I write lots of letters to editors of newspapers and magazines. It’s therapeutic. To maximize a letter’s chances of being published, each one should be kept to as few words as possible — almost never more than 150 words (and, better yet, many fewer). This tight space constraint means that a letter can seldom make more than one point.
This space constraint is really painful in replying to this letter in today’s Wall Street Journal by Senator Byron Dorgan. So much misunderstanding is packed into Sen. Dorgan’s missive that at least a dozen letters in response are necessary to cover its major flaws. But I have time only to write one letter.
First, here’s Sen. Dorgan’s letter:
Alan Murray’s column ("Two Books, Two Different Democratic Tones," Nov.
about my book "Take This Job and Ship It" complains that it isn’t upbeat and optimistic.
Well, he’s right about
that! My book takes on the $800 billion-a-year, out-of-control trade
deficits. It looks behind the economic numbers to understand what is
happening to American workers who are being told to compete with
workers in other parts of the world who will work for pennies an hour.
My book pulls back the curtain on incompetent trade agreements that
sell our country short by paving the way for outsourcing American jobs
and running up crushing trade deficits. It’s hard to find optimism in
that kind of failure.
Mr. Murray especially
takes issue with my noting that the largest U.S. export, by volume, is
waste paper. He wonders of what value it is to cite that information. I
think it is symbolic of our trade failure that we ship waste paper to
China and the rest of Asia so they can make cardboard boxes with which
to ship back their finished products to the U.S. By the way, our
current annual trade deficit with China alone is over $200 billion a
year. That’s a lot of cardboard boxes.
I respect those who
disagree with my views on trade. But I believe the current path is
unsustainable. These trade deficits will have significant and dangerous
consequences to our economy and our future. That doesn’t mean we should
retreat into a protectionist strategy. But we should recognize that we
are engaged with smart, tough economic competitors, and it’s long past
the time for us to insist that the rules of trade be fair to our
country, to our workers and to our businesses.
Sen. Byron L. Dorgan (D., N.D.)
Washington
And here’s the letter that I sent in response to this casserole of misunderstanding:
22 November 2006
Editor, The Wall Street Journal
200 Liberty Street
New York, NY 10281
Dear Editor:
Troubled
by the fact that America’s largest export, by volume, is waste paper,
Sen. Byron Dorgan thinks that "it is symbolic of our trade failure that
we ship waste paper to China and the rest of Asia so they can make
cardboard boxes with which to ship back their finished products to the
U.S" (Letters, Nov. 22).
I wonder if Sen. Dorgan has ever heard
the riddle – and here I paraphrase – "What’s more valuable? A dollar’s
worth of waste paper or a dollar’s worth of consumer electronics?"
Sincerely,
Donald J. Boudreaux
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{ 20 comments }
Dorgan is trying to make the reader draw the conclusion that since we aren't "making" that much money on the waste paper, and since that is our biggest export, we must be in trouble. But he clearly states that it is by volume. "Trade by volume" measurements are simply ridiculous.
Imagine if diamonds and jars of pickles were categorized based on a fixed "per volume" cost. The pickle exporters would look pretty rich, while the poor diamond exporters would have hardly anything to show for themselves.
Sen. Dorgan just doesn't understand that China is doing us a favor by subsidizing us with low cost products and will go broke doing so… oh, wait, they won't.
http://news.bbc.co.uk/2/hi/business/5319256.stm
http://news.bbc.co.uk/2/hi/business/4998020.stm
Ooops, well, we always have waste paper to export.
Bruce,
Nobody is arguing that China's economy is not growing. It is an instructive test case in how to go from a command economy to a market economy.
For instance, notice that their growth is closely related to trade, in the sense that their industrialization and high tech growth only took off after they opened up for international trade.
You seem to imply that their mercantilism is key to their growth. That's not convincing, given numerous counter examples. I will offer just one for now: When New Zealand gave up their tariffs and subsidies in the 80s, it lead to unprecedented growth and employment.
This Bruce Hall character is really quite amusing. Why does it surprise him that a country that has gone from a locked down control economy to a more free-market economy would all of a sudden experience marked growth? This is proving all of our points. Then he calls attention to it to try to persuade us that the opposite is occurring – i.e. that economies need strong governments to run them.
And why would it surprise anyone that a country with 4.4 times as many people as the United States may (in 20 years) catch up to the size of the US economy. Wouldn't it be a shame if they didn't? What does this prove though?
I've got some news for Dorgan and Bruce Hall who seem to think in a mercantilist way – the United States exports 5 times more goods per capita than China does – of course measured by dollars, not cubic meters
I personally like the fact that China has such huge stakes in our Treasuries because it makes it that less likely that they will do something dumb on the military scene.
Sorry, Python. It's not an issue of U.S. going back to mercantilism. It's what the so-called free trade with China is doing to the U.S. While you all think that things are going so well, you somehow can't see the signs that since the late 90s when China began their growth explosion and we began our outsourcing binge… individuals have been struggling more and more.
From the Federal Reserve http://www.federalreserve.gov/releases/housedebt/
Yr/Qtr Percent
80q2 11.16
81q2 10.73
82q2 10.75
83q2 10.57
84q2 10.76
85q2 11.38
86q2 11.95
87q2 12.27
88q2 11.92
89q2 11.90
90q2 11.96
91q2 11.80
92q2 11.12
93q2 10.83
94q2 10.95
95q2 11.60
96q2 11.94
**************
97q2 12.12
98q2 12.04
99q2 12.29
00q2 12.51
01q2 13.19
02q2 13.29
03q2 13.55
04q2 13.46
05q2 14.07
06q2 14.40
Happy Thanksgiving
Not to be unkind, but what would you expect from Dorgan?
I fail to understand why all of you "free market" guys are not apoplectic about the Chinese subsidy of their manufacturing via the recycling of their trade surplus into T-bills. That is designed to keep the exchnage rate artificially low and thus encourage exports. I am sure that if you really pressed them they would be perfectly happy to just flush those t-bills away. It is not about gaining assets, it is about subsidization pure an simple.
The net result is an equilibrium in the market where they produce things and we do not. Of course, then you all suddenly switch to talking about the "consumer" benefits as if switching to the other side of the curve somehow validates the argument. I understand that if the Chinese "want" to smply lend us money then that is theie "problem" but I thought the idea of markets was to reach an "equilibrium". Yes, trade with China has somthing to do with "comparative advanatge" but it also has to do with market manipulation by the government.
Don, speaking of letters to the editor, what's our hit rate? I know you send out at least one a day–how many get published?d
Bill
OK, I give up. What's more valuable? A dollar's worth of waste paper or a dollar's worth of consumer electronics?
George, The problem with your argument and I think the weakness in the professor's short reply is that it does not recognize the value of ideas. China pretty much manufactures to our spec for our people. The back of my iPod says "Designed in California. Made in China." And so they buy our debt with what we pay them. 20 years ago, Japan was manufacturing to their spec for our people and buying all our real estate. Japan does not own us now and China certainly won't 20 years from now. Our ideas and our trend setting culture are at the top of the value chain.
Bruce,
A quick analysis of the Fed website regarding Household debt reveals some interesting things. Look at the "renter" column versus the "homeowner" column. The renter column has gone down from 31 in 2001 to 25 in 2006. While the same time the homeowner column has risen from 16 to 18. Why do you think that this is happening?
The "consumer" data has barely budged – from 5.6 in 1980 to 6.4 now. So most of the increase in household data is from non-consumer items (e.g. housing).
I would argue that a large portion of the overall Household debt rise is from people who were moving from renting to owning. Because mortgages are typically higher than rent, it's no wonder that, on the aggregate, debt would appear to go up. Home ownership has gone from 63.9% in 1985 to 69% in 2005 (http://www.census.gov/compendia/statab/construction_housing/construct.pdf)
I'll have to double-check, but I don't believe that re-financing an existing home shows up well in the household debt stat. For example, if I refinance and get $20,000 out of my house, my mortgage payment may rise say $200 a month. But the disposable income stat only shows the $200 as a negative – I don't believe that it counts the $20,000 as a positive. So you could buy a house for $200K in 1990, have it's value go up to $400K in 2004, re-finance and actually have your household debt look worse, when actually your personal net wealth is much higher than it ever was. And you've used the re-finance money to make home improvements, take a nice vacation, etc.
In addition to that, the rise of variable mortgage rates in the past year have certainly contributed to rises in the percentage of household debt. If anything, the Chinese buying a bunch of treasuries helps keep interest low, not the other way around.
The data you post is in fact useful, but not when trying to correlate a trade relationship with China. I like how you say "individuals have been struggling more and more." Then you go and list data that shows that even while 5% more people own their own homes, household debt has only increased 3.3%. Even if all the reasons I gave for a rise in household debt are not true, a 3.3% change means that if I have $2000 of disposable income a month, I have $66 more dollars of debt to pay. That is not exactly struggling in my opinion.
I'm getting the sense that you are the kind that can rationalize that low unemployment isn't that great of a thing, but as soon as unemployment starts to rise you would cite it as evidence of a weakening economy.
Bruce,
The thing about correlations is sometimes you don't know what the driver is. In the case that you mention with household debt, it could be that BECAUSE Americans have taken on more debt, we are seeking lower priced consumer items, and hence trading more with China.
You also could have said that because Indian Gaming (casinos owned by Native Americans) started to really take off in California in 1996 and has risen in popularity since then, households are in much more debt. See the chart by Bruce Hall to prove it.
Happy Thanksgiving
What? the Chinese don't have ideas? So we have the comparative advantage of being a nation of "managers" or "idea people"? Everyone else just marches to our tune? Oh wait. I can hear the "democracy" folks lining up at the door. we have built a free and open society that encourages innovation and therefore of course we invent and they manufacture. Yes. I understand it in theory. it sure sounds nice. But is it real? Or are you just justifying the failure of the market to provide decent manufacturing jobs for the inevitable proportion of the population that are simply not gifted or brilliant enough to design the iPod. You are not dealing with the failure to achieve equilibrium which is perpetuated by government intervention. This is not about iPods this is about the bulk of things we buy and consume.
I'm not justifying anything George. Perhaps you should justify your nostalgia for decent manufacturing jobs. Christmas is coming up. The biggest shopping day of the year is tomorrow. I'm curious what you would say to all the shoppers who will load up on competitively priced imported goods to give as signs of love to their friends and families next month. Do you think they should pay 30% more as protectionist Dems like Chuck Shumer are proposing?
Really, if the trade deficit with China is a problem, wouldn't you have expected the same problem from two decades ago with Japan to have already clobbered us? Why is China different?
Let's say Shumer's 30% tariff represents the net savings of outsourcing production to China. So we're really saving 30/130 = 23% by outsourcing versus producing domestically. Don't you think that frees up a lot of capital to do other things? Is it better to forego that opportunity so that the C students can glue iPods together?
George,
It's not that we are in favor of Chinese subsidies. Subsidies hurt economies. It's just that in this case, it hurts the Chinese economy, not the US economy.
The proper response is not tariffs. If we are genuinely concerned about US competiveness, the proper response is reform of those policies that are hurting the US economy, such as the highest corporate tax rate within OECD.
Python already responded to Bruce's somewhat orthogonal data, but it's also worth noting that the household debt burden is measured as a percentage of *realized* income. Households are gaining a much larger share of their income through unrealized earnings, such as capital gains and benefits.
Bill,
One of Don's letters was published in the WSJ earlier this week (week of 11/20).
One comment: benefits at many corporations are actually being reduced as these businesses attempt to contain costs to be competitive with no/low benefit Asian producers. One could argue that "real" income is declining if one wishes to include the elusive "unrealized income" into the equation.
http://hallofrecord.blogspot.com/2006/11/no-problems-with-economy.html
Bruce,
Thanks, finally an interesting link. Read the quotes from Bernanke again.
"To say that the U.S. economy benefits from trade is not to say that every individual American worker or family benefits, or that the structural changes induced by trade are not disruptive,"
These are real problems in a dynamic economy, not just from trade, but from all changes occurring rapidly in such an economy. We can talk about that if you want.
However, it's still evident that the economy and living standards *as a whole* benefit from free trade.
Bruce,
It's not that people here think that there is nothing wrong with the economy. But many of us believe that when there is a problem the solution is not put more control in the hands of the government (i.e. pass more "business-restrictive" legislation).
What you have done is say a) here is a problem, and b) here is how the government can solve it.
Most of us would take more issue with Part B, but since your part A seems so weak, it seems silly to use Part B as a solution.
I would like to introduce the Python Fruit Fly Test (PFFT).
Imagine a group of biologists who think that a certain chemical XYZ can kill fruit flies but is harmful to people. Then someone says "I might have seen a fruit fly late at night while walking in the park, we should spray XYZ in the park."
Before action is undertaken, you 1) need to be sure that you really did see a Fruit Fly; 2) need to be sure that your application of the chemical will kill the fly; 3) need to be sure there will be limited negative effects beyond that of the fly's demise.
Frankly, I personally don't think you have passed step 1, and I doubt you have convinced anyone here that you have passed step 2.
I hope I have made it clear that we don't think the economy is perfect, but any changes made to the economy will need to pass all 3 steps of the Fruit Fly test before we can ever look to more government intervention.