Topic: Trade and Immigration

Good News on Income Mobility

Steven Pearlstein of the Washington Post takes a beating around here sometimes, so I want to draw attention to his dynamite column this week on the non-disappearance of the middle class. Drawing on a new book, Social Stratification in the United States by Stephen Rose, Pearlstein demonstrates that

rumors of the demise of the American middle class are greatly exaggerated. In fact, living standards for most Americans are improving. Not everyone is flipping hamburgers or working at Wal-Mart. To the degree that the middle class is shrinking, it is because more people are rising out of it than falling from it.

Pearlstein takes pains to note that Rose “is not your standard-issue conservative market apologist – far from it. He left medical school to get his PhD in economics, then alternated between teaching and community organizing. He served on the Democratic staff of the Joint Economic Committee and in the economics shop of the Clinton Labor Department.” So you can trust him – he worked for Clinton!

And Rose finds, as Pearlstein lays it out, that there’s a lot more good news than the “sky-is-falling rhetoric of the Democratic left” would lead you to believe. Pearlstein notes:

[I]t is often reported that the median household income in the United States is $44,500. Of course, that takes in households of varying size, from singles to the Brady Bunch. It also includes households headed by workers in the prime of their working years (29 to 59), as well as those just beginning or ending their careers, when earnings tend to be lower. So, to get a truer picture of economic well-being, Rose adjusts the data for household size and excludes those headed by people younger than 29 or older than 59. And when he does, it turns out that the median income for the “typical American family” jumps to $63,000, which in most parts of the country buys a pretty comfortable middle-class lifestyle.

This doesn’t mean the middle class isn’t shrinking. In fact, from 1979 to 2004, Rose calculates, the percentage of households in the “middle class” category – those with incomes of $30,000 to $90,000 – fell to 39 from 47 percent. But it would be hard to describe that as bad news when the proportion of well-off households – those with incomes of more than $90,000 – rose by nearly nine percentage points. During the same time frame, the percentage of households that were poor or near-poor remained about the same.

One of the favorite liberal story lines is that the only way middle class families have been able to maintain their standard of living is by forcing mom to work more hours. But that, too, turns out to be an exaggeration. By looking just at married couples at various points in the income ladder, Rose found that for all but the poorest households, inflation-adjusted income was higher in 2004 than in 1979 even after factoring out any increase in spousal work hours.

It is also a myth that the Great American Jobs Machine is producing mostly lousy, low-paying service jobs. Rose simplifies the government data by putting all jobs in three categories: “elite” jobs, encompassing managers and professionals; “good jobs,” such as those held by supervisors, skilled blue-collar workers, craft workers, police, firefighters and clerical workers; and “less skilled” jobs, such as those held by unskilled machine operators, laborers, sales clerks and waiters. Looking at it that way, it turns out that the number of lousy, low-skilled jobs has been on a long, steady decline since 1979, while the number of “elite” jobs has been growing steadily. The number of “good” jobs has declined marginally as skilled office work has replaced skilled factory work.

Rose is concerned, quite properly, about the condition of the poorest people in the American economy, though he and I would probably disagree on the best way to help them enter the economic mainstream.  But he’s also brought a healthy dose of reality to the debate over “the declining middle class.”

For more on these topics, see the recent posts by Brink Lindsey at his personal website and the award-winning Cato Institute book Cowboy Capitalism: European Myths, American Reality by Olaf Gersemann.

A Poison Pill for China?

Last week top Chinese and American economic officials met in Washington for the second “Strategic Economic Dialogue.” While trade and exchange rates grabbed all the headlines, one less publicized subject was advice from the American side on how the Chinese can promote consumption in their domestic economy.

More consumption would presumably mean the Chinese would buy more American products and send less of their excess savings to the United States, leading eventually to a smaller Chinese trade surplus with the United States and the world.

How did U.S. government officials propose to promote more consumption in China? The Chinese were advised by their American friends to “create a social safety net for its population, similar to the Social Security and Medicare programs in the United States, so Chinese residents do not need to continue to save as much as 50 percent of their income for their retirement and future medical needs,” according to one trade newsletter.

Whoa. Would China’s economic managers really want to saddle its population with the same unsustainable government promises that characterize our two biggest entitlement programs? As my Cato colleagues have long noted, and as USA Today reported on its front page this week, the unfunded liabilities wracked up by those two programs has now reached more than $45 trillion (yes, that’s trillion).

I suppose saddling the Chinese economy with a huge, unfunded government obligation would be one way to “level the playing field.”

Gov. Kaine Warns against Protectionism

Virginia’s Gov. Tim Kaine has a message for his fellow Democrats on the subject of trade: protectionism is for losers.

In an interview with Bloomberg News that was published this morning, Kaine said he disagreed with members of his party who criticize globalization and trade agreements such as NAFTA. Their attitude displays a “loser’s mentality,” Kaine countered, adding that, “The only way you’ll succeed [in the global economy] is by being an aggressive competitor rather than trying to hoard your dwindling assets.”

As I’ve argued elsewhere, the Democratic Party’s embrace of Lou Dobbs-style populism against trade betrays the party’s historical commitment to competition and internationalism. For its own and the nation’s good, party leaders would be wise to listen to Gov. Kaine’s advice on trade.

The Wrong and Right Approach on U.S.-China Trade

The economic illiteracy that drives the “revalue-your-currency-immediately-and-dramatically-or-else-we’ll-impose-a-27.5 percent tariff” mantra has become a huge political problem.  The more that policymakers (and columnists) imply parity between the economic effects of a stronger Chinese Yuan and those of a huge import tax on Chinese goods at the U.S. border, the more likely we are to cross the precipice into astoundingly stupid economic policy.

On that score, Washington Post business columnist Steven Pearlstein deserves scorn.  In his column on Sunday, Pearlstein touted his preference for populist bromides over any desire to comprehend and convey truth to his readers about trade.  Pearlstein has joined the ranks of those agitating for an across-the-board tariff on Chinese imports since China “cannot take the one step that would restore some [trade] balance—revalu[ing] its currency.”  Though Pearlstein has grown increasingly hostile to trade recently, Sunday’s column, in which he describes the upside of a massive levy against all Chinese imports, is probably the most irresponsible one I’ve read from him. 

The “currency issue” is the most prominent source of contention afflicting the U.S.-China economic relationship.  But it is merely a proxy for broader concern over the U.S. trade deficit with China.  From the large and growing deficit, many policymakers conclude that we are losing at trade, and we’re losing because China is cheating.  Intervention in the currency market by China’s central bank to keep the Yuan artificially low is the chief form of cheating, which acts as a subsidy on exports and a tax on imports.  Fix the currency manipulation, and you fix the trade account.

That is an extremely simplistic take on the cause and effect of Chinese intervention in the currency market. 

And even if trade balance or a trade surplus were a legitimate and worthwhile objective of policy, measures to encourage consumption in the surplus country or to encourage savings in the deficit country or some combination of both would be the proper course of action.  (Note: To those who believe a trade surplus should be the objective of policy, take a look at Japan and Germany.  Both have had large and persistent trade surpluses for decades.  But for the better part of the past two decades, Japan has experienced anemic economic growth. Germany, during the same period, has had mostly double-digit unemployment.  Meanwhile, the United States, with its large and growing deficit, has experienced steady, consistent economic growth and job creation over the same period.)

But the trade account has very little to do with trade policy.  Attempts to achieve greater trade balance by tinkering with trade policy levers, particularly the levers that discourage trade and investment altogether, should be avoided.  The trade account is a function of habits of savings and consumption, which are to some degree a function of fiscal and monetary policy, as well as relative confidence in local institutions and general outlook.

In that regard, last week’s Strategic Economic Dialogue between U.S. and Chinese officials in Washington was quite successful.  Of course the meetings were characterized by those who fail to look beneath the surface as the last chance for China to bow to U.S. demands and avoid sanctions.  That the Chinese didn’t say “how high” in response to U.S. demands to “jump” is evidence of the failure of the SED.  But the SED is part of a process, and that process has yielded very important progress (if progress is defined as movement toward greater trade balance, which has become a political, rather than an economic, necessity).

In the weeks leading up to last week’s SED congregation in Washington, through its conclusion on Thursday, all sorts of incremental steps have been taken in the name of achieving greater trade balance.  The Chinese announced a broader band within which the Yuan can fluctuate on a daily basis.  The Yuan can now appreciate more quickly than in the past.  Since July 2005, the Yuan has appreciated by over 8 percent against the dollar.  It is now on a steeper appreciation trajectory.  (But has it even occurred to anyone that the deficit has only grown larger during this period of Yuan appreciation?  That fact certainly hasn’t deterred the currency-or-sanctions hawks.)

In response to a U.S. WTO complaint filed in March, the Chinese agreed to cut export tax rebates, which allegedly subsidize Chinese exporters, and to reduce certain import taxes, which allegedly hamper import competition in China.  Also, the Chinese agreed to improved market access for U.S. commercial airliners and other industries, and they agreed to go on a shopping spree to boost U.S. exports (even though U.S. exports to China have been growing by leaps and bounds – by 32% in 2006 versus about 15% overall). 

But in my view, the most important breakthrough last week was China’s decision to open its financial services sector even further than it has bound itself to do under its WTO commitments.  This is more important than anything the Congress is raging about in Washington because it addresses a huge structural impediment to Chinese consumption: the dearth of consumer credit, life insurance, and disability insurance markets.  The scarcity of these services encourages thrift, as medical emergencies, education expenses, big ticket purchases, and expenses related to catastrophic events must be financed, in most cases, from personal savings.

Treasury Secretary Henry Paulson has long held that the key to improving the trade balance is encouraging Chinese consumption.  The Chinese government is trying to encourage that as well.  Paulson’s suggestion that U.S. financial services providers can help in that task (given how skilled we are at consuming), and China’s acceptance of that proposal is testament to the validity and value of the SED.

While Schumer and Graham and Pearlstein advocate dropping the bomb, Paulson and Schwab and Wu Yi contemplate the keys to a successful bilateral relationship with economic growth for all.

Bravo, Sarko

Some more disappointing rhetoric from the mouth of Nicolas Sarkozy, the new French president. Once lauded as the great hope for a new France, he has revealed his protectionist instincts in Brussels.

In an article today in the Financial Times, Sarkozy mounts what the FT calls a “passionate defence of French farmers,” apparently calling for the EU to be even tougher in its defense of European agriculture in world trade talks and to “protect” its citizens from globalization. I wonder how Europe’s citizens feel about being protected from lower prices for food?

In a stunning display of perverse priorities, Sarkozy was quoted as saying, “I’m not going to sell agriculture to get a better opening for services.” But a quick glance in my Economist Pocket World in Figures 2006 suggests that Sarkozy has it all wrong: the contribution to services in the French economy in 2003 was 71.4 percent of GDP, and 74 percent of employment. Agriculture’s contribution? Just 2.8 percent (and 2 percent of employment).

Certainly many services are by definition non-tradeable (ever flown to Paris to catch a taxi?), but according to the World Trade Organization, France was the world’s fourth largest exporter of commercial services in 2004. You’d think Mr Sarkozy would want to do everything in his power to promote their growth, non?

Announcing: Harper’s Law

Mine is a simple — dumb, even — adaptation of Metcalfe’s Law.

“The security and privacy risks increase proportionally to the square of the number of users of the data.”

— First quoted in this eWeek article about the electronic employment verification system included in the current immigration bill.

(I actually suspect that Briscoe’s et al’s refinement of Metcalfe’s law is more accurate, but that’s just so complicated.)

Senate Amendment Guts Immigration Reform

The Senate’s vote yesterday to cut the number of temporary worker visas in half knocks a big hole in the comprehensive immigration reform proposal now being debated in Congress. As I’ve written in a recent Free Trade Bulletin, allowing a sufficient number of foreign-born workers to enter the country legally to meet the obvious demand of our labor market is absolutely necessary if we want to reduce illegal immigration.

Ignoring our policy advice, the Senate voted 74-24 to adopt an amendment by Sen. Jeff Bingaman (D-N.M.) that would cut the number of annual temporary “Y visas” from 400,000 to 200,000. That number is almost certainly too low to provide the workers that our growing economy needs to fill jobs at the lower end the skill ladder for which there simply are not enough Americans available to fill them. The result, if the lower cap stands, will be continued illegal immigration.

The irony is that many of the senators voting to drastically reduce temporary visas are the same senators who warn that we should not repeat the mistake of the 1986 Immigration Reform and Control Act. That bill legalized 2.7 million illegal immigrants but was unable to stop more immigrants from entering the country illegally despite beefed-up enforcement. The real flaw of the 1986 law, however, was its complete lack of any temporary worker program to provide for future, legal workers.

By adopting the Bingaman amendment, a majority of senators have turned the current reform effort into something much more like the failed 1986 law. They have kicked the illegal immigration can down the road, leaving it to a future Congress to find a lasting solution.