Thanks, Europe!

When the Luddites first protested mechanized looms and the Industrial Revolution more broadly they thought that their actions were protecting English society from the horrible job-killing effects of innovation and automation.  But as any economics student can tell you, such protests were utterly misguided: innovation and productivity gains don't increase unemployment because, while they might destroy old, obsolete jobs (like, you know, bank tellers), they free up resources for new and better jobs.  Of course, in today's global market for goods, services and (to a lesser extent) labor, when a society rejects innovative technologies or makes it cost-prohibitive to employ them, the new jobs, economic growth and, yes, further innovation associated with such technologies don't disappear - they simply move to a more hospitable jurisdiction.

Case in point: the 140 high-paying plant science jobs that are currently en route to my neck of the woods due to continued European resistance to genetically-modified foods:

BASF SE, the maker of the Amflora genetically modified potato, is moving the plant-science division that alters genes in crops to the U.S. from Germany after European consumers resisted the technology.

The unit’s headquarters in Limburgerhof will shift to Raleigh, North Carolina, and development and commercialization of products targeted solely at cultivation in Europe will be halted, BASF said today in a statement. The move will lead to the loss of 140 European jobs and cost a “low two-digit million amount,” Stefan Marcinowski, the BASF board member who oversees plant biotechnology, said today on a conference call.

“There is still a lack of acceptance for this technology in many parts of Europe from the majority of consumers, farmers and politicians,” Marcinowski said. “It does not make business sense to continue investing in products exclusively for cultivation in this market.”

The flight of research means Germany may lose out on the $12 billion market for genetically modified plants, which is set to grow 5 percent annually over the next five years, according to advisory firm Phillips McDougall. BASF, the world’s biggest chemical maker, founded the agricultural center in 1914 in Limburgerhof, near the company’s headquarters city of Ludwigshafen....

The plant-science unit will concentrate on the Americas and Asia, BASF said. Its sites in Gatersleben, Germany, and Svalov, Sweden, will close, while research will continue in Ghent, Belgium, and Berlin, the company said. Limburgerhof, which has 11,000 square meters of greenhouses and about 40 hectares of fields, will retain its crop-protection activities, it said.

Genetically modified potato products will no longer be developed specifically for Europe, though the unit will continue seeking regulatory approval to “maintain all options,” the company said. The chemical maker spent a “high two-digit million amount” on developing its genetically altered potatoes, Marcinowski said....

As the article above makes abundantly clear, the biggest loss (or, depending on your location, gain) here probably isn't those 140 jobs, as great as they are - it's the research and innovation that will inevitably result from moving those jobs to North Carolina.  Those advancements will then bring more investment, jobs and growth to the area in the same and peripheral sectors.  Rinse.  Repeat.

Europe's skepticism towards GM foods has long been more about local politics (mainly protecting small farmers and placating fear-mongering environmentalists) than good policy or strong science.  The negatives of those politics, however, have typically been cast in terms of their detrimental effects on exporters of GM foods in other markets (particularly the United States) and EU consumers.  BASF's latest announcement makes clear that if you embrace Luddism for too long, the pain will spread a lot further than that.

The only bright side here is that we all won't suffer from the EU's bad policies.  More accommodating places like the United States will roll out the red carpet for BASF and any other dejected European company that wants to join them over here.

So... willkommen in Nord Carolina, meine Freunde!

Monday Quick Hits (World Champion Dallas Mavericks Edition)

I'm sure that you, like me, are still tired from celebrating the Mavs' ridiculously unexpected victory last night. So here's a little pick-me-up:

• Sec. Clinton: Free trade is great for everyone (except Americans!).  In all seriousness, if you've ever wondered whether the Obama administration's free trade foot-dragging reflects political opportunism or a sincere-yet-misguided misunderstanding of basic economics, wonder no longer.

• WTO Director General Pascal Lamy explains that, because of global supply chains, value-added is a much better way to measure trade flows, and old school trade stats "give us a distorted picture of trade imbalances between countries." A full WTO report on this issue gives us a detailed understanding of the abject absurdity of politicians' breathless claims about global trade imbalances based on the old metrics.  For example, on our elected officials' currency demagoguery, Lamy stated: "When products include many parts made in many other countries, the effect of an isolated exchange rate appreciation or depreciation to the selling price in export markets will be reduced to the domestic content of these exports, to its 'value added content'. This may explain why empirical studies about the impact of exchange rate changes on imbalances tend to show they only have limited or ambiguous effects."  Translation: the demagoguery is pretty much baseless.  Heritage's Bryan Riley has more on our misleading trade stats here.

• In a must-read editorial, George Will absolutely destroys the White House's refusal to submit pending FTAs to Congress without congressional assurances on expanded Trade Adjustment Assistance.  My favorite lines: "A government borrowing $58,000 a second cannot afford Obama’s policy of Stimulus Forever, and there is this problem with TAA at any level: It is unjust to treat some workers as more entitled than others to protection from the vicissitudes of economic dynamism. Consider a hypothetical Ralph, who operated Ralph’s Diner until Applebee’s and Olive Garden opened competitors in the neighborhood. With economies of scale and national advertising budgets, those two franchises could offer more choices at better prices, so Ralph’s Diner went out of business. Should he and his employees be entitled to extra taxpayer subventions because they are casualties of competition? Why should someone be entitled to such welfare just because he or she is affected negatively by competition that comes from abroad rather than down the street? Because national trade policy permits foreign competition? But national economic policy permits — indeed encourages, even enforces — domestic competition. In 2001, when approximately 80,000 people worked in 7,500 music stores, the iPod was invented. Largely because of that and other technological changes, today only about 20,000 people work in 2,500 music stores. Should those 60,000 people be entitled to extra welfare because they are “victims” of technology? Does it matter if the 60,000 have found work in new jobs — perhaps making or selling electronic devices? In 2008, Americans bought 1.4 billion books made of paper and 200 million e-books. Soon they will buy more e-books than paper books, and half the nation’s bookstores will be gone. Should the stores’ former employees be entitled to special assistance beyond unemployment compensation? Reactionary liberalism holds that existing jobs must be protected with policies that reduce the economic dynamism that would mean a net increase in American jobs. So the dreary probability is that even if the TAA entitlement were re-enriched to stimulus levels, Democrats would again move the goal posts, concocting new objections to the trade agreements."  Yep. 

• Speaking of TAA, I quite enjoyed this NYT op-ed from former Bush official Matthew Slaughter and former Clinton official Robert Lawrence about how to resolve the White House's self-imposed TAA/FTA impasse.  Their solution: (i) pass the FTAs as soon as humanly possible, and then (ii) scrap TAA and the current mishmash of other federal unemployment benefits and replace the ancient, broken programs with a more streamlined and rational system that is market-friendly and doesn't discriminate against Americans who lost their jobs due to technology or something other than (allegedly) trade policy.  I don't agree with everything they propose, but I love this idea (and have advocated something similar for a few years now): "enabling unemployed workers to make penalty-free withdrawals from savings accounts like 401(k)’s and I.R.A.’s to finance costs like occupational retraining and relocation."  Sadly, the chances of this deer-in-the-headlights White House actually doing something as rational and economically-beneficial as the Slaughter/Lawrence plan are, well, not good.

• Is the, ahem, "Chicago way" coming to Geneva?  The Peterson Institute's Gary Clyde Hufbauer reports on what he sees as a very troubling development at the WTO: USTR's attempt to block Appellate Body member Jennifer Hillman from serving a second term on the world's most important arbiter of trade disputes: "The United States has never before blocked its Appellate Body appointee from serving a second term. Since the USTR has offered no explanation for blocking Hillman, suspicions are bound to arise that the United States is displeased with her decisions on the AB and wants to name a judge who is more attentive to US positions in future cases. These suspicions are bound to erode confidence in the WTO judicial system, and create a chilly reception for Hillman’s successor appointee. 'Judicial independence' is a hallowed American concept, now enshrined in the WTO.... But as a member of the bar, as well as President, Obama should seriously reconsider this damaging precedent."

• Does CNBC get just how contradictory this ridiculous news story about the Japan tragedy and the US trade deficit is?  Compare and contrast (emphasis mine): "The after-effects from the March earthquake and tsunami in Japan left behind one on the US economy: An unexpected shrinking in the massive trade deficit. But that improvement may not last long….  Most of the $3.1 billion decline came from Japan and a $2.5 billion drop in auto-related imports. The tsunami devastated the Japanese auto industry, slowing parts distribution and production essential to US car manufacturing and sales."  So to recap: choking off essential inputs for US manufacturers is a "positive impact."  Riiiiight.  (h/t Bryan Riley) 

• The Mises Institute's Jeff Tucker explains how US treatment of Vietnamese catfish basa and swai is an "archetype of disgusting protectionism."  Yep.

• In case you're wondering, inflation and rising labor costs aren't isolated to China.  According to the WSJ, India's facing similar issues: "Maruti Suzuki India, the local unit of Suzuki Motor, is facing what's become a familiar hazard in the country: labor action. On Wednesday, a strike by about 2,000 workers at one plant entered the fourth day. With $9 million of potential revenue lost each day from the closure, the total is about $32 million, or close to 1.5% of last quarter's revenue. Maruti's troubles are the latest reminder of the effect of labor unrest as workers demand better wages and benefits, triggered partly by high inflation. Last month, a similar protest by the employees of national carrier Air India lasted nine days, causing a revenue hit of $30 million. In 2010, Hyundai Motor India had to rehire most of the employees it had sacked after a two-day protest that cost a similar amount."

• Slate's Bryan Palmer explains why Europe "sucks" at innovation.  The intro reads like an article from The Onion: "The French government has banned television reporters from using the words Twitter and Facebook when referring generically to social media, because all that free advertising gives the companies an unfair advantage." Sacre bleu! 

• Bloomberg's editors go back to basics, explaining why protectionism is politically attractive yet economically stupid.  The whole thing is worth reading, but I really enjoyed this quote: "Furthermore, the benefits of free trade do not require reciprocity. Avoiding tariffs and quotas is good for us whether China, Japan or Europe follow suit."  Exactly.

• In case you need further evidence of the White House's secret understanding of free trade's myriad benefits, here's video of CIA Director (and current Secretary of Defense nominee) Leon Panetta explaining the strategic importance of free trade, especially with our allies in Korea, Colombia and Panama (start at 6:04, with Sen. Rob Portman's smart line of questioning):

Panetta: Senator, I think that when it comes to protecting our security there are number of areas that have to be addressed and one of those obviously is not just the military responsibility but there is an economic side of this that plays a very important role in terms of promoting better security. The ability of these other countries to develop trade with us to develop their economies creates greater stability within those countries. I think that’s a fact and to the extent that we can help promote that kind of trade, that we can promote that kind of economic development, I think it assists these nations in their ability to achieve stability. Columbia is a good example. They have done a great job going after narco trafficking. If we can help, you know be able to help them develop their economy, that could become another added factor in providing greater security in that region and the same thing is obviously true for Korea.

That's all for tonight.  Go Mavs!

Monday Quick Hits

Lots of interesting links over the last few days, so let's get right to 'em:

• Lifelong Democrat laments his party's anti-innovation agenda.

• WSJ's Strassel: why the GOP needs to take on the government's misguided "green energy" movement.

• AEI's Nick Schulz on why a revised American immigration policy must be a central feature of its future competitiveness policy.

• Korean negotiators to their US counterparts: "Hey, if you guys want to re-open the KORUS FTA for autos and beef, then we'd like to re-visit some of your most important/untouchable issues."

• Not all Dems are against free trade and American competitiveness; unfortunately, this important Dem isn't, you know, an elected official anymore.

• Don Boudreaux quickly explains the illogic of mercantilism.

• Russ Roberts so wants to explain the problems with Ben Bernanke's recent China criticisms that he's willing to give away part of his new book for free.

Now, if you'll excuse me, I need to get back to my intense turkey-ingestion training regimen.

America's Development History

Courtesy of Cafe Hayek's Russ Roberts comes a fantastic lesson from NPR (of all places) about creative destructon and American wealth and innovation: "The Jobs Of Yesteryear: Obsolete Occupations." As Roberts notes, the slideshow, which includes supporting text and audio, demonstrates how most of America's jobs of yesteryear were "lost" because of technological advances, not foreign competition.

I'd add that the slideshow provides a few other good lessons. First, and as a corollary to Roberts' point, the realities of how many jobs really are "destroyed" in America - i.e., by becoming obsolete - shows that one can't focus only (or mainly) the sheer number of jobs created, but also the quality of those jobs. America could add a million jobs tomorrow by mandating the use of typists or elevator operators, but would we really be any better off? (If only someone would ask this question to the state of New Jersey, which still mandates that all gas stations be full service only!)

Second, the photo gallery shows just how predominant child labor was during America's years as a "developing country." Indeed, several of the jobs highlighted - copy boys, pinsetters, switchboard operators (before the kids' pranks became unbearable) - were done mostly by children. Knowing this reality of American development provides some much-needed context when we hear the loud concerns and judgments about child labor in places like India and China coming from people in advanced developed economies that had very similar labor practices during their development. Now, I'm not saying that such concerns/judgments are always insincere or unnecessary - that's obviously untrue - but they do require this historical context. (A point Mark Perry also makes today in discussing a very cool news story about China's workers.)

Finally, and on a more humorous note, it's quite telling that the job of "Lector" - basically a guy who would read the news aloud while people rolled cigars - hasn't been used in the United States for 100 years but, as the NPR slideshow notes, is still being used in Cuba. Ahh, Cuba: socialist paradise!

America's Edge

According to a great new article in today's WSJ, the US remains the world's leader - by significant margins - in science and innovation.  Other countries are making gains - a good thing for everyone - but the dire predictions that the United States will lose its innovative edge anytime soon appear to be overblown.  More on this later, but for now, enjoy:

The U.S. remains the world's science and technology leader, but other countries are gaining ground, the National Science Board said Friday in its biennial report on science and engineering.

The U.S. accounted for nearly a third of $1.1 trillion spent on research and development globally in 2007, minted more science and engineering doctorates than any other country, and led the world in innovative activity. Efforts by China and other developing Asian countries to boost their science and engineering capabilities are bearing fruit, however, and the gap between them and the U.S., though still wide, is narrowing.

For the 10 years ending in 2007, the most recent year for which the data were available, spending on research and development grew between 5% and 6% annually in the U.S., Japan and the European Union. Similar spending in India, South Korea and Taiwan grew an average 9% to 10% a year over the same period. In China, it averaged more than 20%.

The U.S. awarded 22,500 doctorates in natural sciences and engineering in 2007, but more than half of them were awarded to foreign nationals. Past experience suggests that rather than return to their native countries, many of those new Ph.D.s will stay in the U.S. The report noted that 60% of temporary visa holders who earned doctorates in science in engineering in 1997 were working in the U.S. in 2007. The National Science Board is the advisory body of the National Science Foundation, an independent U.S. government agency.

U.S. researchers published about a quarter of an estimated 760,000 research articles in peer-reviewed journals in 2008. Chinese researchers published 8% of the research articles, up from just 1% in 1988.

Despite China's strides, researchers in China accounted for only about 1% of U.S. patents granted in 2008. Despite Chinese government efforts, inventive activity in China "appears elusive, at least as indicated by patents filed in a major Western market," the report noted.

U.S.-based inventors accounted for 49% of patents granted, down from 55% in 1995.

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.