Globalization and Illegal Markets

Despite the war on drugs, the price of cocaine dropped in half in Europe between 1990 and the early 2000s.  The same technological advances that have increased global trade have also benefitted global criminal networks as a recent conference discussed:

“I WAS a child kidnapped from India. Then I was sold into Canada and then my final destination was the United States”, says Rani Hong, the head of the Tronie Foundation, an anti human-trafficking group. Ms Hong’s horrific experience was just one of the disturbing stories recounted at a conference in Los Angeles recently which gathered together experts who have studied various forms of illicit networks.
...The meeting was the brainchild of Google Ideas, a small unit inside the internet giant that calls itself a “think/do tank”. ...The irony is that those running illicit networks tend to be early adopters of new technologies. “The reality is that many of these tools are already empowering people for good and for ill,” says Mr Cohen. Drug smugglers, for instance, have been using GPS signals from phones to track the movements of their teams and to steer them away from police. This is a headache for the forces of law and order, but there are upsides to the mobile revolution too. For instance, when a drug kingpin is finally collared, cops may be able to unravel an entire smuggling network simply by accessing the data that are in the kingpin’s mobile phone.
The aim of the meeting in Los Angeles was to spur new thinking about how the mobile internet and other technologies can be used against traffickers and at the same time to showcase a few projects already under way. One of these is a computer model that shows the legal trade in various kinds of arms between different countries. ...Google was able to build a tool that can be used by, say, investigative journalists and others trying to work out if particular shipments of arms seem dodgy or not.
Another initiative, which has been championed by INTERPOL, the world’s largest international police organisation, involves the creation of a Global Register in digital form that will allow police forces and consumers to verify the origin of products using a mobile-phone app that can read a special bar code on their packaging. Ronald Noble, the head of INTERPOL, reckons this will eventually make it tougher for, say, producers of counterfeit pharmaceuticals to get their fakes into legitimate supply chains.

Several Latin American presidents have completely reversed their position about drugs and declared that the technological advances that have boosted globalization have also made it impossible to stop the international drug trade.  As president Calderón of Mexico said:

"[E]ither the United States and its society, its government and its congress decide to drastically reduce their consumption of drugs, or if they are not going to reduce it they at least have the moral responsibility to reduce the flow of money towards Mexico, which goes into the hands of criminals. They have to explore even market mechanisms to see if that can allow the flow of money to reduce. If they want to take all the drugs they want, as far as I’m concerned let them take them. I don’t agree with it but it’s their decision, as consumers and as a society. What I do not accept is that they continue passing their money to the hands of killers."
Not so long ago these comments would have been unthinkable. Cast your mind back to 1998, when the UN Drug Control Programme (since absorbed by the UN Office on Drugs and Crime, or UNODC) held a session on the “world drug problem” entitled: “A Drug-Free World: We Can Do It”. Since then it has become painfully clear that, so far at least, We Cannot Do It. Since 1998 global consumption of both cannabis and cocaine has risen by about 50% and opiate consumption has nearly trebled, according to the UNODC’s own figures.
Mr Calderón’s comments sum up what seems to be a growing consensus: stopping or even seriously reducing drug consumption has so far proved impossible, so it is time to focus on ways of making that consumption less harmful. That sort of thinking has been fashionable for a long time on the demand side, with innovations such as needle exchanges and methadone replacement now common in many rich countries. The next step is to explore legal ways of managing the supply side, as Colorado and Washington have recently voted to do.
Sitting presidents such as Juan Manuel Santos of Colombia and Otto Pérez Molina of Guatemala are pushing for a rethink.

I would argue that it is possible to stop the drug trade, but the cure is worse than the disease.  For example, we could impose the death penalty for possession.  Iran executed over 500 people for drugs in 2010 and 2011.  China does not publish official statistics, but Amnesty International has estimated that they have executed a similar number for drug offenses.   But even these countries have rarely been able to stomach killing citizens for illegal drugs and the vast majority of people who are caught with illegal drugs escape executions.  

Chinese Currency Manipulation

Both political parties have been demonizing China for our economic woes, but it does not make much sense anymore. Wonkblog:

1) What you’re saying when you say you want to put an end to global currency manipulation is that you want a weaker dollar. That’s what currency manipulation is: An effort by other countries to artificially strengthen the dollar in order to make their currency — and thus their exports — comparatively cheaper. But if we want to weaken our dollar, we could just, you know, weaken the dollar.
2) China is not the world’s worst currency manipulator, or even particularly close to it. Singapore is worse than China. Taiwan is worse than China. These days, Switzerland and Japan are arguably worse than China. ...Here’s a list...
3) China is getting much better. They’ve allowed their currency to rise substantially in recent years. ...China’s ”current account peaked at 10.7 percent of GDP in 2007. This year, it looks like it’ll only be 2 percent.” It seems a bit weird to intensify the pressure on China, and to try and publicly humiliate them, at the exact moment when they’re doing what we’ve been asking them to do. As economist Nicholas Lardy told NPR, ”there was a very good case for the [U.S.] to take action against China five years ago, but not now.”
4) Calling someone a “currency manipulator” doesn’t trigger some magical process that leads to them no longer manipulating their currency. On its own, its nothing but an international insult. But if you follow through, then it’s a first step towards slapping tariffs on Chinese goods. But then China can begin slapping retaliatory tariffs on our goods....

The 'weak' renminbi was a significant drag on the United States for at least a decade, but in 2007 when Chinese currency manipulation was a serious drag on the US economy, globalization was relatively popular and The World Is Flat was a NYT bestseller. Krugman adds:

Since [2007], two big things have happened: relatively high inflation in China, and some appreciation of the renminbi against the dollar. As a result, the real exchange rate of China against the United States (based on consumer prices), has appreciated significantly:

At the same time. China’s surplus has come way down:

So this is an odd time to be making confrontation over China’s currency a centerpiece of your economic policy — unless, of course, it’s just bluster aimed at making voters think you’re tough.

As China's exchange rate has risen, its current account (trade) surplus has dropped, and it has been sending less savings abroad. 

Note that Krugman mislabeled his first graph the "China/US real exchange rate."  It is a graph of the value of the Chinese currency, so it should be labeled the "Chinese real exchange rate vs. US$".  The "China/US" rate would be the value of the US dollar because that is in the denominator, but Krugman isn't thinking of it as a fraction, but as something like a hyphenated word.

Currency Union, "Welfare", and Inequality

 The US is much more of a welfare state than Europe is in some ways.  For example, one reason the US works as a monetary union, but Europe does not is because the US constantly bails out Mississippi and Missouri as Derek Thompson explains:

The euro zone has Greece. The United States has Mississippi. Or Missouri.

The difference between the U.S. and Europe is that when the Greek economy "pulls a Mississippi" (or perhaps I should say, when Mississippi "pulls a Greece"), the EU and the U.S. have 180-degree opposite reactions. Over here, we calmly write checks to Mississippi in the form of Medicaid and unemployment insurance, no questions asked. Europe has no comparable "Peripheraid" for its weak peripheral states. Instead, it has chaos.

Michael Cembalest, the JP Morgan analyst and author of the my favorite new chart about monetary unions -- it's not a crowded field, admittedly -- passes along another clever graph which shows fiscal transfers (don't worry, that's just another word for money) between the rich California-Connecticut-Illinois-New Jersey-New York quintuple and poorer states like Tennessee. If similar, seamless transfers existed in the EU, the rich north would have to send to Portugal and Greece at least an additional 30 cents for every dollar they paid in taxes, year after year after year.

When you hear commentators say, "the euro zone must begin to transition toward a fiscal union," what they are saying, in human-speak, is that the Europe needs to be more like the United States, with balanced budget laws for its individual members and seamless fiscal transfers from the rich countries to the poor, to protect the indigent, old, and sick, no matter where they reside.

The Germans call this sort of thing "a permanent bailout." We just call it "Missouri."

 This is why the US actually has less inequality than Europe does as a whole.  We transfer money from rich states to poor states.  Europe transfers much more money from rich to poor individuals within their states, but they have very few transfers from rich states to poor states and that makes Europe much more unequal than the US.  Moneybox:

One very interesting point that James Galbraith makes in his newish book Inequality and Instability is that if instead of looking at Finland then Spain then Germany then Greece all as separate countries but instead look at "Europe" as an integrated marketplace with perfect capital mobility and legal labor mobility then it's even more unequal than the United States:

And when you do that, when you take what had been isolated labor market situations and bring them into direct interaction with each other, you have to measure the inequality on the new basis, on the new foundation. And nobody had done that. And what we found was that in fact when you do that, European inequality, taking into account the differences that exist between, let’s say, Germany and Poland or between Norway and Portugal, is actually larger in wages than it is in the United States.

Galbraith melds this into a policy argument that will be very controversial, but I think it would be helpful for people with all different kinds of political perspectives to just consider this isolated fact more clearly. Further analytic issues fall out of it quite clearly. Europe the collection of separate low-inequality places has generally high taxes and generally high levels of income redistribution. But Europe the collective has extremely low taxes and almost no income redistribution.

Below is a map from The Economist of what states subsidize what other states.  The map would be much more dramatic if it had county detail.  For example, I think I remember reading that San Francisco alone subsidizes about what the entire state of Kentucky absorbs.   New Mexico, Mississippi and West Virginia have all gotten well over 10% of their annual state incomes from subsidies coming from the green states over the decades.  Puerto Rico has been getting the most: almost 15% of its income from net federal transfer payments.  That may be why they do not want to revolt against 'taxation without representation'.  


The European Union is an unwieldy currency union because it is surprisingly heterogeneous and that is because it has little political union and almost no fiscal transfers.  Derek Thompson

Compared across more than 100 factors measured by the World Economic Forum Global Competitiveness Report, from corruption to deficits, JP Morgan analyst Michael Cembalest calculates that the major countries on the euro are more different from each other than basically every random grab bag of nations there is, including: the make-believe reconstituted Ottoman Empire; all the English speaking Eastern and Southern African countries; and all countries on Earth at the 5th parallel north.

And here is your tweetable fact: A monetary union might make more sense for every nation starting with the letter "M" than it does for the euro zone.

If you find yourself wondering, as I did, how the 50 states within the U.S. would compare across this measure of dispersion, remember that the nice thing about the United States is that baked into the first word of our name is not only a monetary union (i.e.: we all use dollars) but also a fiscal union. If Mississippi has a bad year (or decade, or century), Washington doesn't debate whether we should force the state to raise taxes or cut spending to become more competitive. We just keep paying it Medicaid, which is basically a transfer from rich Americans to poor Americans, many of whom live in Mississippi.

Neverending Trade Deficits OK?

Moneybox:

according to assentially all sources, Australia has always run a large balance of payments deficit except for one flukey year in the early '70s. At various times different politicians and investors have proclaimed this unsustainable, but it's always been sustained. And it keeps on being sustained even though Australia is currently undergoing a boom of primary commodities exports to China. What's more, despite this never ending trade deficit Australia decided about 20 years ago to stop having recessions which is pretty enviable.

So what's going on?

Two things, I think. One is that Australia is a very respectable country with a stable liberal democracy just like the United States or Germany or Japan. But the other is that Australia has a very fast-growing population. It's growing substantially faster than the American population, to say nothing of Japan or the major European countries. And if you're thinking about savings and investment in the broadest and most generic sense, that's exactly where you want to invest. A country where you can say with confidence that 20 years in the future the same political framework will be in place and there will be much more overall demand for land and goods and services due to the growing population. So because Australia is such a fundamentally sound investment opportunity, it gets to run a trade deficit. And it will always get to run a trade deficit until either it decides to sharply curtail immigration and population growth, or until India's political system strikes rich foreigners as more credible and stable.

Foreigners are willing to lend Australia money (invest in Australia) because it can credibly pay the money back partly due to the growing economy which is growing partly due to its growing population.  One of the only other rich countries that has a stable economy and a growing population is the US and we also have had a current account deficit for decades.  

American Exceptionalism

Will Oremus lists some things that are unusual about America at Slate:

As we celebrate the 236^th anniversary of America’s independence, it’s a good time to reflect on all the things that make the United States the greatest country in the world. Like, for instance … well … hmm.

We’re billed as the land of the free, but we’re actually 47^th in press freedom according to Reporters Without Borders, behind Botswana and El Salvador. We’re 10^th in economic freedom, according to the Heritage Foundation—not bad, but not quite on the level of Canada or Mauritius. We’re 51^st in math and science education, according to the World Economic Forum. We spend by far the most on health care, but can’t crack the top 20 in life expectancy. And while we remain the richest country in terms of gross domestic product, we’re anywhere from sixth to 19^th in per-capita income, depending on how you count. (Plus, no one expects us to hold off China for long when it comes to GDP.)

So what do we lead the world in? If you believe Will McAvoy, the news anchor on Aaron Sorkin’s [fictional HBO series] The Newsroom, the United States is tops in just three things: "number of incarcerated citizens per capita, number of adults who believe angels are real, and defense spending." ...

But come on—don’t we lead the world in anything we can be proud of? Indeed, we do! To celebrate July 4, here is a list of some rather obvious, some surprising, and some genuinely inspiring achievements that put the “exceptional” in “American exceptionalism."

...Legal immigrants. A whopping 35.5 million as of 2005. Our immigration system may be broken, but it’s not as broken as a lot of other countries’ immigration systems.

Generosity. What American decline? The United States jumped from fifth place to first in the U.K.-based Charity Aid Foundation’s latest World Giving Index, which grades countries on three metrics: volunteering, helping strangers, and donating money.

Patriotism. Even if the facts don't always bear us out, we’re still convinced that our country is tops. In a World Values Survey, 77 percent of Americans reported being "very proud of their nationality," more than any other country polled. Well, technically, we were tied for first with Ireland. And the survey in question is from the 1990s. But how else could you explain all those people still singing along with Lee Greenwood every Fourth of July?

Media. We have the most newspapers, radios, television broadcast stations, and hours of television watched per day. Oops, maybe that last one isn’t so inspiring. But hey, it’s a holiday. Go ahead and enjoy the fireworks on your boob tube. In the land of the 47^th-most-free, no one’s going to stop you.

Unfortuntately most of the other items on Will's list are wrong or misleading because they are simply due to the fact that the US has the largest GDP.  For example, the title of Will's article celebrates the fact that the US is the number one in cheese production, but that isn't per-capita and so it is just due to the fact that the US has more people who can afford cheese than any other country.  The US is nowhere near the top in per-capita cheese. Greeks eat over twice as much per capita as Americans and the US isn't even one of the top ten cheese exporters. France is the big cheese there.   And the US is not the most obese.  We are near the top, and the heaviest big country, but there are a few small Pacific-island countries that are even heavier, possibly in part due to their history of regular famines which killed off anyone without fat genes.  

Running a country is different from running a company.

Henry Ford wanted his workers to be able to afford his cars.  But he only sold perhaps less than one percent of his cars to his own workers.  How much of America's production is sold to America's workers?  About 87%.  Only about 13% of US GDP is exported.  And we import about 16% of GDP (meaning that foreigners lend us about 3% of GDP per year to buy more of their stuff).   

One of the ironies of globalization is that very little production is actually traded internationally.  This is mainly because people mostly buy services and real estate which rarely can be outsourced to another country.  In the future, if the global economy continues to become more service-sector oriented, we may trade even less of our production. 

People often think that 'everything is made in China', but that is because of the availability heuristic: images that are readily available when you think about a subject are emphasized more than their actual importance and Americans really do import most of our consumer goods.  But we spend most of our money on real estate, health care, education, restaurants, police protection, etc.    And America exports almost as much stuff as we import, but the kinds of goods that we export are not consumer goods.  We export airplanes, military hardware, and capital goods that foreign businesses buy.  That means that foreign business owners may think of the US as an exporting juggernaut because they picture all the things that they buy from the US, but foreign consumers (most people) do not buy much American production except for cultural goods like movies and music. 

Optimal Currency Area

Some optimal currency area theory and applications on my macro blog.

Manufacturing wages and Inequality

Perhaps the increase in inequality is partly due to the decline in manufacturing.  If manufacturing pays better and it hires fewer people, then that alone will increase inequality.  Plus, the opportunity cost of service-sector work declines as the local manufacturing jobs dry up.  The opportunity cost of being a barber in a small town in Texas was manufacturing before they closed down the factory and now the barbers get lower wages both because their opportunity cost has declined and because their customers have lower wages too. 
Moneybox:

Susan Helper, Timothy Krueger, and Howard Wial forcefully make the case for manufacturing in a Brookings paper (PDF) where one subject of interest is the seeming existence of a wage premium in the manufacturing sector. At different skill levels, manufacturerers pay more:

What I wonder when people point this out is what they think follows from this. Here's one though. In India, a very large segment of the workforce is doing extremely low wage work in the agricultural sector. And agricultural productivity is limited by the availability of land. So insofar as you're able to subsidize the creation of manufacturing work, not only do the people who get the manufacturing jobs earn higher wages—the residual agricultural population earns higher wages too. This off the farm aspect to industrialization has historically been a huge driver of prosperity and I think it's crucially important for political leaders in developing countries to think about it.

Unit Labor Costs

Unit labor costs are basically wages minus productivity. It's the price of labor's output rather than the price of labor.  This is a good measure of inflation and it tracks the CPI fairly well even though it is a very different statistic. 
The Economist: 

the OECD released their quarterly “Unit Labour Costs and Related Indicators”. ...Costs were generally rising in the second quarter, but were up sharply in Norway and Australia. Why does this matter?

Unit labour costs are the best estimate of staffing costs faced by firms. They represent the amount of money needed to pay your staff to make one unit of output, one widget. This is a function of two elements, the cost of the staff—their hourly wages—and the speed at which they make widgets, their productivity. Expressed in growth rates unit labour costs are roughly equal to growth in wages minus the growth in labour productivity, per widget. In America, in the second quarter, unit labour costs increased by 0.8%, this consisted of a 1.0% increase in wages and a 0.2% increase in labour productivity.

The rise in unit labor costs indicates the level of  inflation in America. 

Normally, and especially now, this is not a concern; a little bit of inflation is better than a little bit of deflation. [Most countries] display similar trends.
Contrast that with the situation in Norway and Australia, where rising wages and falling labour productivity are generating unit labour cost increases above 5%. This is indicative of a tight labour market; firms are forced to increase wages to hold onto workers and must occasionally employ lower skilled workers than they'd prefer, leading to decreases in average labour productivity.
So what's up with Norway and Australia? Both economies are heavily dependent on natural resources. Unlike manufacturing jobs, natural resource industries aren't susceptible to offshoring when labour costs soar. You have to mine coal where the coal is.

Menzie Chinn:

The interesting trend since 2001 has been the rise in [price markup over unit labor cost.]

Source: Economic Report of the President, 2012.From this graph, one would be hard pressed to find American business in terrible shape. Productivity has increased, labor compensation growth has been modest, so that it’s obvious where profits have come from. This also means (to me) that there is substantial space for rising wages to be absorbed without a commensurate wage-price spiral.
As I noted in this recent post, rapid productivity growth combined with slow compensation growth has improved American competitiveness. Nominal dollar depreciation over that period emphasized that improvement.

Raising Wages With Charity

The NYT discusses "Foxconn, with 1.2 million Chinese employees, [which] is one of China’s largest employers. It assembles an estimated 40 percent of the smartphones, computers and other electronic gadgets sold around the world."  Foxconn announced that, "it would raise salaries as much as 25 percent, to about $400 a month, ...after an outcry over working conditions at its factories."  The article suggests that this will only work if consumers have sufficient charity.

Plants depend on workers’ being at assembly lines six or seven days a week, often for as long as 14 hours a day. ...For that system to genuinely change, Foxconn, its competitors and their clients — which include Apple, Hewlett-Packard, Dell and the world’s other large electronics firms — must convince consumers in America and elsewhere that improving factories to benefit workers is worth the higher prices of goods.

“This is the way capitalism is supposed to work,” said David Autor, an economist at the Massachusetts Institute of Technology. “As nations develop, wages rise and life theoretically gets better for everyone.  But in China, for that change to be permanent, consumers have to be willing to bear the consequences. When people read about bad Chinese factories in the paper, they might have a moment of outrage. But then they go to Amazon and are as ruthless as ever about paying the lowest prices.”

If consumers' sentiments in favor of Chinese workers does not last, will improvements in Chinese working conditions be temporary too?
Did America develop higher wages than China because our consumers have been "willing to bear the consequences" and decided it is worth paying higher prices for US goods?

Futility of Some Intellectual Property

Moneyball:

Here's a nice point from Julian Sanchez and Cory Doctorow: Most of the thinking on Capitol Hill about "piracy" utterly fails to wrestle with the reality that in the future copying is destined to become radically easier than it is today.

Consider that 30 years ago, Seagate introduced the world to the SG-506 with 5 megabytes of storage for $1,500. Today they sell a 4 terabyte drive for less than $450. Where you used to get 0.003333 megabytes per dollar, you know get 9,320 megabytes per dollar in nominal terms. Thirty years from, random individuals will easily and cheaply be able to store all the songs you could possibly imagine. Shutting down large-scale data centers isn't going to accomplish anything, you'd need very intrusive monitoring of everyone's activities all the time to prevent copying from running amok. It'd be intrusiveness on the order of what it would take today to stop people from lending books to friends. Either content production will survive a world of nearly ubiquitous file-copying, or else some other kind of system like Dean Baker's arts vouchers will have to be devised.

Free Market Path to Reduce Global Warming

MoneyBox:

What if I told you that we could obtain half the reduction in carbon emissions needed to stave off climate disaster not with new government interventions in the economy but simply by removing existing interventions?

Fatih Birol, chief economist of the International Energy Agency is telling you exactly that. In data released this month as part of the IEA’s latest World Energy Outlook report, he shows that in 2010 the world spent $409 billion on subsidizing the production and consumption of fossil fuels, dwarfing the word’s $66 billion or so of subsidies for renewable energy. Phasing fossil fuel subsidies out would be sufficient to accomplish about half the reduction in greenhouse gas emissions needed to meet the goal of preventing average world temperatures from rising more than 2 degrees Celsius.

You don’t hear as much about this as you should largely because the biggest offenders are far from our shores. Still, the scale and scope of the issue is worth dwelling on if only because these subsidies are so wrongheaded.

Far and away the biggest problem seems to be that misguided sense that countries that are large producers of certain kinds of fuels ought to subsidize domestic consumption of the fuel in question. Thus Saudi Arabia spends more than $30 billion a year on gas consumption subsidies while Russia spends $17 billion on natural gas subsidies. Iran, which produces both, subsidizes both, spending $66 billion in total plus an additional $14.4 billion on electricity consumption subsidies. Large-population developing countries such as China, India, and Indonesia are also important players in the subsidy game. In no case do these subsidies make sense.

For starters, the mere fact that your country contains a lot of oil offers no special reason to subsidize gasoline consumption. For one thing, gasoline isn’t oil. Like other usable fuels, it needs to be refined from crude. Iran is actually a net importer of refined petroleum products, and the United States has recently become a net exporter of them, even as the situation for crude oil is the reverse. More broadly, the opportunity cost of using a domestically produced barrel of oil is identical to the financial cost of buying a barrel on international markets. In other words, if the Japanese government wants to offer subsidized oil to its citizens, it needs to go buy the oil first from Saudi Arabia. By the same token, if the Saudi government wants to offer subsidized oil to its citizens, it needs to sell less to Japan. The budgetary impact is identical in either case and the merits of the policy have nothing to do with how much oil a country has.

And what are the merits? Not much. Consumption subsidies are typically justified as beneficial to the poor. But while it’s certainly true that in rich countries utility bills and transportation fuel costs disproportionately burden the poor, it’s not clear that this is true in the developing world. Here in the United States, only rich people go to fancy restaurants, but everyone needs to run home appliances, which is why higher energy costs hit the poor hardest. In India, however, more than a third of the population doesn’t have electricity, and most people don’t have cars. China’s not as poor as India, but the same logic applies: The people who truly need help are the people who can’t afford to take advantage of the subsidies. The IEA calculates that less than 10 percent of global fossil fuel subsidies benefit the poorest 20 percent. These subsidies would be much better spent on a mix of cash grants to the poor, lower taxes to spur growth, and investments in infrastructure and education.

But even a direct fuel subsidy for the poor is a pretty bad way to help people. America doesn’t go in for lavish spending on fuel consumption subsidies, but we do have something called the Low-Income Home Energy Assistance Program, which offers targeted subsidies to help poor families in cold-weather states to keep their families warm in the winter. This is hardly the worst idea in the world, but you’d do more for the families and the environment if you just gave them cash. Some of that cash might go to pay the heating bill, but some might go to the purchase of sweaters or better insulation, ecologically friendlier solutions that will probably help households more over the long run.

That these kinds of subsidies are misguided counts as conventional wisdom in the economics world, but it’s not clear that even economists have recognized the sheer scale of the impact. If roughly half of what needs to be done can be achieved simply by eliminating economic distortions—economic distortions that would be unwise even if there were no concern about pollution—then the whole framework of a trade-off between prosperity and sustainability is largely misguided. The outlook for greener, freer markets gets even brighter when you consider that consumption subsidies aren’t the only dirty interventions out there. The U.S. government offers generous tax subsidies for the production of oil and natural gas (each year, President Obama proposes to scrap them, and each year Congress declines), and the European Union does the same for coal. Local governments nearly everywhere require the construction of more parking spaces and lower-density buildings than a free market would provide, encouraging excessive driving and energy-intensive large detached homes.

At the end of the day, pure laissez faire can never meet the world’s environmental challenges. If you want to reduce greenhouse gas emissions, you need to cap them and then you need to reduce the cap. But a surprisingly large step toward that target can occur by simply allowing the market to do its work by removing the subsidies that encourage lavish and inefficient consumption of fossil fuels.

Why are wages high in some cities?

See Brookings' compilation of Census data about median wages in 2009:

 

Why are companies willing to pay more for workers in these towns?  Are they just being nice?  Could they make more money by moving to where wages are lower?

Agglomeration Economies of Iphone

NYT

In 2007, a little over a month before the iPhone was scheduled to appear in stores, Mr. Jobs beckoned a handful of lieutenants into an office. ...Mr. Jobs angrily held up his iPhone, angling it so everyone could see the dozens of tiny scratches marring its plastic screen... People will carry this phone in their pocket, he said. People also carry their keys in their pocket. “I won’t sell a product that gets scratched,” he said tensely. The only solution was using unscratchable glass instead. “I want a glass screen, and I want it perfect in six weeks.”

¶ After one executive left that meeting, he booked a flight to Shenzhen, China. If Mr. Jobs wanted perfect, there was nowhere else to go.

¶ ...all iPhones contain hundreds of parts, an estimated 90 percent of which are manufactured abroad. Advanced semiconductors have come from Germany and Taiwan, memory from Korea and Japan, display panels and circuitry from Korea and Taiwan, chipsets from Europe and rare metals from Africa and Asia. And all of it is put together in China.

¶ In its early days, Apple usually didn’t look beyond its own backyard for manufacturing solutions. A few years after Apple began building the Macintosh in 1983, for instance, Mr. Jobs bragged that it was “a machine that is made in America.” In 1990, while Mr. Jobs was running NeXT, which was eventually bought by Apple, the executive told a reporter that “I’m as proud of the factory as I am of the computer.” As late as 2002, top Apple executives occasionally drove two hours northeast of their headquarters to visit the company’s iMac plant in Elk Grove, Calif.

¶ But by 2004, Apple had largely turned to foreign manufacturing. Guiding that decision was Apple’s operations expert, Timothy D. Cook, who replaced Mr. Jobs as chief executive... Most other American electronics companies had already gone abroad, and Apple, which at the time was struggling, felt it had to grasp every advantage.

¶ In part, Asia was attractive because the semiskilled workers there were cheaper. But that wasn’t driving Apple. For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies.

¶ For Mr. Cook, the focus on Asia “came down to two things,” said one former ...Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.” The result is that “we can’t compete at this point,” the executive said.

¶ The impact of such advantages became obvious as soon as Mr. Jobs demanded glass screens in 2007.

¶ For years, cellphone makers had avoided using glass because it required precision in cutting and grinding that was extremely difficult to achieve. Apple had already selected an American company, Corning Inc., to manufacture large panes of strengthened glass. But figuring out how to cut those panes into millions of iPhone screens required finding an empty cutting plant, ...and an army of midlevel engineers. It would cost a fortune simply to prepare.

¶ Then a bid for the work arrived from a Chinese factory.

¶ When an Apple team visited, the Chinese plant’s owners were already constructing a new wing. “This is in case you give us the contract,” the manager said... The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory. It had a warehouse filled with glass samples available to Apple, free of charge. The owners made engineers available at almost no cost. They had built on-site dormitories so employees would be available 24 hours a day.

¶ The Chinese plant got the job.

¶ “The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

¶ In Foxconn City

¶ An eight-hour drive from that glass factory is a complex, known informally as Foxconn City, where the iPhone is assembled. To Apple executives, Foxconn City was further evidence that China ...outpaced their American counterparts.

¶ That’s because nothing like Foxconn City exists in the United States.

¶ The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. ...

¶ “They could hire 3,000 people overnight,” said Jennifer Rigoni, who was Apple’s worldwide supply demand manager until 2010, but declined to discuss specifics of her work. “What U.S. plant can find 3,000 people overnight and convince them to live in dorms?”

¶ In mid-2007, after a month of experimentation, Apple’s engineers finally perfected a method for cutting strengthened glass so it could be used in the iPhone’s screen. The first truckloads of cut glass arrived at Foxconn City in the dead of night... That’s when managers woke thousands of workers, who crawled into their uniforms — white and black shirts for men, red for women — and quickly lined up to assemble, by hand, the phones. Within three months, Apple had sold one million iPhones. ...

Manufacturing glass for the iPhone revived a Corning factory in Kentucky, and today, much of the glass in iPhones is still made there. After the iPhone ...Corning received a flood of orders from other companies hoping to imitate Apple’s designs... and it has hired or continued employing about 1,000 Americans to support the emerging market.

¶ But as that market has expanded, the bulk of Corning’s strengthened glass manufacturing has occurred at plants in Japan and Taiwan.

¶ “Our customers are in Taiwan, Korea, Japan and China,” said James B. Flaws, Corning’s vice chairman... “We could make the glass here, and then ship it by boat, but that takes 35 days. Or, we could ship it by air, but that’s 10 times as expensive. So we build our glass factories next door to assembly factories, and those are overseas.”