on agricultural imports that keep Norwegian farms in business: “We have perhaps the most protected agricultural system in the world,” he said. “It’s not a particularly easy place to grow anything. Farms are small and the season is short.”

That may mean higher food prices, but at least you are buying local.

The NYT earlier notes that a cup of coffee will cost you $4.50 in Oslo, a fast food burger and fries is a whopping 23 bucks, and - most depressing - a six-pack of "mediocre beer" goes for a buzz-killing $30!  When asked how they cope with these prices, a Norwegian pharmacist quips "It's easy. We buy everything in Sweden."

Smart dude, but I'm not so sure that's the result of a sound economic policy.

Now, I freely admit that I don't know anything about Norway's labor regulations, but the bit about agricultural tariffs finds strong anecdotal support in last December's blog post on how Norway's import-prohibitive dairy protectionism caused butter prices to spike to an insane $450 per pound, thereby threatening a "cookie-less Christmas" in the world's butter cookie capital.  And if economist Mr. von der Fehr is correct about Norway's labor regulations, you just have to love how an obsession with income inequality has - combined with fierce protectionism - created shared misery in its attempt to prevent unequal prosperity.

But, hey, at least you're buying local!

(Or rich enough to afford traveling to Sweden and smuggling back some reasonably-priced cookies.)

Have US Incomes Really Stagnated Since the 1980s? (Hint: No)

One of the most common justifications for protectionism, tax increases, government spending or intrusive economic regulation is the "fact" that median incomes in the United States have depressingly stagnated since the 1980s. For example, President Obama in his December 2011 speech in Osawatomie, Kansas stated:

We simply cannot return to this brand of “you’re on your own” economics if we’re serious about rebuilding the middle class in this country. We know that it doesn’t result in a strong economy. It results in an economy that invests too little in its people and in its future. We know it doesn’t result in a prosperity that trickles down. It results in a prosperity that’s enjoyed by fewer and fewer of our citizens.

Look at the statistics. In the last few decades, the average income of the top 1 percent has gone up by more than 250 percent to $1.2 million per year. I’m not talking about millionaires, people who have a million dollars. I’m saying people who make a million dollars every single year. For the top one hundredth of 1 percent, the average income is now $27 million per year. The typical CEO who used to earn about 30 times more than his or her worker now earns 110 times more. And yet, over the last decade the incomes of most Americans have actually fallen by about 6 percent.

President Obama then used his scary median income statistic - and a few others - to justify his calls for all sorts of taxes and Big Government stuff (aka "fairness" and "investments").  And he certainly isn't alone.

Fiscal conservatives typically counter these median income data by noting that the base numbers don't include government transfers and benefits, and these critics definitely have a point.  But Steve Landsburg has an even simpler rebuttal: the overall median income number is a total "racket":

If you’re the sort of person who reads economics blogs, you’ve probably heard that the median US worker has enjoyed hardly any income gain over the past few decades. Here are the numbers behind the noise (all corrected for inflation): 

A mere 3% increase over 25 years does indeed look pretty grim. And note that the year 2005 is pre-crash, so what we’re seeing is not an artifact of the recession.

Now let’s look a little deeper and ask which demographic groups account for all this stagnation. White men? Nope, their median income is up 15%. Nonwhite men? Up 16%. White women? Up 75%. Non-white women? Up 62%. That’s everybody:

If you're like me and have never seen this breakdown before, your mouth is currently agape with surprise.  Landsburg then explains why median income shoots up in every demographic sector while the overall median remains nearly unchanged (emphasis mine):

Imagine a farmer with a few 100-pound goats and a bunch of 1000-pound cows. His median animal weighs 1000 pounds. A few years later, he’s acquired a whole lot more goats, all of which have grown to 200 pounds, while his cows have all grown to 2000. Now his median animal weighs 200 pounds.

A very silly person could point out to this farmer that his median animal seems to be a lot scrawnier these days. The farmer might well reply that both his goats and his cows seem to be doing just fine, at least relative to where they were.

That’s exactly what’s happened with median incomes. Each demographic group has progressed, but at the same time, there’s been a great influx of lower income groups — women and nonwhites — into the workforce. This creates the illusion that nobody’s progressing when in fact everybody’s progressing.

After correcting for this very significant demographic change and assuming that 1980's workforce was identical to today's workforce, Landsburg finds that "the overall median income in 1980 would have been $19,600. Today’s $25,700 represents a 31% increase over that corrected figure."

Landsburg noted that he took these numbers from Edward Conard’s new book Unintended Consequences: Why Everything You've Been Told About the Economy Is Wrong.  Another interesting tidbit from that book (along with the aforementioned one about benefits): "The table, because it only shows medians, does not show the explosion in income growth above the median. Fully half of the new jobs created since 1980 have been high-paying professional jobs; prior to 1980, only 23% of jobs were in that category."

That is very important and, again, something that President Obama and his friends conveniently fail to mention.  Landsburg also adds a point of this own: "the table fails to account for the vast increases in leisure time over the past 40 years and the equally vast increases in the quality of the goods we buy. Those things matter too."

Indeed, they do.

Income Inequality Round-up

The blogosphere was a-twitter (see what I did there?) this week with debate over the Occupy Wall Street protests and income inequality.  I've written a lot about this subject over the last couple years, and I particularly liked these new items on this oft-discussed issue:

• AEI's Jim Pethokoukis has been blogging up a storm on income inequality over the last few days.  First, he has seven great reasons why President Obama is wrong about the perils of rising inequality.  Then, he follows up by explaining why income inequality is liberals' new "global warming."  He had even more great stuff to say last week (here and here).

• Jim's colleague Mark Perry also has an excellent post on one of the biggest reasons why most discussions of income inequality are misguided: today's 1% or 5% or 99% won't be tomorrow's.  He concludes "In the discussions on income inequality and wage stagnation, we frequently hear about the 'top 1%' or the 'top 10%' or the 'bottom 99%' and the public has started to believe that those groups operate like closed private clubs that contain the exact same people or households every year. But the empirical evidence... tells a much different story of dynamic change in the labor market—people and households move up and down the earnings quintiles throughout their careers and lives. Many of today’s low-income households will rise to become tomorrow’s high-income households, and some will even eventually be in the 'top 10%' or 'top 1%.'"

• NYU professor - and one of my intellectual idols - Richard Epstein explodes the head of his PBS interviewer when he explains in typical Epsteinian detail why income inequality is actually an unmitigated "good thing" (AEI's Nick Schulz has more on that fact here):

• The WSJ's Mary Anastasia O'Grady has another great video explaining the real conclusions we should draw from the latest CBO study on income inequality:

•  Finally, courageous radio host and investment guru Peter Schiff took a video camera down to the epicenter of the Occupy movement and tried to talk some sense into the protesters about income inequality, capitalism and government.  Fantastic:

Newsflash: Nobody's Actually Getting Poorer

One of the more repeated bits of conventional wisdom out there is that, while the last few decades have been quite good for America's "rich," our poor and middle class have really struggled.  For example, here's President Obama trotting out the conventional wisdom in his recent middle finger to Paul Ryan speech on deficit reduction:

In the last decade, the average income of the bottom 90 percent of all working Americans actually declined. Meanwhile, the top 1 percent saw their income rise by an average of more than a quarter of a million dollars each. That's who needs to pay less taxes?

Leaving aside the speechwriter's apparently bad grammar (I think it's "fewer" taxes), an interesting new study (h/t Mark Perry) from the Employment Policies Institute calls President Obama's basic assertion that the "rich got richer, and the poor got poorer" into question.  Here's The Daily Caller with a good summary of the new study:

Research, published at The Journal of Policy Analysis and Management, from Cornell economist Richard Burkhauser, Joint Committee on Taxation economist Jeff Larrimore, and Indiana University economist Kosali Simon, however, suggests that the president’s piece of conventional wisdom isn’t entirely accurate. According to the findings, while the rich have indeed been getting richer, for the last 30 years so too have the poor and middle class.

Burkhauser told The Daily Caller that Obama’s suggestion that the poor are getting poorer understates the amount of income to which Americans actually have access. The president does not take into account, Burkhauser explained, tax unit shifts, government transfers, and other sources of income such as health care benefits.

“The bottom line is [conventional wisdom] asks what’s been happening to private personal income over time and they are right if you look at that for tax units, things do not look very good for the middle class,” he said. “But if you take other things into account, the reason the country has not gotten in a civil war is because things are not that bad. In fact everybody has done better.”

Burkhauser’s research shows what has actually been happening to the lives of Americans over the last thirty years — not just counting the amount of money individuals made in the market, but the actual income that people get in their hands to spend.

“This isn’t a zero sum game, where one group wins at the expense of others,” Burkhauser said. “The growth in productivity of Americans in the top twenty percent of tax units increased the size of the economic pie sufficiently to register major gains across the entire distribution of after-tax income.”

Burkhauser's findings add to a growing body of work which demonstrates that policymakers' (and rent-seekers') breathless concerns over American "income inequality" could be totally overblown, and thus that the redistributionist/statist policies that they justify based on said inequality should be met with serious skepticism.  One of the things not covered by Burkhauser but explained here frequently is the role that trade with China and other low-cost nations plays in further shrinking the great divide between rich and poor because the benefits of "cheap" imports are disproportionately enjoyed by lower income Americans. (In short, "rich" people don't shop at Wal-Mart or Target, so they don't get as much benefit from free trade with China than do frequent Wal-Mart/Target shoppers.)

So if America's poor and middle class have actually been earning more than originally thought (and more than they did only a few years ago), and if through free trade (and other things like technology) they can afford a lot more with those earnings, then should we really follow the President and his buddies into the tax-happy abyss based on an increasingly incorrect conventional wisdom about wage stagnation?

I think not.

(p.s. If the middle class has experienced a 30-40% increase in "total income" since 1979, and 1979 is when US manufacturing jobs peaked, then what does that say about another bit of conventional wisdom re: the alleged "superiority" of such jobs?  Hmmmm.)

UPDATE: Cato's Alan Reynolds has more on the issue here.

Tuesday Quick Hits

A lot of very interesting things have come across my (virtual) desk over the last few days, and many of them support the things I've been discussing here over the last few months.  I highly recommend reading some, if not all, of these in full:

• Harvard's Edward Glaeser discusses why the "morality" of modern economics is rooted in human freedom (h/t Fred Smalkin).  In so doing, he underscores one of the big themes of Dan Ikenson's and my new paper on the broader case for free trade, its inherent morality: "Improvements in welfare occur when there are improvements in utility, and those occur only when an individual gets an option that wasn’t previously available. We typically prove that someone’s welfare has increased when the person has an increased set of choices. When we make that assumption (which is hotly contested by some people, especially psychologists), we essentially assume that the fundamental objective of public policy is to increase freedom of choice. Our opponents have every right to contend that economists are unwisely idolizing liberty, but they err by saying we sail without a moral North Star. Economists’ fondness for freedom rarely implies any particular policy program. A fondness for freedom is perfectly compatible with favoring redistribution, which can be seen as increasing one person’s choices at the expense of the choices of another, or with Keynesianism and its emphasis on anticyclical public spending. Many regulations can even be seen as force for freedom, like financial rules that help give all investors the freedom to invest in stocks by trying to level the playing field.  The belief in freedom does, however, create a predilection for human interaction and trade.  As [Milton] Friedman wrote, 'The most important single central fact about a free market is that no exchange takes place unless both parties benefit.' For many economists, defending free trade isn’t just about gross domestic product; it’s fighting for core values of freedom and human interdependence.  As [Adam] Smith said, 'To give the monopoly of the home market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation.'  Economists are often wary of moral exhortation, as many see the harm so often wrought by arguments that are long on passion and short on sense. But don’t think that our discipline doesn’t have a moral spine beneath all the algebra. That spine is a fundamental belief in freedom."

• The Economist: based on a rough (but very reasonable and scholarly) esitmate, trade with China has saved American consumers approximately $780 billion(!) between 2001 and 2010.  Chinese President Hu Jintao said it was around $600 billion, and the magazine's back-of-the-envelope confirmation of Hu's claim definitely calls for more research.  Nevertheless, WOW!

• Dallas Fed further confirms what we already knew: China's currency policy is not the primary driver of the US-China current account balance: "Normally, a fast-growing economy such as China would borrow money from the rest of the world instead of lending. An obvious suspect in China’s mounting current account surplus is the fixed exchange rate between its yuan and the dollar. An undervalued yuan makes Chinese products cheaper than those of competitors in international markets. As a result, China exports more than it imports. According to this explanation, yuan appreciation could rebalance the global economy. This argument has at least two flaws. First, the durability of the U.S.–China imbalance is difficult to explain. In order for the exchange rate to affect import prices, those prices can’t adjust.... Although in reality prices cannot change instantly, they do adjust over the long run; therefore, the exchange rate has only short-term effects on import prices and the current account. China has run a significant trade surplus against the U.S. for about 10 years (Chart 2). It is hard to imagine that prices have not fully adjusted to offset the exchange rate after such a long period. Second, an appreciating yuan may only minimally reduce the imbalance. Even in the short run, the exchange rate’s impact on import prices would be quite limited, studies have shown. Exporters usually pass on only a fraction of exchange rate movements when setting prices. About 20 percent of exchange rate changes were reflected in U.S. import prices during the past decade, Federal Reserve economists Mario Marazzi and Nathan Sheets found. Profit margins usually absorb some of exchange rate movement as exporters seek to maintain market share. Additionally, the currency under which import prices are invoiced also affects the exchange rate pass-through. Most U.S. imports from China are priced in dollars, and their prices are fixed in the short run. In this case, depreciation of the dollar against the yuan has no short-run effect on import prices from China."

• The FT's Clive Crook (rightly) dismantles Obama's State of the Union Address (h/t Phil Levy).  He hits on many of the problems with "competitiveness" and "investment" that I've discussed here at length.  My favorite lines: "The metaphor of growth as a race with winners and losers – all that stuff in the speech about Sputnik moments, falling behind, winning the 21st century – is nonsense. Over the long haul, if US productivity rises, so will US living standards. Why should growth in China or India hold back US productivity? No reason at all. Once conditioned to think “productivity” whenever a politician says “competitiveness”, you look at economic policy differently. Winning begins to seem overrated. What exactly do we win, you wonder? Being number one in worldwide production of solar panels would be nice, but how would that raise economy-wide productivity? The key to improving living standards lies not in winning the race to develop showcase technologies, but in accumulating capital, diffusing knowledge and accommodating the disruption that this entails."

• China is starting to experience some pretty significant trade diversion, but (unsurprisingly) very little of the sourcing is heading to the United States: "More than half of international buyers have tended to increase their sourcing from India and Vietnam due to continuous export price hikes from China, according to a recent survey by the Global Sources, a trade information provider.... Workers in Vietnam, however, are said to need twice as much time to finish one task, the Global Sources said. 30% of respondents said they plan to increase sourcing from Thailand. However, export price may not be the polled buyers' sole consideration, for 7% of them are considering increasing imports from countries that have higher production costs than China, including South Korea, Japan, the United States and the European Union."

• Meanwhile, the NYT notices (again) that Chinese inflation may shrink the US-China trade deficit.  Color me shockedtotally and utterly unsurprised.  Although most of this article just updates what we've already known for a while now, I think it's worthwhile to note this passage about the deleterious effects of higher Chinese import prices on US consumers: "The higher Chinese prices will tend to show up mainly in products like inexpensive clothing and other commodity goods in which labor and raw materials represent a bigger part of the final value — rather than in sophisticated electronics like Apple iPads, in which Chinese assembly is only a small fraction of the cost."  In short, the pain will mainly be felt by poorer American consumers and US manufacturers.  Wealthier Americans?  Not so much.  And yet it's the politicians who claim to "care" most about America's poor and the US manufacturing sector - and who demonize America's "rich" - that have for years now been demanding more expensive Chinese imports.  Maybe they're not telling us the whole story, huh?

• WTO Director General Pascal Lamy, channeling Cato's Dan Ikenson, explains in the FT why "Made in China’ tells us little about global trade": "As recently as 30 years ago, products were assembled in one country, using inputs from that same country. Measuring trade was thus easy. 2011 is very different. Manufacturing is driven by global supply chains, while most imports should be stamped “made globally”, not “made in China”, or similar. This is not an academic distinction. With trade imbalance causing friction between leading economies, the measures we use can gravely exacerbate geopolitical tensions at a time when co-operation is more vital than ever."  Good stuff from DG Lamy, but, yes, it should all sound very familiar.  However, I did find this stat to be new and interesting: "Measures we use also change the way trade affects jobs too. Research on Apple’s iPod shows that out of the 41,000 jobs its manufacture created in 2006, 14,000 were located in the US. Some 6,000 were professional posts. Yet since US workers are better paid, they earned $750m, while only $320m went to workers abroad. Indeed, the iPod may have never existed if Apple had not known that Asian companies could supply components, while both Asian workers and Asian consumers would manufacture and buy it. Statistics that measure value added can provide a more reliable way of seeing how trade affects employment."  And speaking of the WTO and trade statistics, the trade body is hosting a big seminar on the subject this week.

• The Heritage Foundation's Anthony Kim explains just how far Colombia has come in terms of economic and political freedom.  Maybe it's time we implemented that FTA, huh?

• China expert Lee Miller explains why the conventional wisdom (and hope?) that China's banking sector will be more, ahem, reserved in 2011 may be misguided.  Bizarre stuff.

• America is silly rich and relatively equal.  Also from the NYT's Economix blog comes your chart of the day on global income inequality, which shows that (i) contrary to the breathless claims of certain lefty bloggers out there, the United States is absolutely nothing like Brazil (or other major developing countries) when it comes to income inequality;and (ii) the "bottom 5 percent of the American income distribution is still richer than 68 percent of the world’s inhabitants" and "about as rich as India's richest."  Check it out:

• The always-great Becker-Posner Blog has more on inequality here (and here).  It's nothing groundbreaking, but definitely worth a read.

• More of the same: US manufacturing sector expands for the 18th straight month. Yawn. BUT, there is this little nugget: "The ISM Employment Index increased in January to 61.7%, which is the 16th consecutive month of growth in manufacturing employment and the highest reading for the ISM manufacturing employment index since April of 1973."  Don Boudreaux has more insights, including a link to a neat new story from MSNBC on the state of US manufacturing, here.

That should keep you busy for a while.  Now get to reading!

Monday Quick Hits

There have been several interesting developments over the last few days, so let's get right to them:

• Eight weeks after the 2010 mid-term elections, the Obama administration, ahem, boldly announces that it has begun the process of looking into whether it will maybe start letting Mexican trucks onto US roads again.  The Transportation Department proposal is here.  The Teamsters are "deeply disappointed," and Mexico sounds pleased, so this is looking pretty good.  But let's be very clear here: nothing has changed yet.  Mexican trucks are still banned from US roads, and $2.4 billion worth of US exports will continue to face retaliatory Mexican tariffs - as they have since 2009 - until this agreement is finalized.  Today, USTR Ron Kirk and his Mexican counterpart Bruno Ferrari optimistically announced that it could be at least 4-6 months before the program begins (it apparently needs congressional approval), and Mexico will stop adding or removing products from its retaliation list.  Nevertheless, the tariffs will remain: "Once we have dates, time frames and the manner in which this Nafta mandate will be met, we'll present and discuss the process to lift the retaliatory tariffs," Ferrari said.

• Are things looking up for the US-Colombia FTA's prospects in the 112th Congress?  According to Inside US Trade, ranking member of the House Ways & Means Committee Sander Levin (D-MI) and Senate Finance Committee Chair Max Baucus (D-MT) separately have announced trips to Colombia over the next few weeks.  These visits will definitely give both top Democrats (and any others joining them in body or spirit) a new excuse to support the FTA, despite strong resistance from US labor unions and many, if not most, of their fellow Dems.  As you may recall, similar trips to Peru back in 2007 gave Levin and former Ways & Means chairman Rangel cover to support the US-Peru FTA.  On the other hand, supporters of the US-Colombia FTA shouldn't get too excited - the FTA remains organized labor's most-hated pending agreement; the White House still hasn't gotten behind the agreement (although the Daley Chief-of-Staff pick is a reason for optimism); and Levin and Baucus are some of the Democratic Party's more reasonable folks on trade, especially trade agreements that would boost automobile and beef exports.  Nevertheless, the Levin/Baucus trips are a good thing, and maybe, just maybe, they're a sign that the Democrats' absurd resistance to the Colombia FTA is fading.

• Martin Feldstein, former chair of Reagan's Council of Economic Advisors recently predicted that the US-China current account deficit should disappear in the next few years.  Today, China announced its 2010 trade balance, and its surplus is dramatically smaller than anyone was expecting.  "Chinese exports increased 31.3 percent last year as global demand recovered, but the extent of China's outperformance was underlined by a 38.7 percent jump in imports, fueled by its voracious appetite for oil, iron ore and other commodities." As a result, "China's full-year [2010] trade surplus was 38 percent lower than its pre-crisis peak of nearly $300 billion in 2008."  I've repeatedly cautioned that global supply chains now limit the predictive value of these trade stats.  Nevertheless, it appears - on the surface at least - that some changes are afoot.

• The Daily Caller reports that the United States is missing out on being a big exporter of, wait for it, horse meat.  But because of a 2007 USDA rule that effectively banned the slaughter of horses, the 1 billion global consumers of horse meat get their food elsewhere.  Oh, and here's a real shock: the "saved" American horses apparently suffer far worse fates than the slaughterhouse, and they're causing serious environmental problems in several Western states.  And the Law of Unintended Consequences wins again.

• Politico: "Leaders of 1,655 companies and associations sent letters this week to ever member of Congress pressing for passage of all three pending free trade agreements (Korea, Colombia, Panama). House letter: http://politi.co/gGKSkb Senate: http://politi.co/gsIam3."  Me: please note the letters' typical overemphasis on exports.  Sigh.

• New research shows that bank deregulation had a significant, beneficial effect on income inequality.  Says Cato's Mark Calabria: "[W]e need to examine banking regulation/deregulation as it actually occurs and is implemented, and not how we believe some all knowing, benevolent government would impose it. The odds seem to me that the more extensive is banking regulation, the more likely it is to be captured by economic elites and narrow interests."

That's all for now.  Happy reading.  (And Go Ducks.)

More Research on the "Inequality Myth"

One of the more sophisticated arguments against free trade and other free market policies is that they exacerbate income inequality in the United States.  For example, here's Public Citizen in a 2008 anti-Bush/FTA screed:

U.S. median wages in inflation-controlled terms have scarcely risen in a generation, in no small part thanks to "labor arbitrage" between U.S. workers and low wage workers offshore, and the replacement of higher paying manufacturing jobs with lower paying service sector jobs....

[S]ome have suggested that technology – not trade deficits – are to blame for the job losses and stagnant real wages, meaning that policymakers should ignore trade and focus on making workers more computer literate. While more education and skills are certainly desirable, these are a separate concern.  For instance, college-educated workers have seen their wage growth stagnate in recent years, even in technologically sophisticated fields like engineering – the opposite of what you would expect if growing returns to skill were the main story. As well, a National Academies' study has found that employers will continue to demand mostly low skilled labor for the foreseeable future, projecting occupations like hospitality and restaurants as having the greatest demand in the coming decades. Thus, addressing the problems with the existing trade and investment rules, not only better educating American workers, will be an essential part of halting rising income inequality.

I've mentioned before that these criticisms are pretty misguided, most notably because (a) traditional measures of income inequality often focus on wages alone and neglect critical things like benefits and the ever-declining cost of basic necessities; and (b) recent work shows that trade actually decreases real income inequality by lowering prices for lower-end goods.  On this latter point, I've stated:

Beyond the obvious savings for basic household necessities (food, clothing, appliances, shelter, etc.) and the lower interest rates that it provides, free trade - particularly with low-cost countries like China - also has been shown to reduce real income inequality in the United States because the benefits of "cheap" imports are disproportionately enjoyed by lower income Americans. (Put simply, "rich" people don't shop at Wal-Mart, so they don't get as much benefit from free trade with China than do frequent Wal-Mart shoppers.)  Less real income disparity and more equal access to disrectionary goods and services means more social cohesion among America's rich, middle class and poor.

According to the Economist, new research supports both of these points and reinforces the notion that "income inequality" is mostly a myth and thus provides no grounds for the imposition of anti-market policies like protectionism:

In a recent paper weaving together several strands of new research, [Robert Gordon, an economist from Northwestern University] reports that improved use of income datasets "shows that there was no increase of inequality after 1993 in the bottom 99 percent of the population, and can be entirely explained by the behavior of income in the top 1 percent." So we are left needing an explanation for the rise of "the stinking rich"....  But when it comes to rising inequality, that's all there is to explain....

Mr Gordon's surprising conclusion is based upon recent studies showing that measured income inequality has been overstated due to inadequacies in traditional methods for constructing price indices and estimating real income. In the latest version of a much-discussed paper Christian Broda and John Romalis find that

the relative prices of low-quality products that are consumed disproportionately by low-income consumers have been falling over this period. This fact implies that measured against the prices of products that poorer consumers actually buy, their “real” incomes have been rising steadily. As a consequence, we find that around half of the increase in conventional inequality measures during 1994–2005 is the result of using the same price index for non-durable goods across different income groups.

Many popular narratives about inequality are grounded on the alleged fact that wages and incomes at the middle and bottom of the distribution have been stagnant for decades. It appears that this, too, may be an artefact of insufficiently sophisticated methods for building the price indices used to calculate rates of inflation. Using an updated price index, Christian Broda, Ephraim Leibtag, and David Weinstein find that

the real wages at the 10th percentile increased by 30 percent from 1979 to 2005. In other words, the real wages of low earners have not remained stagnant, as suggested by conventional measures, but actually have been rising on average by around 1 percent per year.

Surely there are intelligent objections to these studies. But taken together they are impressive and deserve careful consideration....

Please keep this research in mind the next time you hear someone breathlessly demanding the imposition of protectionist policies because they are "essential" to reversing American income inequality.  Either he's ignorant of the latest research, or he might just have other, less altruistic motives.

Monday Quick Hits

Lots to clear off here, so let's get right to it:

• New Peterson Institute study: imports don't put downward pressure on wages.  The authors conclusions: " This analysis suggests that the fears of rising US wage inequality from developing-country imports in recent years are unwarranted. While conventional trade theory makes such expectations plausible our investigation reveals they are far off the mark.... US industries competing with developing country imports are not particularly intensive in unskilled labor. Moreover, the relative effective prices of the US industries that are unskilled labor–intensive have actually increased rather than decreased since the early 1990s.  Changes in effective US prices from whatever cause have not mandated changes in relative wages. Neither have changes that can be ascribed to import prices mandated increases in wage inequality.... The goods exported by developing countries are highly imperfect substitutes for those produced by developed countries. This means that for the most part, unskilled US workers are not competing head to head with their counterparts in developing countries. It also suggests that methodological approaches to the question of trade and wages that measure the net factor content of trade or that assume that imports and domestic products and/or tasks are close substitutes rest on extremely shaky grounds." (h/t Alec Van Gelder)

• US manufacturers: Obama's National Export Initiative is "misguided" because it's economically illiterate.  Money passage:
  

  David Speer, chief executive of Illinois Tool Works, a large diversified manufacturer widely seen as a bellwether for the sector, noted that most big industrial companies have spread their manufacturing operations around the world, making the focus on exports a poor reflection of the health of the sector.
  
  The export drive “is very misdirected”, Mr Speer said in an interview with the Financial Times. “You often hear the politicians say: ‘those are US jobs that went overseas, they should be here.’ Well, most of the jobs go overseas for rational reasons – that’s where the growing market is.”
  
  “We’re not going to be any better off by saying: ‘we’re going to ship our product to China from the US’,” Mr Speer said.
  
  “We can’t do it. It won’t work. We won’t be able to compete – for lots of reasons, the smallest of which is the wage rates. It’s logistics, it’s the duties, it’s the closeness to the customer end-market that you can’t service remotely.”
  
  The ITW chief’s comments reflect a view expressed in private by many industrial companies that the export drive is unfeasible and gives the false impression that lost manufacturing jobs in the US will be replaced.

  Gee, now where have we heard that before?
  

• WSJ (subscription): Changes in China's currency won't change trade surplus because bigger, systemic changes are needed.  Cato's Dan Ikenson adds more here.  (And, yes, all of this also sounds vaguely familiar.) 

• WTO releases its Annual Report.  The new publication has lots of good info on the WTO's history and recent activities.

• AEI's Claude Barfield: Here's the real "big news" about the President's big weekend announcement re: the US-Korea FTA.  "Finally, for Washington inside baseballers, it is interesting that the planning and announcement of this decision was carried out by the National Security Council (NSC). This will undoubtedly feed the speculation that the White House staff really directs key U.S. trade policy decisions and that Michael Froman, the NSC Deputy Director for International Economics, is really the “go-to” guy, rather than U.S. Trade Representative Ron Kirk."

• Mark Perry: Colombia's economy is dominating because of its commitment to free markets and free trade.  Too bad the President didn't make an FTA announcement about them last weekend too, huh? 

• Sen. Jim DeMint (R-SC): The current system for requesting miscellaneous tariff suspensions is awful; my legislation will fix it.  Me: it also would end an ongoing spat between some US manufacturers and anti-earmark Republicans in Congress. 

• The UK: here's a simple reminder of why Americans should fight tooth-and-nail against a VAT.  (And, yes, that's twenty - two-zero - percent tax on top of everything else.) 
  

On "Keeping America's Edge"

The Manhattan Institute's Jim Manzi has a thought-provoking essay in the Winter 2010 edition of National Affairs that's been getting a lot of traction on the interwebs.  Manzi's essay is definitely worth reading in full, but his basic argument is that current US policies fail to solve the inherent conflict between economic dynamism and social cohesion, and that the United States, unlike Europe, simply cannot retreat into the low-growth, social democratic model embraced by our statist friends across the pond:

Our strategic situation is shaped by three inescapable realities. First is the inherent conflict between the creative destruction involved in free-market capitalism and the innate human propensity to avoid risk and change. Second is ever-increasing international competition. And third is the growing disparity in behavioral norms and social conditions between the upper and lower income strata of American society.

These realities combine to form a daunting problem. And the task of resolving it turns out not, by and large, to be a matter of foreign ­policy. Rather, it compels us to consider how we balance economic dynamism and growth against the unity and stability of our society. After all, we must have continuous, rapid technological and business-model innovation to grow our economy fast enough to avoid losing power to those who do not share America's values — and this innovation requires increasingly deregulated markets and fewer restrictions on behavior. But such deregulation would cause significant displacement and disruption that could seriously undermine America's social cohesion — which is not only essential to a decent and just society, but also to producing the kind of skilled and responsible citizens that free markets ultimately require. Moreover, preserving the integrity of our social fabric by minimizing the divisions that can rend society often requires ­government policies — to reduce inequality or ensure access to jobs, education, ­housing, or health care — that can in turn undercut growth and prosperity. Neither innovation nor cohesion can do without the other, but neither, it seems, can avoid undermining the other....

To grasp the difficulty of this moment for America, we must see more clearly the pain involved in economic innovation, the price we would pay for stifling innovation, and the daunting social obstacles that stand in the way of balancing the two.

Manzi provides a thorough accounting of the aforementioned issues confronting the American policy landscape, and I have only minor quibbles with his thoughts there (full disclosure: I've been a fan of Manzi since he released a blistering series of blogposts in Fall 2008 about the financial collapse).  However, Manzi's solutions to these daunting challenges left me irked - not because of their content, which I think is pretty spot-on, but because of what he left out (intentionally or otherwise).

Manzi provides four pro-market solutions to ensuring both economic growth/innovation and social cohesion: (i) stopping or unwinding much of Obama's economic policies, including the Stimulus*, cap and trade, and ObamaCare; (ii) smart, unobtrusive financial regulation; (iii) educational deregulation; and (iv) a "reconceptualization" of immigration as recruiting for the best and brightest in the world (while re-establishing control of our southern border).  All good things.  But Manzi leaves out one last critical piece to his policy puzzle: unilateral elimination of barriers to trade in goods, services and investment.

(Like you didn't know I'd say that.)

The conflict between maintaining rapid economic growth and reducing social upheaval also exists in the ongoing battle between free trade and protectionism.  Free traders (like me) argue that the only way for American growth and innovation to prosper in a rapidly developing global economy is to unilaterally reduce barriers to foreign goods, services and investment, and the facts overwhelmingly back us up. The protectionists, on the other hand, seek to restrict trade because the resulting economic dynamism, they allege, means lost jobs and market share in a import-sensitive sectors (usually dominated by organized labor). So they prefer economic isolation, and the slower growth, innovation and job-churn associated therewith.

But the protectionists cannot be allowed to win the policy argument because, just as Manzi says:

[T]he United States does not exist in a vacuum, and making our internal economic changes less stressful is far from our only concern. We also face external challenges, especially rising competition from abroad. And our position in the global order means we cannot afford to go easy on ourselves and constrict ­innovation. Quite the opposite: We need rapid growth just to keep up.

So closing our borders to import competition and investment - and the resulting economic stagnation it would produce - is not an option for the United States, just as imposing higher energy costs through Cap and Trade or installing a social democratic welfare state is similarly untenable.  Yet Manzi focuses his solutions on education, labor and financial regulation, and ignores both trade and foreign investment.  My guess is that this focus stems from Manzi's discussion of historical data showing that, while US manufacturing output has remained steady as a share of GDP (around 15% since WWII), manufacturing employment (overall and as a share of total US employment) has declined consistently over the same period - an indication of "ever-increasing productivity."  Perhaps Manzi therefore thinks that manufacturing jobs shouldn't be a focus of any 21st century policy framework because "human capital" will be used in "new and constantly evolving ways" (read: not in manufacturing). 

I think there's a lot of truth to this, and thus that America's educational and immigration systems shouldn't dwell on creating or recruiting the next generation of assembly line workers but rather engineers, computer scientists, doctors, etc.  Nevertheless, America remains the world's largest manufacturer (by value), and as Manzi's own data demonstrate, manufacturing's share of US GDP has remained pretty constant (around 15%) for over 60 years.  Thus, considering that manufacturing is and will remain a large part of the US economy, free market policies should be put in place to ensure that the sector - as well as the many services jobs that it can indirectly support - remains vibrant.  And because a majority of all imported goods are capital goods and equipment - things that help US manufacturers stay globally competitive - guaranteeing unfettered access to these imports must be a priority.  Policies that eliminate domestic subsidies and encourage global investment in US manufacturers companies (and services firms too) are equally necessary.

Trade also addresses the "social cohesion problem."  Even if one were to ignore US manufacturing and foreign investment, the immense social benefits that trade provides American families is reason enough to nurture unilateral liberalization policies.  Beyond the obvious savings for basic household necessities (food, clothing, appliances, shelter, etc.) and the lower interest rates that it provides, free trade - particularly with low-cost countries like China - also has been shown to reduce real income inequality in the United States because the benefits of "cheap" imports are disproportionately enjoyed by lower income Americans.  (Put simply, "rich" people don't shop at Wal-Mart, so they don't get as much benefit from free trade with China than do frequent Wal-Mart shoppers.)  Less real income disparity and more equal access to disrectionary goods and services means more social cohesion among America's rich, middle class and poor.

So free trade policies actually address both of Manzi's concerns - ensuring economic growth, innovation and global competitiveness (through access to prime inputs and services at good prices) and eliminating social disparities between rich and poor (through lower interest rates and expanded access to basic necessities and "luxury" goods).  And, of course, these policies are free market solutions that involve less government, not more, so they'd seem to be a great fit among Manzi's policy solutions.

Now, despite all of the great things that trade can do, the fact remains that today the protectionists are winning the rhetorical - if not policy - battle.  Indeed, President Obama successfully campaigned on promises of overt protectionism - renegotiating NAFTA, taxing corporate outsourcing, opposing pending FTAs, maintaining domestic farm subsidies - while Sen. John McCain was an unabashed free trader and, well, placed a not-so-close second.  So current US "free trade" policy is obviously not doing the trick.  To rectify this problem, a variation of Manzi's fourth solution - reconceptualizing immigration as recruiting - could also work for trade and investment.  If government cast unilateral trade liberalization as the unabashed expansion of American families' and businesses' fundamental right to obtain the best goods, services and capital in the world (at the best prices) - rather than the apologetic and reluctant capitulation of US market share done only when reciprocated by other nations - free trade would very likely be better received in America (despite protectionists' howls to the contrary).  Such a change would require the reversal of many current policies that serve (intentionally or not) to paint imports as "necessary evils," tolerated only because they ensure foreign market access for US exports.  These policies include the standard, tit-for-tat formula of reciprocal trade negotiations, basic trade deficit reporting and the use of trade adjustment assistance (TAA) for US workers allegedly displaced by imports.

Such changes certainly wouldn't be easy, but they're needed to foster domestic support for unilateral trade and investment liberalization - to create a new "free trade culture" in the United States.  And if the challenges that Manzi describes are real, then free trade policies, along with those focusing on education, immigration and smart financial regulation, can definitely help keep "America's edge" in tact.

Charts of the Day: It's Getting Better All The Time

Great stuff from Steve Horwitz over at Austrian Economists on the modern enrichment of America's poor:

% Households with:	Poor 1984	Poor  1994	Poor 2003	Poor 2005	All 1971	All 2005
Washing machine	58.2	71.7	67.0	68.7	71.3	84.0
Clothes dryer	35.6	50.2	58.5	61.2	44.5	81.2
Dishwasher	13.6	19.6	33.9	36.7	18.8	64.0
Refrigerator	95.8	97.9	98.2	98.5	83.3	99.3
Freezer	29.2	28.6	25.4	25.1	32.2	36.6
Stove	95.2	97.7	97.1	97.0	87.0	98.8
Microwave	12.5	60.0	88.7	91.2	1.0	96.4
Color TV	70.3	92.5	96.8	97.4	43.3	98.9
VCR	3.4	59.7	75.4	83.6	0.0	92.2
Personal computer	2.9	7.4	36.0	42.4	0.0	67.1
Telephone	71.0	76.7	87.3	79.8	93.0	90.6
Air conditioner	42.5	49.6	77.7	78.8	31.8	85.7
Cellular Telephone			34.7	48.3	0.0	71.3
One or more cars	64.1	71.8	72.8 (2001)		79.5
source:  http://www.census.gov/population/www/socdemo/extended-05.html and prior years

As we can readily see, America's poor (i.e., those officially below the poverty line) own a lot more household "necessities" today than they did only 20 years ago.  And what about the gap between rich and poor?  On that issue, Horwitz offers a follow-up chart:

% Households with:	Poor 2003	Rich 2003	2003 gap	Poor 2005	Rich 2005	2005 gap	Gap change
Washing machine	67.0	94.8	27.8	68.7	95.2	26.5	-1.3
Clothes dryer	58.5	93.6	35.1	61.2	94.3	33.1	-2.0
Dishwasher	33.9	86.1	52.2	36.7	88.4	51.7	-0.5
Refrigerator	98.2	99.6	1.4	98.5	99.8	1.3	-0.1
Freezer	25.4	44	18.6	25.1	43.7	18.6	0.0
Stove	97.1	99.6	2.5	97.0	99.7	2.7	0.2
Microwave	88.7	98.6	9.9	91.2	98.8	7.6	-2.3
Color TV	96.8	99.5	2.7	97.4	99.5	2.1	-0.6
VCR	75.4	97.7	22.3	83.6	98.5	14.9	-7.4
Personal computer	36.0	87.9	51.9	42.4	92.7	50.3	-1.6
Telephone	87.3	98.6	11.3	79.8	97.1	17.3	6.0
Air conditioner	77.7	90.3	12.6	78.8	89.1	10.3	-2.3
Cellular Telephone	34.7	88.6	53.9	48.3	92.4	44.1	-9.8

As the chart makes clear, the gap has narrowed in 10 of 13 categories in only 2 years, and the only product with a large increase is landline telephones - something that is easily explained by the large increase in poor cellphone ownership.  Finally, these charts inspired Mark Perry to issue his own awesome chart on the cost of these household necessities in terms of hours worked to pay for them:

Very cool.  As we can see from Perry's chart, the average American today has to work far fewer hours than they did in 1973 to buy basic household items.  As such, they're far better off today than they were back then. Indeed, all of these charts make clear that we should be very, very suspicious when we hear politicians lamenting the worsening state of America's "poor."

I think the charts speak for themselves, but I'll still offer up a post-script: one of the big things driving these figures is open trade with China and other low-cost countries. Indeed, according to University of Chicago's Christian Broda and John Romalis, "[M]uch of the rise of measured income inequality has been offset by a relative decline in the prices of products that poorer consumers buy." And China, as the primary manufacturer of such "products," is one of the main drivers of their price declines.