Has Globalization Peaked?

updated at medianism.org.

The Box

UPDATE: moved to Medianism.org

The Economist magazine explains containerization:

[C]ontainers—uniform boxes that can be easily moved between lorry, train and ship—have reshaped global trade over the past few decades. Why...?

...

Industrial Policy In History and In China

Michael Pettis writes a history of industrial policy and implications for Chinese development.  

It was... the post-War Japanese development model, itself based on Japan’s experience of economic development during and after the Meiji restoration, that became the standard for policymakers throughout East Asia and China. I think of China’s growth model as merely a more muscular version of the Japanese or East Asian growth model, which is itself partly based on the American experience.
There were three key elements of the American System. ...Michael Lind, in one of his economic histories of the United States, described them as:
·      infant industry tariffs
·      internal [infrastructure investment] and
·      a sound system of national finance
These three elements are at the heart, explicitly or implicitly, of every variation of the investment-led development model adopted by number of countries in the last century – including Germany in the 1930s, the USSR in the early Cold War period, Brazil during the Brazilian miracle, South Korea after the Korean War, Japan before 1990, and China today, to name just the most important and obvious cases. For this reason I think it makes sense to discuss each of them in a little more detail.
Infant industry tariffs
The “infant industry” argument is fairly well known. I believe Alexander Hamilton was the first person to use the phrase, and the reasoning behind his thinking was straightforward. American manufacturing could not compete with the far superior British, and according to the then- (and now) fashionable economic theories based on Adam Smith and David Ricardo, the implications for trade policy were obvious. Americans should specialize in areas where they were economically superior to the British – agriculture, for the most part – and economic policy should consist of converting US agriculture to the production of cash crops – tobacco, rice, sugar, wheat and, most importantly, cotton – maximizing that production and exchanging them for cheaper and superior British manufactured items.
In this way, as Ricardo brilliantly proved, and assuming a static distribution of comparative advantages, with each country specializing in its comparative advantage, global production would be maximized and through trade both the British and the Americans would be better off. While most academic US economists and the commodity-producing South embraced free trade, Alexander Hamilton and his followers, mainly in the northeast, did not (in fact differing views over free trade as well as over slavery and state rights were at the heart of the North-South conflict that led eventually to the Civil War).
Hamilton was convinced that it was important for the US to develop its own manufacturing base because, as he explained in his Congressional report in 1791, he believed that productivity growth was likely to be much higher in manufacturing than in agriculture or mineral extraction. Contrary to David Ricardo, ...Hamilton believed that comparative advantage was not static and could be forced to change [to increase productivity of a country]... What is more, he thought manufacturing could employ a greater variety of people and was not subject to seasonal fluctuations or fluctuations in access to minerals.
Given much higher British efficiency and productivity, which translated into much lower prices even with higher transportation costs, how could Americans compete? They could do it the same way the British did to compete with the superior Dutch a century earlier. The US had to impose tariffs and other measures to raise the cost of foreign manufacturers sufficiently to allow their American counterparts to undersell them in the US market. In addition Americans had to acquire as much British technological expertise and capacity as possible (which usually happened, I should add, in the form of intellectual property theft).
This the US did... in fact I believe every country that has managed the transition from underdeveloped to developed country status (with, perhaps, the exception of one or two trading entrepôts like Singapore and Hong Kong, although even this is debatable), including Germany, Japan, and Korea, has done it behind high explicit or implicit trade tariffs and stolen intellectual property. The idea that countries get rich under conditions of free trade has very little historical support, and it is far more likely that rich countries discover the benefits of free trade only after they get rich, while poor countries that embrace free trade too eagerly (think of Colombia and Chile in the late 19^th century, who were stellar students of economic orthodoxy) almost never get rich unless, like Haiti in the 18^th Century or Kuwait today, they are massive exporters of a very valuable commodity (sugar, in the case of Haiti, which was the richest country in the world per capita during a good part of the late 18^th Century).

Note: I'm not sure where Pettis got the above idea that Haiti was so wealthy before its revolution, but I suspect that Pettis is not counting the Hatian slaves as people in this measurement.  That was the usual practice in slave societies.  Pettis continues:

...rather than ...embrace protection ...there is one very important caveat. Many countries have protected their infant industries, and often for many decades, and yet very few have made the transition to developed country status. Understanding why protection “works” in some cases and not in others might have very important implications for China. ...I suspect ...domestic competition [may help explain successful infant industry strategies].
Specifically, it is not enough to protect industry from foreign competition. There must be a spur to domestic innovation, and this spur is probably competition that leads to advances in productivity and management organization. I would argue, for example, that countries that protected domestic industry but allowed their domestic markets to be captured and dominated by national champions were never likely to develop in the way the United States in the 19^th Century.
I would also argue that companies that receive substantial subsidies from the state also fail to develop in the necessary way because rather than force management to improve economic efficiency as a way of overcoming their domestic rivals, these countries encourage managers to compete... to gain greater access to those subsidies. Why innovate when it is far more profitable to demand greater subsidies, especially when subsidized companies can easily put innovative companies out of business? Last April, for example, I wrote about plans by Wuhan Iron & Steel, China’s fourth-largest steel producer, to invest $4.7 billion in the pork production industry.
The company’s management argued that they could compete with traditional agro-businesses not because steel makers were somehow more efficient than farmers, but rather because their size and clout made it easier for them to get cheap [loans] and ...government approvals. They were able to invest in an industry they knew little about, ...because they knew they could extract economic rent. This clearly is not a good use of protection.
The lessons for China, if I am right, are that China should forego the idea of nurturing national champions and should instead encourage brutal domestic competition. Beijing should also eliminate subsidies to production, the most important being cheap and unlimited credit, because senior managers of Chinese companies rationally spend more time on increasing access to these subsidies than on innovation [in] which, ...China fares very, very poorly.
There is nothing wrong with protecting domestic industry, but the point is to create an incentive structure that forces increasing efficiency behind barriers of protection. The difficulty, of course, is that trade barriers and other forms of subsidy and protection can become highly addictive, and the beneficiaries, especially if they are national champions, can become politically very powerful. In that case they are likely to work actively both to maintain protection and to limit efficiency-enhancing domestic competition. ...Friedrich Engels, [Karl Marx's best friend, criticized protectionism saying,]  “the worst of protection is that when you once have got it you cannot easily get rid of it.”
Internal improvements
The second element of the American System was internal improvement, which today we would ...call infrastructure spending. Proponents of the American System demanded that the national and state governments design, finance and construct canals, bridges, ports, railroads, toll roads, [schools], and a wide variety of communication and transportation facilities that would allow businesses to operate more efficiently and profitably. In some cases these projects were paid for directly (tolls, for example) and in other cases they were paid for tax revenues generated by higher levels of economic activity.
It is easy to make a case for state involvement in infrastructure investment. The ...benefits ...are likely to be diffused throughout the economy, making it hard for any individual company to justify absorbing the costs of investment. In this case the state should fund infrastructure investment and pay for it through the higher taxes generated by greater economic activity.
For me the interesting question, especially in the Chinese context, is not whether the state should build infrastructure but rather how much it should build. In fact this is one of the greatest sources of confusion in the whole China debate. Most China bulls implicitly assume that infrastructure spending is always good and the optimal amount of infrastructure is more or less the same for every country, which is what allows them to compare China’s per capita capital stock with that of the US and Japan and conclude that China still has a huge amount of investing to do because its capital stock per capita is so much lower.
But this is completely wrong, and even nonsensical. Infrastructure investment is like any other investment in that it is only economically justified if the total economic value created by the investment exceeds the total economic cost associated with that investment If a country spends more on infrastructure than the resulting increase in productivity, more infrastructure makes it poorer, not richer.

Pettis' third point, a sound financial system, seems to be in place.  China has done better so far than most of the West.  I would expect that China will have a financial crisis eventually too, but so far so good for them.  And the US did not have a sound financial system before the Great Depression and the US still developed well, so China is better off than the US was.  And the biggest financial problems since the 1970s has been caused by rapid capital flight out of countries.  China has capital controls and is less vulnerable to this kind of problem than most of the world. 

Predicting Future Exchange Rates

Nobody can reliably predict future exchange rates or else they would be incredibly rich because you could earn billions of dollars by being able to predict even miniscule movements in exchange rates.  There are many professional exchange rate traders who do try to predict them, and perhaps some can eke out profits, but they can only do so at significant cost in researching real events that could drive future exchange rate prices and beating everyone else to identify those events.  Many professional traders lose vast fortunes on the exchange rate market and about 3/4 of small traders lose their shirts according to the Wall Street Journal (pay-wall). 
But that doesn't mean that foreign exchange futures are useless to small businesses. The very fact that small businesses cannot predict future exchange rates is what makes the futures market useful for them.  That is because business can sometimes predict their future needs for foreign exchange accurately and they can reduce their own future risk by buying the currency futures now.  For example, if you are sure you will need to buy $20k of French cheese next summer, why not lock in your exchange rate now so that you can predict your future costs better?  Othewise, the price of French cheese will fluctuate with the exchange rate.  By fixing your exchange rate, you have one less variable to worry about and can focus on the business of how to profit from all that cheese.  Hopefully that is what your competive advantage is, not foreign exchange speculation.  Indeed, if you don't buy foreign exchange futures, and you know that you will need to order French cheese in the future, then you have unconsciously decided to become a foreign exchange speculator.  If the Euro drops, you will make more money, but if it rises, you could still lose your shirt on the cheese. 

Cost Disease of Services

Derek Thompson at The Atlantic examines the cost disease of services:

[The] National Journal [had a] special report on the rise and fall and rise of manufacturing. The spectacular graphic compares employment by sector in 1947 and 2007 and its most important lesson is a whopper. Manufacturing and agriculture employed one in three workers just after World War II. Today, those sectors employ only one in eight.

Where did all the making-stuff and growing-stuff jobs go? They went into services.

...The big story about American jobs in the post-war period is this: The manufacturing/agriculture economy shrunk from 33% to 12%, and the services economy grew from 24% to 50% [plus government, food services, energy and mining, and construction have all stayed about the same]. ...as manufacturing and agriculture got more efficient, they required fewer American workers, while the services industry (which had slower efficiency gains since it has more person-to-person work) required more employees to keep up with the rising demand for consulting, nurses, teachers, computer technicians, and so on. This isn't a sad story, or a happy story. It's just what's happening...

Closing thought: Why isn't anybody talking about the tragic decline of agriculture? [Agriculture's] share of workers has fallen by 80 percent in the last 60 years. Nobody seems to think that's much of a tragedy, but we do consider it tragic that manufacturing has lost 60 percent of its share over the same period. Are we being hyperbolic about the decline of manufacturing...? 

Update: ...Manufacturing jobs have declined as a share of the economy. But manufacturing hasn't declined as an industry. It's grown. By a lot. ...Output has sextupled.

Culture, Not Economics, Determines Immigration Politics

Immigration has raised the wages of US-born workers.  Moneybox:

Via Dylan Matthews, the Hamilton Project has the great summary chart (above) comparing the findings about the short-term economic impact of immigration from two major studies by economists.  I'm more of an Ottaviano-Peri man than a Borjas-Katz man because I believe in complementarity, the idea that immigrant workers increase the demand for skills (English language competence, for example) that even 'unskilled' U.S.-born workers have.

What it also shows you is that the actual economics of immigration are totally irrelevant to the political debate. The voters most likely to oppose high levels of immigration are precisely the people who Borjas and Katz say benefit from it economically. Meanwhile, immigration supporters and especially Spanish-dominant Latinos often feel the negative wage impact of immigration, since that's where complementarity plays the least role. In other words, if the immigration issue were about economics, then you'd see white working-class voters clamoring for amnesty and open borders while SEIU and MALDEF emphasized the need to secure the border before taking any further steps.

Of course you don't see that at all...

Kevin Drum explains the politics further:

John Tanton, the founder of FAIR, the nation’s oldest and most influential immigration restriction group... tried to preach an anti-immigration message based on economic and conservation grounds. But it didn't work. Chris tells us what did work:

Crisscrossing the country, Tanton found little interest in his conservation-based arguments for reduced immigration, but kept hearing the same complaint. “‘I tell you what pisses me off,’” Tanton recalls people saying. “‘It’s going into a ballot box and finding a ballot in a language I can’t read.’ So it became clear that the language question had a lot more emotional power than the immigration question.”
Tanton tried to persuade FAIR to harness this “emotional power,” but the board declined. So in 1983, Tanton sent out a fundraising letter on behalf of a new group he created called U.S. English. Typically, Tanton says, direct mail garners a contribution from around 1 percent of recipients. “The very first mailing we ever did for U.S. English got almost a 10 percent return,” he says. “That’s unheard of.” John Tanton had discovered the power of the culture war.
The success of U.S. English taught Tanton a crucial lesson. If the immigration restriction movement was to succeed, it would have to be rooted in an emotional appeal to those who felt that their country, their language, their very identity was under assault. “Feelings,” Tanton says in a tone reminiscent of Spock sharing some hard-won insight on human behavior, “trump facts.”

Cultural insecurity and language angst are the key issues here. It doesn't matter if they're rational or not.

 How much of general globalization opposition is also due to cultural issues rather than economic ones? 

The reason immigration benefits native workers is that they are more complimentary for native workers rather than substitutes which makes native workers more productive.  The same is true for capital goods.  If robots make your labor more productive, then they will raise your wage, but if they are substitutes for your labor, then they will lower your wage.  Immigration has increased the supply of dishwashers and busboys which has let native-born Americans move up to higher-paid employment as waiters, chefs, and making kitchen equipment.  Moneybox:

The research that really changed my thinking on this is ably covered in this great Heidi Shierholz did for EPI back in February 2010. Note that EPI is the premiere labor-liberal think tank in Washington and hardly a hotbed of apologism for the top one percent. The basic point here is that the old CW on low-skill immigration is that it raised real wages for high-skill workers but lowered them for low-skill workers. The key methodological advance comes from realizing that a very large share of low-skill workers in the United States are themselves immigrants. Since restricting low-skill immigration for the sake of low-skill immigrants is a little perverse, it's helpful to distinguish between the impact on immigrant workers and native-born workers.

Here's what they found:

One key finding here is that if you look at typical native-born working class Americans—folks with high school diplomas but no college degree—they win out thanks to immigration. And even if you restrict your attention to U.S.-born high school dropouts they win under most scenarios.

The losses from increased labor market competition are very real but they're concentrated among other immigrants. That's because it's all about complements. An increased supply of dishwashers and busboys increases the value of modestly educated people with complementary skills. To return to the restaurant, a waiter or a bartender needs to be able to speak English. In a world with no immigrants "can speak English" isn't much of a skill but when low-skill immigrants rush in suddenly it is. The people who lose out are the other workers who can't speak English, or who have specialized taco-making skills, or otherwise are extremely similar to new immigrants.

To Trade Is Human

Updated at Medianism.org

The Wall Street Journal summarized the work of some economic historians who argue that trade was the reason that puny humans took over the world: Evolution and Creativity: Why Humans Triumphed:

Nothing seems to explain the sudden takeoff of the last 45,000 years—the conversion of just another rare predatory ape into a planet dominator with rapidly progressing technologies. Once “progress” started to produce new tools, different ways of life and burgeoning populations, it accelerated all over the world, culminating in agriculture, cities, literacy and all the rest. Yet all the ingredients of human success—tool making, big brains, culture, fire, even language—seem to have been in place half a million years before and nothing happened. Tools were made to the same monotonous design for hundreds of thousands of years and the ecological impact of people was minimal. Then suddenly—bang!—culture exploded, starting in Africa. Why then, why there? The answer lies in a new idea, borrowed from economics, known as collective intelligence: the notion that what determines the inventiveness and rate of cultural change of a population is the amount of interaction between individuals….
Scientists have so far been looking for the answer to this riddle in the wrong place: inside human heads. Most have been expecting to find a sort of neural or genetic breakthrough that sparked a “big bang of human consciousness,” an auspicious mutation so that people could speak, think or plan better, setting the human race on the path to continuous and exponential innovation.  But the sophistication of the modern world lies not in individual intelligence or imagination. It is a collective enterprise. Nobody—literally nobody—knows how to make the pencil on my desk ...let alone the computer on which I am writing…
We tend to forget that trade and urbanization are the grand stimuli to invention, far more important than ...individual genius. It is no coincidence that trade-obsessed cities—Tyre, Athens, Alexandria, Baghdad, Pisa, Amsterdam, London, Hong Kong, New York, Tokyo, San Francisco—are the places where invention and discovery happened. Think of them as well-endowed collective brains. Trade also gave way to centralized institutions…
Agriculture was invented where people were already living in dense trading societies….
Go even further back and you find the same thing. The explosion of new technologies for hunting and gathering in western Asia around 45,000 years ago, often called the Upper Paleolithic Revolution, occurred in an area with an especially dense population of hunter-gatherers—with a bigger collective brain. Long before the ancestors of modern people first set foot outside Africa, there was cultural progress within Africa itself, but it had a strangely intermittent, ephemeral quality: There would be flowerings of new tool kits and new ways of life, which then faded again….
Trade is to culture as sex is to biology. Exchange makes cultural change collective and cumulative. It becomes possible to draw upon inventions made throughout society, not just in your neighborhood. The rate of cultural and economic progress depends on the rate at which ideas are having sex.
Dense populations don’t produce innovation in other species. They only do so in human beings, because only human beings indulge in regular exchange of different items among unrelated, unmated individuals and even among strangers. So here is the answer to the puzzle of human takeoff. It was caused by the invention of a collective brain itself made possible by the invention of exchange.
Once human beings started swapping things and thoughts, they stumbled upon divisions of labor, in which specialization led to mutually beneficial collective knowledge. Specialization is the means by which exchange encourages innovation: In getting better at making your product or delivering your service, you come up with new tools. The story of the human race has been a gradual spread of specialization and exchange ever since: Prosperity consists of getting more and more narrow in what you make and more and more diverse in what you buy. Self-sufficiency—subsistence—is poverty….
This theory neatly explains why some parts of the world lagged behind in their rate of cultural evolution after the Upper Paleolithic takeoff. Australia, though it was colonized by modern people 20,000 years earlier than most of Europe, saw comparatively slow change in technology and never experienced the transition to farming. This might have been because its dry and erratic climate never allowed hunter-gatherers to reach high enough densities of interaction to indulge in more than a little specialization.
Where population falls or is fragmented, cultural evolution may actually regress. A telling example comes from Tasmania, where people who had been making bone tools, clothing and fishing equipment for 25,000 years gradually gave these up after being isolated by rising sea levels 10,000 years ago. Joe Henrich of the University of British Columbia argues that the population of 4,000 Tasmanians on the island constituted too small a collective brain to sustain, let alone improve, the existing technology.
The oldest evidence for human trade comes from roughly 80,000 to 120,000 years ago, when shell beads in Algeria and obsidian tools in Ethiopia began to move more than 100 miles from the sea and from a particular volcano respectively. (In recent centuries stone tools moved such distances in Australia by trade rather than by migration.) This first stirring of trade was the most momentous innovation of the human species, because it led to the invention of invention. Why it happened in Africa remains a puzzle, but Steve Kuhn and Mary Stiner of the University of Arizona have argued that for some reason only Africans had invented a sexual division of labor between male hunters and female gatherers—the most basic of all trades….
The process of cumulative innovation that has doubled life span, cut child mortality by three-quarters and multiplied per capita income ninefold—world-wide—in little more than a century is driven by ideas having sex. And things like the search engine, the mobile phone and container shipping just made ideas a whole lot more promiscuous still.

The article also talks about Neanderthals:

Neanderthals are now known to have had brains that were bigger than ours and to have inherited the same genetic mutations that facilitate speech as us. Yet, despite surviving until 30,000 years ago, they hardly invented any new tools, let alone farms, cities and toothpaste. The Neanderthals prove that it is quite possible to be intelligent and imaginative human beings (they buried their dead) yet not experience cultural and economic progress.
Further proof that exchange and collective intelligence are the key to human progress comes from Neanderthal remains. Almost all Neanderthal tools are found close to their likely site of origin: they did not trade. In the southern Caucasus, argues Daniel Adler of the University of Connecticut, it is the “development and maintenance of larger social networks, rather than technological innovations or increased hunting prowess, that distinguish modern humans from Neanderthals.

Our ancestors (Homo sapiens) displaced Neanderthal man (Homo neanderthalensis) despite our competitors having larger brains and much stronger bodies.  They had tools and speech and buried their dead.  Jason Shogren argues that the only advantage our ancestors had over Neanderthal man is that Homo sapiens was much more inclined to trade:

SINCE the days of Adam Smith and David Ricardo, advocates of free trade and the division of labour, …have lauded the advantages of those economic principles. Until now, though, no one has suggested that they might be responsible for the very existence of humanity. But that is the thesis propounded by Jason Shogren, … For Dr Shogren is suggesting that trade and specialisation are the reasons Homo sapiens displaced previous members of the genus, such as Homo neanderthalensis (Neanderthal man), and emerged triumphant as the only species of humanity.
Neanderthal man has had a bad cultural rap over the years since the discovery of the first specimen in the Neander valley in Germany, in the mid-19th century. The “caveman” image of a stupid, grunting, hairy, thick-skulled parody of graceful modern humanity has stuck in the public consciousness. But current scholarship suggests Neanderthals were probably about as smart as modern humans, and also capable of speech. If they were hairy, strong and tough—which they were—that was an appropriate adaptation to the ice-age conditions in which they lived. So why did they become extinct?
Neanderthals existed perfectly successfully for 200,000 years before Homo sapiens arrived in their European homeland about 40,000 years ago, …. But 10,000 years later they were gone, so it seems likely that the arrival of modern man was the cause. The two species certainly occupied more or less the same ecological niche (hunting a wide range of animals, and gathering a similarly eclectic range of plant food), and would thus have been competitors….  according to Dr Shogren’s paper in a forthcoming edition of the Journal of Economic Behaviour and Organisation, it was neither cave paintings nor better spear points that led to Homo sapiens‘s dominance. It was a better economic system.
One thing Homo sapiens does that Homo neanderthalensis shows no sign of having done is trade. The evidence suggests that such trade was going on even 40,000 years ago. Stone tools made of non-local materials, and sea-shell jewellery found far from the coast, are witnesses to long-distance exchanges. That Homo sapiens also practised division of labour and specialisation is suggested not only by the skilled nature of his craft work, but also by the fact that his dwellings had spaces apparently set aside for different uses….  Only in the case of the trading and specialisation variables did they allow Homo sapiens an advantage: specifically, they assumed that the most efficient human hunters specialised in hunting, while bad hunters hung up their spears and made things such as clothes and tools instead. Hunters and craftsmen then traded with one another.
According to the model, this arrangement resulted in everyone getting more meat, which drove up fertility and thus increased the population. Since the supply of meat was finite, that left less for Neanderthals, and their population declined…. the presence of a trading economy in the modern human population can result in the extermination of Neanderthals even if the latter are at an advantage in traditional biological attributes, such as hunting ability.

Both trade and technology finally had an enduring expansion during the “upper paleolithic explosion” about 40,000 years ago. The above reading argues that it was due to population density.  Haim Ofek’s book argues that this was due to the invention of money.  He argues that this was the time when there was a blossoming of symbolic expression like sculpture and cave paintings.  Money is nothing more than a symbolic representation of value and so a culture that widely engages in symbolic artistic representation may also ‘get’ the idea that rare beads are worth trading for food or stone blades.