Stimulus Package Doesn't Add Up
Sat, 01/26/2008 - 1:30pm
Like most people, my first reaction on reading about the economic stimulus package was, "What's in it for me?" And the answer is, actually, a lot. I'm married, pay taxes, and have three kids at home, so the announced plan would give me $2100. Not bad, right?
Actually, it is bad. The plan costs about $150 billion, or about $500/person. My family's share of the national debt would go up by $2500. Borrowing $2100 now and paying back $2500 (plus interest) later isn't a good deal. It's a ripoff.
Worse yet, all that debt will be held by foreign investors, including the Chinese government, who will have more leverage than ever over us. We're giving away our economic independence in the name of avoiding a recession.
Worst of all, the package won't do much to avoid that recession. Like most middle-class families, my wife and I may spend some of our tax rebate, but nowhere close to all of it. A plan that directed money to the poor (who need it and would spend it) might have made sense, but this "money for everybody" plan is just election-year nonsense.
Hopefully, somebody in Congress will stand up to this boondoggle. Or maybe the tooth fairy will release her stash of coins. The odds are about the same.
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Stimulus Package
By rabbit162
Sat, 01/26/2008 - 8:37pm
How can it be an "immediate stimulus" if the checks won't go out until some time in May? It isn't even February yet!
There's more to this than simple arithmetic.
By Jdvn1
Sun, 01/27/2008 - 12:41pm
Let me explain try to you how loans work, and why this statement of yours is wrong.
Do you realize that the reason any organization incurs a debt is that the temporary productivity increase is worth more than the cost of the debt? Do you feel ripped off on your home mortgage? Would you rather have lived in the sort of domicile that you could've afforded using only your cash-on-hand? Maybe you're obscenely rich and are able to pay for a house for your entire family out-of-pocket, but most homeowners would argue that they chose to get a mortgage because the house that the mortgage enables them to obtain is better than the alternative, despite the debt incurred. That is, the family is better off with the loan than without.
In a similar fashion, a company might get a business loan in order to buy more machinery or labor, or to embark on a new project, or somesuch. This is increase of capital or business activity raises the company's productivity, which in turn raises revenue, so that paying off the loan isn't an issue. In other terms, the rise in productivity is worth more than the debt incurred with the loan. The company is better off.
Likewise, when the government incurs a debt, it tries to make the country more productive. This rise in productivity is worth more than the debt incurred with the loan, so that paying off the loan isn't an issue. The country is better off.
Mind you, our national debt is something like 3% of GDP--a pretty small percent. It could be paid off easily if there were incentive to do so. Fact is, there isn't. As mentioned earlier, debts are incurred for a purpose. We may get rid of our debt every once in a while (and, the ability to pay for things out-of-pocket is nice for the super-wealthy), but a debt isn't necessarily a bad thing.
Now, THIS is a different topic entirely. Sometimes loans don't work out the way you intend for them to work out, just like a company's new project failing, or a family not able to pay their mortgage (that's why subprime loans are so bad, and why loan agencies are supposed to be picky about to whom they give loans). A government, too, can have a loan that doesn't work out.
The government is essentially making a loan the the American people so that they spend money, businesses sell more, manufacturers produce more, their employees make more, and so on until the business cycle revs up again. The projected increase in productivity is worth more than the debt incurred.
You may have a valid point with this paragraph--maybe. Problem is, no one knows for sure. Who cares if you don't spend your share of the stimulus package? Who cares if everyone you know doesn't spend his share of the stimulus package? The government tries to take that into account! It needs a certain percentage of people to spend a certain percentage of the stimulus package in order for the plan to have its desired effect, and you and the people you know are not a sufficient sample of the United States.
So, will the plan work? No one knows. Very educated people disagree on the matter. If it works, then the loan is worth it. If it doesn't work, then it was a bad idea. But it might work. It isn't a clear-cut issue, and there are a lot of "maybes" tied to it. If you contribute your share to the stimulus package, then it's more likely to work--if not, then I hope someone else picks up your slack.
Oh, and for the "how come 'immediate' means 'May'?" comment--compared to the speed the government tends to move on this sort of thing, May is pretty fast.
Good and bad loans
By Lorenzo Sadun
Sun, 01/27/2008 - 9:23pm
If I need money for something important, like a house or a college education or to start a business, then it makes good sense to borrow. Having the money now is more important than having it later, and that's worth paying interest for.
It's entirely different if somebody loans me money that I don't immediately need and haven't asked for, saddles me with 20% more debt on day one than the money I get, and also makes me pay interest from then on. Credit card companies offer me useless loans all the time, and I dump their offers into the trash. But the Bush administration and the Democratic Congress won't let me dump their offer in the trash. If the package passes (and it will), I'll be stuck with it, and so will you.
The point of a stimulus plan is old-fashioned Keynesian economics, running a deficit to stimulate demand. Of course, if the government actually spent the money, building roads or bridges or schools, then every dollar of new government debt would instantly create a dollar of extra economic activity -- and we'd have good things like roads and bridges and schools. But if people get tax rebates and only spend half of it, then there is only 50 cents of directly generated economic activity for every dollar of debt. That's incredibly inefficient.
I don't know whether we're about to have a severe recession, a mild recession, or just a period of very slow growth. (Nobody else knows, either.) I don't know whether a stimulus, done right, would make good economic sense. As you say, the economists are split on that. But it's pretty clear that this package is not being done right.
A few words about the size of the deficit and debt. The government's annual deficit is only about 3% of GDP, which is tolerable. However, our accumulated debt is between 5 and 10 trillion dollars (depending on how you account for unfunded entitlements), or about the same size as our GDP. A good fraction of that is from the past 7 years. At the end of the Clinton years we had a golden opportunity to pay off our debts, but the Bush tax cuts and the Iraq war put an end to that, changing us from "tax and save" economics to "borrow and spend".
As our government generates more and more debt, somebody has to loan the government money. Unlike in FDR's time, when most government securities were held by Americans, much of our debt is held by foreign investors and foreign governments. (A consequence of our huge trade deficit.) If they decided to unload their securities, or even just to refuse to buy any more, our government would be in deep, deep trouble. As a result, we negotiate with foreign countries -- on trade, human rights, Iraq, and a host of other issues -- from a position of extreme weakness. The debt isn't just about economics. It undercuts our national security.
It comes down to this: I don't mind paying taxes. I'm happy to pay my share of the cost of improving our nation. But the idea of mortgaging our children's future, even more than we're already doing, leaves me feeling ill.
Quality TBD
By Jdvn1
Mon, 01/28/2008 - 12:06am
You may not need the loan, but the economy may need for you to take it anyways.
Your premise that a dollar of government spending creates a dollar of extra economic activity is not necessarily true (though, it is a mistake that some economists still make). Moreover, government spending is inherently inefficient, since taxing a large area to put a bridge in a smaller area may help the smaller area, but hurts everyone else, and is therefore economically inefficient.
These rebates are going to people in low and middle income tax brackets. As has been said, these people have lower savings rates, and are therefore more likely to spend the money rather than save it. Also, since these people can spend the money how they see fit, that aspect is more economically efficient than government spending (a key problem with Keynesian economics is the inefficiency of government spending).
Guaranteed expenditures with higher inefficiency in allocation, or fewer expenditures with a higher efficiency in allocation--which way is 'better' isn't clear cut either.
You are correct about the deficit and the debt (though, I think my 3% figure is dated... I think it may be closer to 5 now, and the debt is something like 40-70% of GDP, depending on which measure you use), but it's important to note that foreign entities (who have something like 25% of the debt) unloading their US securities would hurt them too. They have strong incentive not to make such drastic measures. But that's not really the issue, here. You may be unhappy with mortgaging our children's future, but there are probably worse offenders than the stimulus package.
Tax "rebates" to people who didn't pay in?
By unchainthedogs
Sun, 01/27/2008 - 9:08pm
I know the reasoning is that people living in poverty will spend the money, but I don't see this helping the economy in any real sense and I don't like the idea of my hard earned tax dollars being given away. We'd be better off fighting for American companies to bring back the jobs they sent overseas.
They still pay in
By George Nassar
Sun, 01/27/2008 - 10:10pm
The Brookings Institute analysis points out that recipients of that money still paid taxes -- they may not have paid any income tax, but they would still have paid payroll/FICA tax on every dollar they earned. That's single mothers with kids they get tax credits for, underemployed heads of households, et cetera. They work, they make money, but they don't make enough to do much more than keep their family afloat. They already get all their income tax paycheck deductions back, but they still pay out taxes, if that makes you feel any better.
If they pay in, yes I feel better.
By unchainthedogs
Mon, 01/28/2008 - 11:18am
Thanks George. I do feel better. This is getting off track a little, but your comment of: "They work, they make money, but they don't make enough to do much more than keep their family afloat." I wished our government would address this fact which is at the core of so many of our problems -- Responsible parenting and Education being at the top of the "root" causes of ......well...poverty, IMO.
On a side note
By Jdvn1
Mon, 01/28/2008 - 8:23am
You may also want to read why outsourcing is good for the American economy (and, by extension, Americans).
Basic Google search yields a bunch of people telling you why.
http://www.google.com/search?q=outsourcing+is+good&btnG=Search&hl=en
Outsourcing?
By George Nassar
Mon, 01/28/2008 - 11:52am
Hasn't been mentioned yet, but you may want to refine your Google search there a bit: the issues people have are with *offshore* outsourcing. Big difference.
Though I do like the tenth link for that search: "Why outsourcing is good -- for investors." The simplistic extension of "good for the economy = good for Americans" is flawed because of different ways of defining a strong economy; good for GDP is good for investors, but particularly in this case, not for the blue-collar employees that drive the consumer market. "Outsourcing is good for America" You may want to try a Republican blog; that overgeneralization will float much better over there. :-)
And before I hear that GDP growth is eventually also good for blue collar employees, take into account that for the past few years people have thought their own pocketbook economy has been poor -- they can't get health care, they can't put anything into savings, 70% of bankruptcies come from medical emergency bills, etc. And over time that hit consumer confidence, reduced consumption, and eventually slowed GDP to where now we're in the uncomfortable position of possibly running smack into stagflation. We never seem to want to learn the lesson that our economy is driven more by Americans willing to buy than by variations in the federal funds rate and extended amortization schedules for businesses. Saying that GDP is good for the average employee is the tail wagging the dog, IMHO.
Republi...?! Ew.
By Jdvn1
Mon, 01/28/2008 - 2:42pm
The costs and benefits of offshore outsourcing are more complex than you seem to imply.
The benefit to Americans (including blue collar employees) of offshore outsourcing comes in a variety of ways, including lower prices. It also strengthens areas of our economy in which we have a comparative advantage. This, in turn, creates more better paying blue collar jobs. GDP growth and wage inequalities are two separate issues, though you may not think that if you look at only Bush or Clinton Administration data, but there are other benefits there, too.
It's not a Republican statement to make, it's well established in economic literature, and you'll find plenty of Democratic economists also supporting offshore outsourcing--though, both sides have caveats. I just didn't mention them, since both sides have their own set caveats. Regardless, on the whole, economists agree that outsourcing is a good thing for our economy, other economies, and the world (this is referred to as pareto efficiency).
Offshore outsourcing results in lower prices? Disagree.
By unchainthedogs
Mon, 01/28/2008 - 2:52pm
My AT&T bill has not been lowered due to their outsourcing and neither has my credit card interest rates. Can you site exactly what prices have been lowered due to outsourcing? I would love to know. Any money saved is going right in the pockets of the CEOS and Owners of those companies which is the Corporate Greed that John Edwards wants to attack and rightfully so, IMO.
Economists from different schools of economic thought agree.
By Jdvn1
Tue, 01/29/2008 - 12:11am
They'd be higher without offshore outsourcing. I could explain why, but I think this is interesting... a quick Google search not only gives me sources that have already explained it for me, but these first two links I'm going to put here are from two very, very different economic viewpoints--one from a Chicago school economist, and the other from an Austrian school economist.
Though, I will mention that CEO salaries aren't as important to companies as their profits, since that attracts investors. If your company can show saved money as increased profits, they'd probably prefer that. If a lot of companies in the same market can do that, that makes your company look less impressive in comparison. Then, the company will try to attract investors again by lowering their prices a bit to gain a larger share of the market to attract investors... bingo, lower prices!
The Chicago school explanation:
http://www.nationalreview.com/nrof_canto/canto200404060834.asp
The Austrian school explanation:
http://mm2.mises.org/freemarket_detail.aspx?control=499
But, those are a bit long-winded for the casual reader. This is easier to digest:
http://www.heritage.org/Research/TradeandForeignAid/wm467.cfm
I'm sorry that one is a conservative website, but it's concisely written and clearly cites the research.
Unions, of course, are going to tell you otherwise, but that's what special interest groups do (and we're all too aware of that in Texas, aren't we?).
Wrong statement
By George Nassar
Tue, 01/29/2008 - 12:27am
Sure, there are economic benefits to offshore outsourcing. That's not the "Republican statement" I was referring to in what you said. (Though I do appreciate the "ew" that the label brought about.) I was instead addressing the oversimplified "good for the economy, good for Americans" take. Yes, some of the results are good for Americans. But most are better for some Americans than for others, and that's where the problem lies. You could say that getting your Wal-Mart T-shirt for $8 instead of $10 is good for blue-collar America, but it can also be argued that it's not nearly as good as the increasing unemployment levels in the industrial sector is bad. The middle-income jobs that most Americans hold are often the ones most threatened by offshore outsourcing. Overall, America's economy can look like it's not taking much of a hit, as offshore outsourcing comes handy-dandily bundled with free trade agreements that boost exports and allow companies to make up for a hurting consumer base in the U.S. (and also lowers prices on importable goods, sure). But Joe Bob down the street is still hard pressed to buy the T-shirt that's gone down from $10 to $8, because he can't even pay for his kids' diapers.
When I labeled the take as Republican, I refer to the idea of calling an economy successful based primarily on GDP growth. Yes, that's a very common metric for international comparison. But within a particular nation, with a particular citizenry in mind, the employment levels of that population, the level of underemployment, the CPI growth vs. real wage, the differences in CPI/wage ratio for particular income strata, etc. should play a much larger part than they do. And that's the Democratic/Republican difference: Republicans are happy determining an economy's strength solely from its mostly corporate, net productivity success; Democrats actually care as to what that means for the average person.
Benefits for all.
By Jdvn1
Tue, 01/29/2008 - 1:03am
So, since I didn't actually mention GDP growth as my metric, were you referring to the tenth article in the Google search, preempting what you thought would be my argument, or something else entirely? I'm not sure why you mentioned that. Personally, I'd mention the advantages to both the average person and also to businesses--we're all important players in the economy.
Offshore outsourcing creates a net growth of jobs, not a loss--sure, one sector may take a hit, but other sectors are going to need people to handle the increased demand. The ability to adapt to change is not only the mark of a healthy economy, but an inherent part of American history.
As a side note, I support government-funded retraining programs in order to make the transition easier.
Whole thing
By George Nassar
Tue, 01/29/2008 - 10:32am
I was referring to the Google search as a whole. You cited it as the source for explanations as to why "outsourcing = good for America," and most all of those focused on the effects of corporate growth or GDP — again, talking points for Republicans, as we think that the effect on the lower-middle class worker is also important. The tenth article just makes it clear in its title, which the others do not. (Though, frankly, you didn't mention *anything* as your metric, and you also didn't object to the earlier characterization of GDP growth as a typical metric, so if you were using a different metric than that, it may have been good to note it. Fortunately, as the Google search was what I was referring to, that wasn't an issue in this case.)
Offshore outsourcing does not create a net growth of jobs in the U.S., necessarily. It typically creates jobs as tied to the resulting GDP growth. Whether it creates net jobs depends on the industries affected. It is the hope that the underlying industries affected by such growth will employ more people than would be lost in the outsourced industry. But, to use as an example one of the industries most often cited with relation to offsourcing, that relationship does not exist in the IT sector — as there's no raw material that goes into the production of software, there are few underlying industries affected. (I suppose you could cite computer production, but as an IT worker would "consume" one computer every five years or so, the gain/loss in that industry based on IT employment has historically been negligible. The residential consumer and non-technical business user markets are much more influential.) And even with all that notwithstanding, this all still does little for the employment status of the people that are actually displaced. (I'll get to retraining later.)
Additionally, those jobs created can still be filled by outsourced labor, and often are — extending the supply chain for a given industry internationally usually has higher marginal cost than growing the local presence of said supply chain in the foreign country.
And government-funded retraining isn't much of a full-fledged solution either — that shifts the problem from employment costs in high-wage vs. low-wage countries to the cost of education in said countries, and often the latter will have lower education costs per capita than the former as far as the education level required for such outsourcable jobs goes. If it costs less for foreign governments to train a given individual to do a job than it does for a local goverment, and therefore they can produce more workers for that industry more efficiently.
Like I originally said, the idea of "GDP growth is good for America and Americans" (which can without much loss of accuracy be restated as "corporate growth is good for America," or even, in Calvin Coolidge's words, "the business of America is business" — see how well that worked out for him) is overgeneralized, as it is often not true when the effect on the lower and middle classes is taken into account, and that can be much more important in the long term than GDP growth — as economic success is only one of the many responsibilites of an effective government. (In other words, and much to the chagrin of many economists, economics is not politics.) As responsible stewards of the electorate, we should be looking at specific measures taken to encourage corporate growth and seeing how they affect the average American instead of using "well, anything that grows the economy is good for a country" as a moral compass.
You're not close to the whole yet.
By Jdvn1
Tue, 01/29/2008 - 8:16pm
I didn't mention a metric, because I don't think it'd be responsible to just focus on just one or two metrics. There are a lot of factors at play, and some of them aren't easily or commonly measured. To ignore GDP growth would be a mistake, I think, just as it would be to ignore what happens to middle income Americans, and it'd also be a mistake to ignore what happens to high and low income Americans, as well as what happens to trade relations, trade balances, currency strength, the bond market, the stock market, inflation, and so on. You look at a couple metrics, but I don't try to simplify the situation so much as to ignore possibly important factors. I could try to detail every factor I could think of, but I'm not well versed enough to be able to provide reliable numbers on relatively very many of the factors, and I doubt anyone could without some high level economic analysis and at least a year's time.
And, that tenth article in that search may be one of the worst articles to use as an example, since it doesn't even really talk about the issue at all. Google searches aren't all winners, but taking the time to educate yourself on an issue--and, particularly taking the time to seek out economists' views on the subject, especially to see if there is or isn't consensus--is always a good idea. I'm not saying anyone here does or doesn't do that, I'm just saying Google search is a starting point, and a good number of those articles deal with offshore outsourcing, and most of the ones that do (all the ones I took the time to read--I think I read three on the first page and one on the second) mention GDP growth and job creation both.
Some of the research on offshore outsourcing shows that it causes a net creation of jobs, and others show little or no affect on job growth. No research shows a net loss of jobs. You can say that it depends on the particular industries affected--I'd say you're wrong--but either way, there's an overall growth of jobs due to offshore outsourcing. If costs in the IT sector go down, there will be a corresponding drop in the price of the IT service, which means that industries that use IT services (which, nowadays, isn't a shortage of industries) save on costs as well. Those industries now have extra cash--some of them will use the money to expand their operations and hire more people. Others may invest the money, and then other firms will use the money to hire more people. Other industries will lower their costs, and then industries which use those services can hire more people. Industries are linked, and Hazlitt's one lesson of economics can't be ignored (though, really it's just an extension of Pareto efficiency, which also comes into play here, but you seem to ignore that too). While getting all of the metrics may be difficult, there research that is there seem to point in a particular direction, and there are some basic principles of economics that guide the analysis of economists. A high degree of efficiency is why economists consistently support offshore outsourcing, though some have caveats (note previous links which show support from what could arguably be called the two polar opposites of economic thought--the Chicago school and the Austrian school).
And, jobs filled by outsourced labor does more to help the US economy and the job market here. If outsourcing tends to be a good thing, then the argument "outsourcing leads to more outsourcing" is counterproductive to your point.
Also, post-secondary education in the United States is significantly bigger and better than in most countries, particularly compared to ones in which outsourced jobs go to. If that weren't true, we might not be outsourcing jobs to those countries in the first place. Regardless, the retraining would be for industries in which jobs are created--those industries would be ones in which American workers have a comparative advantage. That is, not jobs in fields that are being outsourced. Offshore outsourcing only occurs when the overseas worker provides more benefit per cost. Still, how to allocate money to displaced workers is an interesting issue, and is the issue that one probably would focus on once you accept Pareto efficiency.
Interestingly, Carter had some excellent economic policies (and, Krugman agrees with me in a recent blog post) which spurred a lot of growth in GDP. And for not caring about GDP growth, Democratic presidents have a history of strong GDP growth compared to Republicans. He wasn't popular and it didn't win him elections, but he pushed some serious pro-business policies that Reagan later got credit for. Of course, economics isn't politics, and politics isn't economics either. The stock market isn't economics either, and neither is traffic safety. Many economists, I'm sure, would agree with you there. I'm only arguing the economic side of this discussion, which is really an analysis of what some of the effects of offshore outsourcing are. Still, it is necessarily true that if the aggregate benefit of offshore outsourcing to the country is greater than the aggregate cost of offshore outsourcing (which seems to be the case, based on evidence), then offshore outsourcing is to the benefit of the group, and a deal can be made so that no one loses out.
the whole *search*, like I said.
By George Nassar
Tue, 01/29/2008 - 9:28pm
You mentioned the tenth article in the search. I was referring to the whole of the search results, not the tenth article. Thought I made that abundantly clear in the first paragraph of my response.
Democrats *do* have a fantastic record on GDP growth in the medium term — and they *do* put the middle class labor force interests above corporate interests. That's *how* they get GDP growth — far from catering to what businesses think is good for them in the short term, we shore up the labor force and in doing so also strengthen the consumer base, and *that* drives domestic growth.
'And, jobs filled by outsourced labor does more to help the US economy and the job market here. If outsourcing tends to be a good thing, then the argument "outsourcing leads to more outsourcing" is counterproductive to your point.'
I guess it's a good thing that my argument isn't that simple. Like I said, outsourcing leads to a short-term loss of jobs. It can then, due to business growth, lead to creation of more jobs — which will be outsourced, and won't lead to a localized net gain of jobs. That outsourcing can create more, and that can be outsourced. Your fallacy is assuming "outsourcing tends to be a good thing" from the start. I don't state "outsourcing tends to be a bad thing." I state short-term and long-term effects, and point out the spiral that results from the interplay of both. Not that most of the models you mention that speak well of outsourcing care — very few deal with *localized* job growth, and use (once again) business growth as a metric, no matter whether that growth is from expansion in the U.S. or in Dubai.
Not that any of that matters, actually, because you seem to be agreeing with my fundamental point — my saying that outsourcing doesn't necessarily lead to a net plus was simply a part of the greater point that "business is good for America" is oversimplification, which is what you just devoted a couple of fairly long paragraphs to.
And dealing specifically with outsourcing, yes, economists like offshore outsourcing because of greater efficiency. Efficiency is a great thing to economists, which is why economists get short shrift in politics — it makes for a remarkably poor political metric.
Crossed lines
By Jdvn1
Tue, 01/29/2008 - 11:50pm
You did. I didn't mean to imply that you were only looking at that article. You just specified that you liked that article because of the title, but I'm just pointing out that the article has nothing to do with the topic at hand. The rest of that paragraph, I'm talking about the Google search in general, just as you are.
One of the reasons I mentioned Carter specifically is because he pushed a lot of pro-business policy--less regulations, for example, not more. That's certainly in corporate interests.
I don't recall you ever distinguishing between short term and long term effects of offshore outsourcing; though I already pointed out that the job creation being outsourced is a flawed argument anyways, since more outsourcing means more jobs will be created--besides the point that there's no evidence to support that and there is evidence to support the contrary (unless you're seriously arguing that *all* created jobs will be outsourced, which is not only without any evidence but also much more of a stretch).
Still, long term effects of job creation are considered more important than short term effects for the same reason that net job growth is considered more important that localized job growth. An economy that doesn't adapt to changing market forces is ultimately doomed. Long term doesn't mean a time period when we're all dead, in this regard it means the amount of time it takes for someone to find a job--currently somewhere in the vicinity of six months or less, but the terms "short term" and "long term" aren't precise measures anyways. So most people don't care about short term unemployment--those people will get jobs relatively quickly and will end up being just fine. We care about what happens to them, of course, but the short term is short enough that they'll be okay.
Of course, there's also the issue that a lack of offshore outsourcing would actually hurt those industries' competitiveness (with a corresponding loss of jobs).
I still contend that outsourcing does lead to a net positive job growth, but I won't argue that point. If there are cases where it doesn't lead to a net growth of jobs, they may have exceptions in those cases, but certainly offshore outsourcing in general leads to net job growth.
And, that case you cite involves externalities which are factors that should be involved in efficiency calculations, though a precise measure of them is considered difficult or impossible. That is to say that economic efficiency is a good thing when you do what you're supposed to do--aggregate all costs and benefits. That doesn't mean count up all dollars and cents involved, the complete analysis of the balance between costs and benefits must also include things like corruption, national pride, depression, satisfaction... things that can't readily be accurately measured. That's an example of when economic principles are better used instead of metrics. That article is actually also good example of one of the problems with the Chicago school of economic thought. Rest assured that the article is a poor example of economic efficiency.
Theoretical vs. practical examples
By George Nassar
Wed, 01/30/2008 - 2:20am
You call cases of offshore outsourcing that don't lead to a localized net growth of jobs exceptions. I call them the rule — as they're the more profitable examples. When offshoring jobs to a country where labor is cheaper, a corporation wants to create more jobs over there — the labor is cheaper! Why would they want to create more jobs that they have to pay higher rates for? Where's the comparative advantage when it's already a given that the outsource location already has a workforce with the ability to fill jobs in a more efficient manner?
Job creation being outsourced, and more outsourcing leading to more jobs being created offshore, is neither a stretch nor without evidence (and I don't have to argue that all created jobs are outsourced — just most). In fact, the first example I recall was years ago — had to dig it back up. Businessweek did a pro/con piece on outsourcing; the discussion is interesting, but what is more interesting is the stated background for the piece: the IT industry had seen a number of low-level tech jobs already move to India, but this article noted that not only were those jobs moving out faster than they were coming in, but that it got so even white-collar jobs being created at IT firms were being outsourced, leading to unprecedented job displacement. (Again, the premise that a company would be encouraged to create jobs in a market that's *more* expensive as opposed to *less* is fundamentally contrary to common sense, and part of the reason the economic models that show net job growth are so poor at estimating results for *localized* job growth.) Interestingly, we have seen the results of this more recently, as we have statistics for those who lost their IT jobs around that time — I wish I could find where I saw this, but median length of time unemployed for that population was near the two year mark. (I'll source this when I find it again.) This is why Brookings recommended lengthening eligibility for unemployment benefits as one of the most useful ways to stimulate the economy. Even outside the IT industry, length of unemployment after job displacement has increased over the last few years. Hardly "six months or less." With the mean around five months, and a fairly wide standard of deviation (as reported via BLS) with a distribution positively skewed (understandably, as a negative time of unemployment is impossible), it's often much more than six months.
The day that economists can include all the externalities that I've been discussing (and that I've left out) in models and do so with any degree of accuracy or reliability is the day that the models will actually be of more than limited use in politics. I expect that by that point we'll have seen wings prove themselves evolutionary advantageous in the domestic swine population. Until then, those externalities will have to be dealt with within the realm of conjecture — because those third parties that the externalities apply to are exactly the parties that a social contract government should be caring most about.
You mention Krugman — he puts it a different way himself, but the general point of simple assumptions of growth not dealing well with realities of local employment is the same.
To touch on what's attributed to Carter (but pushed much harder by other, far more fiscally neoconservative, presidents) for a bit, anti-regulation stances increased GDP temporarily — and then deregulated companies started making an anticompetitive mess of their industries. The airline industry collapsed, the energy industry saw Enron come and go. Hardly what I'd point at as a success of typical "pro-business" policies. I've said it once, and I'll say it again: protect the laborer, and you're protecting the consumer, and by that you assure a stable base of consumption for produced goods and thus corporate growth. The other way around has a pretty poor track record. Overregulation can be a problem, but so can underregulation. Carter was pretty sound in that he skirted the former and the latter; in more recent administrations, we haven't been so lucky.
Why would they want to
By Jdvn1
Wed, 01/30/2008 - 11:09am
For the same reason a firm does anything at all. Marginal value is greater than marginal cost. Not all jobs are being outsourced, and the US has more higher quality workers than most countries. Overseas workers have a lower marginal value.
Well, if you want to talk about the educated people--let's say those with a college degree or higher--their earnings last I checked have been steadily increasing compared with those without college degrees for quite some time. I already mentioned that the outlook in one industry's job situation is less important than looking at aggregate numbers, and it's also contrary to basic economic principles of efficiency. And as that article points out--workers with college degrees are seeing gains, and private-sector jobs are seeing increased salaries. The educated may have to find new jobs if they worked in some aspects of IT, but they're certainly not doing poorly. Notably, the "outsourcing is bad" side of the argument has only one statistic, and it doesn't sound very reliable, since it's something that's not easily measured and the realities of low unemployment and high job opening rate are easy counters.
There are a few fundamental problems with your logic. First of all, a market doesn't care how expensive a job is. Not one iota. You'd do well to get that idea out of your head. The market (and, firms) cares about the marginal value of a job. If hiring a worker in the United States costs ten times as much as an overseas worker, but is 100 times more productive, you better believe the US worker will get the job. Further, a firm will continue to hire labor with high marginal values. This has a number of consequences. One is that, with more money to spend, a firm will have room to expand its business. It employs relatively higher and relatively lower skilled workers, but it's going to expand workers at all of these levels, and that means hiring expensive workers who bring in a high level of productivity (and thusly, more profit/worker) as well as cheap workers (who bring in less profit/worker).
In IT specifically, you may not see this happen as much. That doesn't matter, because those college graduates with degrees in computer science or whathaveyou can still get well-paying jobs. You'll still see some white collar jobs in the US, because IT companies have an interest in containing some of their operations in the United States--if they didn't, they'd be completely gone by now. I probably don't know as much about intellectual property rights as you do, but my understanding is that that's a big reason to keep some of their operations here. But, as I said, one industry isn't as important as the aggregate for reasons mentioned above (oh, and those models aren't meant to show localized job growth--that's why they're bad at it, not any other reason you might give. There are other models for localized job growth, but you don't tend to see that sort of thing at the BLS site).
Er, let's see. The mean is right around 20 weeks according to that graph there-strictly speaking, a week and a half shorter than five months. You tell me that distribution is positively skewed, which makes perfect sense--but, remember that this means that the median is below the mean (probably closer to four months than to five). That is, there are more people below the mean than above the mean, or that most people will find a job before 20 weeks. Length of unemployment, therefore, is more often less than six months. I think the figure is something like 70% of people will find jobs within six months. Sure, that's 30% who haven't, but "six months or less" describes most people.
I don't remember you mentioning any externalities, either. I thought you were sticking pretty close to metrics concerning blue collar workers. Still, the point to keep in mind conerning economists that you seemingly keep ignoring is that economic theory can be used when metrics aren't sufficient (remember the problem with the Chicago school?).
Of course! That's why we economists have caveats. Any good economist is familiar with the basic assumptions of economic theory, knows that they're ideals, knows that while reality may be somewhat close at times, it isn't very close other times. Krugman is an example of a Democratic economist who supports offshore outsourcing with caveats. That's Pareto efficiency at its best.
On the contrary, I'd say that you're attributing too much to Carter. He gave those industries chances to flourish, and the problems you cite aren't because of what he did. Reaganomics, for some reason, is credited with benefits galore (though, mostly by Republicans, and I don't see Democrats discussing the issue very often one way or another), and Carter is given the shaft. What's attributed to Carter is misleading, just as what's attributed to Reagan is misleading.
So the point is settled.
By George Nassar
Wed, 01/30/2008 - 12:35pm
There's a lot of straying here. Let's get back to the point first.
Which was precisely my original, overarching point. Saying "good for business is good for America" is dramatically oversimplified. Offshore outsourcing without certain caveats may be something business is a big fan of, and may have a sound economic argument for it, but it causes a lot of problems to other third parties without those caveats that aren't visible to those "sound economic arguments" due to oversimplified models and the inability to account for certain externalities. Quod erat demonstrandum. I'm glad you agree.
On to the nitpicky asides, if we must...
Except it isn't. Your assumption begs the question. Marginal value is lower than marginal cost for local vs. offshore workers. That's why they're going offshore for workers in the first place. The marginal cost of those workers does not dramatically change after doing so, so it is more beneficial for the employer to stimulate the economy and create jobs where work is cheaper.
On that note, the assumption of a higher marginal value for American labor because of higher education level is one of the many things that amounts to a poorly quantified, badly justified assumption on the part of economists to try and give some credence to "see, this problem isn't so bad." When the wage of an offshore worker is ten times lower than here (again, I refer to the IT industry), there's no level of education that will be sufficient to make up for that difference in cost. It is actually cheaper to *give* them the education and then hire them. Not that their educated work force is in any way lacking in numbers to begin with. The education levels of certain parts of their work force are comparable to, and in some cases even better than, ours. The idea of education as a comparative advantage for us is flawed.
Frankly, I'm a little shocked that you'd vehemently make such an outlandish statement. You yourself discredit it in the next two lines:
The first of those two sentences states that they care about marginal value — sort of incomplete. The second, which is more accurate, states that they care about marginal value as compared to marginal cost. (Which, by the way, is what you said yourself a bit earlier.) Marginal cost is itself the the change in total cost by increasing in this case the labor force by one unit. The cost of that job is very much dependent on how expensive that job is, wouldn't you say? I would think most people would say the cost of that job is exactly how expensive that job is. Your earlier exhortation makes no sense.
Why you would insist on using numbers for an entire national workforce when only certain industries are being disproportionately affected by the issue is a little beyond me.
Once again, the job displacement occurs in a specific industry, and in service-based industries, there are few or no underlying markets that would get a local growth boost from the increase in production due to outsourced labor (as the BusinessWeek article I cited before also mentioned).
Funny, I thought that was precisely the reason I gave. Those models — not just the BLS models, but those used to justify offshore outsourcing, which of course tend to be remarkably similar to the BLS models — are unsuitable for the policy concerns they wish to shape. Most, in not addressing the issue of localized employment, can't speak to net job increase or decrease specifically within the United States, effectively making the American worker as a specific, separate aggregate one of the externalities that you don't remember me mentioning.
That's not quite what you originally said, is it? You said "in the vicinity of six months or less," and of course I wouldn't niggle on details by taking you literally and assuming you meant that as holding to absolutely everyone, and give you the benefit of the doubt that you mean mostly everyone, save some straggling outliers. To say the mean is under six months is fine. To say unemployment is more often than not six months is also accurate. But to say 70% of the work force is unemployed for that period -- and as that would mean a less than one month standard of deviation, considering the positive skew, I would tend to doubt that, but even if that percentage is accurate, that's 30% of the population without income after their unemployment insurance expires. And having been driven to keep less and less in savings and more and more in both secured and unsecured debt, that does not bode well for the average consumer. And in the long run, that doesn't bode well for business that relies on consumption either.
I don't ignore it. The reason I mentioned economic theory in the first place, if you will recall, is to note that it was basically ignored in discussions of things like offshore outsourcing and instead there was a ridiculous overuse of metrics from models that don't do squat to measure a number of issues that should be the driving force behind government policy, namely issues affecting the majority lower-middle class work force.
You better leave that to the political historians — I'm sure being immersed in an econ department has made that bit skewed. Trust me, Democrats discuss Reaganomics quite a bit — it has been, I'd argue, the most commonly lambasted Republican economic push since the national bank debates. Reaganomics, which in exchange for middling job growth and little long-term benefits gave us a trillion-dollar national debt and a deficit that it would take us twelve years to correct (before another Republican went and screwed that up again)? If you haven't heard Democrats discussing it, you haven't been listening to Democrats. Considering the makeup of most economics departments, I have little trouble believing that. You guys get a pretty skewed take on governmental policy on the whole.
Specifically, though, when you say "the problems [I] cite aren't because of what he did," I didn't say they were. I led off pretty clearly with explaining that Carter may have done some rolling back on regulations, but far stronger pushes to that effect followed from neo-Con Republicans, and they're the cause of the problems. And I state at the end of that that the problem is specifically not that unregulated markets are evil, but that the pendulum has swung too far due to said Republicans.
Further clarification, and my last.
By Jdvn1
Fri, 02/01/2008 - 9:11pm
Ignoring what I consider to be blatant tangents.
By original point (seeing as how I made the response that you're replying to). Rather, it was a response to the policy of
Which is a terrible policy. A policy of, "Encourage offshore outsourcing," rather than, "Fix offshore outsourcing," is a significantly better policy.
Well, that's where Pareto efficiency comes in (part of the economic argument, too). Pareto efficiency includes the caveats, when they're necessary. I guess I shouldn't expect you to know that.
Also, I was using "marginal value" as benefit per cost, or bang for buck, if you will. I may have been imprecise in my terminology, since I didn't specify the units in which I was measuring the margin. I can see how that was confusing. Still, price and benefit don't matter at all--it's about the ration of the two.
And, would you also argue that a Valparaiso University School of Law law degree is equivalent to a Harvard law degree? Have you noticed there are a lot of international students coming to the US to study at the college and graduate level? Would you say that a New Mexico Inst of Mining & Tech computer science degree is worth as much as one from Stanford or MIT? Why is a company willing to pay bigger bucks to students from better universities? Why not pay less money to a students from a worse school? The US tends to have significantly better schools than are available overseas, and there will be jobs for US workers, though some of them will have to be educated in other fields (in American schools).
I addressed this issue multiple times in previous posts, and it is essentially to keep the reason I do this in mind, as it is essential to the point.
Why's that an issue?
By George Nassar
Fri, 02/01/2008 - 11:27pm
You were replying to some other statement. That's fine.
In that reply, you stated:
Effectively stating that "outsourcing is good for the American economy," irrespective of whatever you were replying to.
I was pretty clear I was stating that was a gross oversimplification.
You may have been replying to something else. But I was replying to you, and you made a false generalization. As you have basically stated later.
Ah, Internet snark. Actually, you happen to be incorrect, and I've just been letting you slide — due to governmental and corporate enforcement issues, most of those "caveats" are not Pareto improvements; they're Kaldor-Hicks improvements. Should I expect you to know that? Or should we just quit playing economics one-upmanship?
But given that, of course those utility improvements would be included in efficiency. Where they are *not* included is your original oversimplified statement.
As tempting as it would be to also play English one-upmanship, I'll simply state that "it's about the ratio of the two" proves that *both* matter, not that *neither* matter.
Because they assume that that student will give a better return on their investment in terms of productivity, of course.
When offshore wages are fractions of what they are here, however, and you can hire four employees for the price of one here, even an MIT degree won't in most cases get you a fourfold (or sixfold, in MIT grads' cases) productivity increase.
Which is why, again, the issue is much more complex than your stated oversimplification would make it seem.
You've got me wrong.
By Jdvn1
Fri, 02/01/2008 - 11:55pm
1. I'm not trying to one-up you in any way, or be snarky. I'm sorry you got that impression.
2. Kaldor-Hicks is more broad--no, I am indeed referring to Pareto efficiency. By bringing up the issue at all, you continue to miss my point.
3. MIT grads can make three or four times (or more) than another grad, and your theory doesn't explain the discrepancy. More importantly, I think you missed my point here as well.
The point
By George Nassar
Sat, 02/02/2008 - 5:05am
So much for that being your last comment?
I dealt with the point at the beginning of the comment. I then addressed the other minor things you brought up.
As you stated, your original point was not made to me. It was directed at someone else's statement. I don't miss your point -- I simply have nothing to do with it.
But in making your point, you made a statement that was overbroad. I caught the generalization and corrected it. You agreed with the correction. Why is this still an issue?
OK, again to deal with the minor points -- that you originally brought up:
2) I know you're referring to Pareto efficiency. I'm saying you're wrong. Pareto efficiency is inapplicable for multiple reasons, one of which -- the one I addressed -- being that the "caveats" offered for outsourcing to work are KH (or even Marshall, for that matter) improvements, but not Pareto improvements. The reason for which having nearly nothing to do with economics and everything to do with the political implementation of said caveats. (Another would be that Pareto efficiency would have little to do with the social aspect of political economic policy, as it doesn't care which local maximum on the Pareto frontier it approaches and therefore doesn't address at all issues of distribution.)
3) On average, they don't make three or four times the income. In fact, ceteras paribus as far as their actual position goes, I'd say they *never* do. I know of no position where a particular level of education will give someone a fourfold increase in wages. If there are any, they're definitely not within the field I've been discussing.
Now if you're talking about three or four times the income for a different position, then my "theory," as you call it, explains it just fine -- if the position is, say, expected to produce three or four times the output after all things considered, then they would be paying a premium for equivalent increase in production.
Not that that has *anything* to do with what my primary point, which was income compared to offshore income. And in that case, one can find an offshore worker with a similar education level to a worker here -- not an MIT grad, but the *average* worker here from State U as compared to the *average* there -- for a fraction of the cost. And if needed, there are world-class schools and world-class students in the countries we outsource to as well. Education is, again, no longer a strong competitive advantage here. The <1% fringe cases don't change the education level of the vast majority of the workforce.
If you'd like to discuss those tangential points more, again, email.
The asides
By George Nassar
Wed, 01/30/2008 - 12:37pm
Actually, as the point is settled, and the asides are taking a disproportionate amount of space and time, I'd ask that if you'd like to continue, please do so by email.
We should be looking at specific measures
By unchainthedogs
Tue, 01/29/2008 - 9:02pm
George - "anything that grows the economy is good for a country" as a moral compass....I love it! Absolutely, I agree, "we should be looking at specific measures taken to encourage corporate growth and seeing how they affect the average American. Cheers. However, one question -- What if "corporate growth" affects the average American in a bad way such as ExxonMobil? They have record "corporate growth" at the expense of the average American.
Driving the economy
By George Nassar
Tue, 01/29/2008 - 9:32pm
Well, that's a good question, and something I touched on in my latest reply to that comment thread. Democrats have a surprisingly strong track record for GDP growth in America, something that is counterintuitive to knee-jerk pro-business types that note that we tend to be pro-labor, pro-regulation, and pro-everything that businesses hate. Thing is, when we strengthen the middle class, by assuring them income levels that they can live off of or decent working conditions or a marketplace that is kept honestly competitive by regulatory bodies looking to root out cronyism and abuse of monopoly powers, we both strengthen the backbone of production and strengthen the consumer market that makes higher production possible in the first place.
Corporate growth that is done "at the expense of the average American," Exxon's or otherwise, is fundamentally unsustainable. When the average American is short-shrifted, the consumer market is short-shrifted, becomes unreliable and hesitant to consume, and we get exactly the sort of economic issues we're seeing right now.
Moral compasses
By George Nassar
Sun, 02/03/2008 - 4:55pm
One more thing for you on that topic, since you seemed interested: NYU economist Ariel Rubinstein wrote a piece based on a study on how modern economics students are basically being taught to value profit maximization over any sort of concerns of the apportionment of the profit, and how because of this, their assumptions of what a "rational actor" would do are completely out of step with reality.
The work also seems inspired by Scitovsky's 1976 book "The Joyless Economy" (and from there in part from Keynes' own comments) which mention the need for qualitative, and not just quantitative, observation and analysis of economic growth.
These would all fundamentally agree with you and I, in noting that growth should not be the be-all and end-all of a responsible economic plan.
This election day...
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Thu, 10/30/2008 - 5:06am
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