...three Mexican citizens who were charged with illegal re-entry after being found in Travis County Jail [in Texas].
[The judge] wrote that like many of the defendants prosecuted under the federal illegal re-entry law, the men had no significant criminal history. He says it has cost more than $13,350 to jail the three.
He also noted the charges mean additional costs and work for prosecutors, defense lawyers, court personnel and others.
Clearly it is logical to spend $13,350 and waste the time of people in law to convict and deport three non-criminal men who would have likely (though not definitely) brought more benefits than costs to the United States.
It's a short video (6 mins) of the great economist Milton Friedman speaking of the U.S. steel industry and trade. He makes several great points:
1. The steel industry does not support free enterprise, but rather protection of their own interests, which in this case is tariffs on imported steel.
2. By Japan subsidizing their own steel industry, the U.S.:
a. receives a subsidy for cleaner air, since less steel needs to be produced in the U.S.
b. will see a decrease in steel-industry jobs, but will see an increase in other jobs. This occurs because the dollars the U.S. sends to Japan for steel must then be used, eventually, to purchase U.S. goods (or invest in the U.S.). This will create employment wherever those dollars end up.
c. essentially receives foreign aid from the Japanese. Thank you Japanese taxpayers for the cheap steel!
3. U.S. consumers are harmed by tariffs on steel, because it makes the steel (and products made from steel) more expensive than they would be otherwise.
4. Why do tariffs on steel (and other products) find political success? The Visible vs. the Invisible problem: U.S. citizens can see the people who lose their jobs to Japanese steel imports, but it is much harder/impossible to see the created/never allowed to happen export jobs.
Previously I wrote about the Monetarist explanation of this current recession. Today, I will take a look at a rather different view: Keynesianism. This school of thought became dominant during the Great Depression; however, it was eventually overtaken, in its original form at least, by Monetarism. I will focus on the original form of this theory, with some of the neo-Keynesian aspects included to make the theory more robust.
What a good ol' Keynesian would call "animal spirits" led to over-confidence in the stock and housing markets. Eventually this exuberance reversed itself and the animal spirits turned pessimistic. This led to crashes in both the housing and stock markets. As people began losing money, there was an increased tendency to save money. Unfortunately, this leads to the Paradox of Thrift: when people start saving money due to bad times, then businesses start making less money, and they start firing workers, who then need to save more money, and round and round we go. In normal recessions, the Federal Reserve can just pump more money into the system, which creates extra money to spend. This would overcome the desire to save in the short-run. If the story ended here, then there would be little significant difference between Keynesians and Monetarists. However, the Great Recession of 2007-2009 and the Great Depression were unique stories.
Like Monetarism, the Keynesians see the major problem of this recession occurring when the Fed Funds rate hit zero (note: the rate did not actually have to hit zero but for simplicity we will say that is the case). At this point, the Fed became powerless to use conventional tools to increase the money supply. As well, the effectiveness of the Fed policy was losing steam because people had such an extremely high desire to keep cash saved away and not being used productively in the economy. Such a position is the dreaded Liquidity Trap. Due to sticky prices and wages, which prevent the economy from rapidly adjusting to the recession, it would be impossible to avoid unemployment in a Liquidity Trap if the government did nothing.
SOLUTION TO RECESSION: The government needed to step in to prevent the Paradox of Thrift from taking down the economy. With the Fed out of the picture (in the heads of Keynesians, but not Monetarists as we discussed in the previous post), this meant the Federal Government would have to step in by spending enormous sums of money.
CRITICISM:
1. The government is simply transferring money from some people to other people, which does nothing to help the economy.
RESPONSE: Normally it does not help, but we are in a Liquidity Trap and the government needs to spend because the private sector has stopped spending.
2. Monetarist critique: The Fed will simply nullify the effect of the stimulus bill, because it is targeting its own growth rate.
RESPONSE: The Fed wouldn't do that. It realizes that the Fiscal Stimulus is needed in a Liquidity Trap and that the Fed cannot provide stimulus.
3. By propping up failing parts of the economy, the government is just delaying an eventual shift of resources in the economy.
RESPONSE: The problem during a Liquidity Trap is not one of "recalculation" in the economy, but rather a shortage of people willing to spend money. Any recalculation can occur later, but the government needs to do whatever it takes to get the economy churning and people spending again.
STANCE ON FISCAL STIMULUS: As was seen with TARP and the huge Stimulus Bill, the Keynesians won the day, although some die-hard Keynesians thought that both this and the New Deal of the 1930s were way too small (!).
Funny comment by Will Wilkinson on Liquidity Traps here.
Best resource for Keynesian-influenced views here.
"Once the elites have money and power," Mr. Casimir said, "theyre scared of people like me, the younger generation and so on. Because we travel around the world and see how other governments function, and obviously most countries are not corrupt like Haiti.
[P]icture someone from a very poor country, a family, a couple of young children, a father and a mother, and picture them moving to Munich or Zurich or Vancouver. We dont think of that as colonial; we think of that as something that gives them opportunities that they really want. And this proposal is no more than saying if we cant let hundreds of millions of people go to those cities, lets create some new cities that are run like those cities where large numbers of people could go. Paul Romer
The concept of Charter Cities as a global-poverty solution was pioneered recently by economist Paul Romer. It allows, through flexible means, a charter city to be created and populated by whomever would like to move there. Presumably, the billion people stuck in extreme poverty would like the chance to live in a city governed by the rules that lead to prosperity. According to Romer, these cities would "provide security, economic opportunity, and improved quality of life." The charter city is originally set up by an existing national government who is given the rights to create a charter laying out the rules of the city. People and investors can then decide if these rules seem appealing to them. The most successful systems of rules win
The main concerns of this blog are immigration, trade, and competitive government (I promise I will get to the latter two much more soon), but I would like to take a sidetrack to start a three or four-part series on different explanations of the current recession. The different schools I would like to touch on are Monetarists, Keynesians, and Austrians. Naturally, this exercise will involve oversimplification of the views, but it will hopefully be a useful resource for those of you without extensive knowledge in economics.
Today I will begin with the "Monetarist story" of the current recession. This story of the 2007-2009 recession reaches its climax in late 2008. Until that point, the economy had merely experienced a mild recession, due to the sub-prime crisis. Banks had made bad bets on loans to people who could not pay them back. As a result, a few major local housing markets collapsed. The economy stagnated for half of a year. The unemployment rate did not rise above 6%, from a starting point of 5% in December 2007, until August of 2008. It was not until late 2008 that the recession spread nationwide. This was when the Great Monetary Sin was committed by the Federal Reserve Bank. The Fed had lowered the Fed Funds Rate from 4.25 in January to a lower bound of 0 by December. This meant they had run out of conventional monetary tools to boost the economy. What was the result? Inflation (or, nominal GDP) expectations plummeted. Markets predicted that the Fed would throw its hands up in the air and call it quits when the Fed Funds rate hit zero. The markets were right. Nominal GDP did indeed fall, from around a healthy 5% to -3%. This was a drop not seen since the depression-era 1930s. This meant deflation from August to December of 2008, which was the first year-over-year deflation since the 1950s. Needless to say, the occurrence of deflation was an ugly force
In a post by economist Scott Sumner from March 2009, he offers a contributing factor to the Recession that I had never heard to that point:
The housing bubble in 2004-2006 was partly driven by rapid immigration from Latin America (as was the bubble in Spain itself!), and also by a perception (which turned out false) that coastal zoning constraints were spreading into interior markets. Many Hispanic immigrants were snapping up older ranch houses, allowing native born Americans to move on to bigger McMansions. The immigration crackdown in 2007 dramatically slowed this immigration (as did the worsening economy.) Population growth estimates going several years forward fell sharply, hurting housing speculators. Ground zero of the sub-prime bust is in working class areas of the Southwest and Florida. Any guess as to who bought homes in those areas? In addition, after 2006 nominal GDP growth slowed gradually, and then very sharply, to a rate far below the level any rational investor could have anticipated in 2006. Even today, few people seem to realize the impact that going from plus 6.5% to negative 6.5% nominal growth has on housing prices. This didnt trigger the collapse, but it dramatically deepened it.
Republicans are generally regarded as the more free market party of the two major U.S. political parties; however, they are also seen as more xenophobic. This leads to potentially conflicting forces on endorsing free trade. According to the Republican Parties 2008 Platform:
Greater international trade, aggressively advanced on a truly level playing field, will mean more American jobs, higher wages, and a better standard of living. It is also a matter of national security and an instrument to promote democracy and civil society in developing nations.
Economist Don Boudreaux frequently sends letters to newspapers pointing out the fallacies and misrepresentations in their articles. This latest letter brilliantly lays out why restricting the people of Haiti from emigrating to the United States is both immoral and hypocritical. Enjoy!
Part of your case for keeping a lid on immigration from Haiti is the claim that Haitis survival depends on encouraging its best and brightest to remain and work on its revival (Help Haitians, but dont throw open U.S. borders, Jan. 29).
A new study by the Chicago Urban League and the Alternative Schools Network "proves" that illegal immigration has destroyed the job market for young adults and teens. What appears to be their evidence? Well, 20-24 year old people were hit the hardest in terms of employment decline during this recession. Since these are the low-skilled workers in the economy and illegal aliens are generally low-skilled, the report concludes that it must have been illegal immigrants that led to such massive job loss from 2007-2009.
From Republican Congressman Lamar Smith's reaction to the study
I appreciate your perspective based on many years of experience. I agree with much of what you say, at least as far as where you are coming from, but I still think there are some misleading/inaccurate points you are trying to make.
1. To the extent that the global economic arena locks out real free enterprise, I agree with you. The best global economy is one built on free enterprise.
2. Thank you for clarifying what you meant in regards to the Biblical phrase. That is concerning that so many people feel that way. Still, I dont think that free markets/free enterprise by definition mean that people cannot treat each other well. Free markets are simply a system that allows the individual actors to determine how much doing good is worth. So it is more the underlying morals of people that lead to this phenomenon. Also, note that, generally, Communist nations make Christianity illegal.
3. I think one of the main reasons our views conflict is in how we define free trade, free market, and globalization. To me, free trade simply means a country having no barriers to trade with any other countries. Free markets simply means a system where the government has little to no influence in the actual functioning of the markets, although government is necessary to uphold contracts, laws, etc. Globalization is just the free movement of people, goods, capital, ideas, etc. across borders.
My definitions are at the theoretical level, while you seem to be more concerned with how these concepts have been played out at the political level in practice. I think both of us bring something important to the table. I see that the countries in the world with the least poverty are those where globalization has impacted the most. On the other hand, those places that are off the grid so to speak are where people still have life expectancies in their 40s and 50s. Same for free trade and free markets. You, on the other hand, note that corporations/politicians have done a great deal of harm by promoting what they call free trade, even when it is far from the free trade that I envision. This is a valid point.
I agree with you that these shortcomings of the actual globalization movement should be pointed out. However, I think it would be dangerous to throw away the idea of the theoretical concepts that I promote. True free trade and free markets would be a tremendous benefit to the world.
4. Again, just a slight nitpicking, but the U.S. economy certainly does still make stuff. In fact, U.S. manufacturing output increased by 50% from 1994 to 2006. Jobs in manufacturing has been on a downward slide for a long time, but that is due to increased productivity, not trade, that allows for factories to make more stuff, with fewer people. I consider this a good thing on net.
I have not had the time yet to check out all of the resources you provided, but I certainly will.
1. The free market and "do unto others..." is completely compatible. Why would it not be?
2. Of course there has to be rules in the business world, and Ron Paul would not disagree (even if government does not make the rules).
3. The U.S. economy still makes plenty of things. Our manufacturing sector was booming in terms of output before the recession.
4. Adam Smith's defense of free trade has been tested and confirmed in more recent times than when he wrote it. It is basically unanimous among economists that free trade is desirable.
Well, the countries in South America saying "yes" to Free Trade are the ones prospering relative to the South American countries saying "No."
Africa has said "No" to Free Trade and we see that has done them much good.
East Asian countries said "Yes" to Free Trade and saw the most miraculous ascent from poverty to wealth, while lifting hundreds of millions out of poverty.
You are only focusing on the losses of trade without recognizing the benefits from trade, which far outweigh the losses in most instances.
"Stimulating" the domestic economy merely means a welfare loss to U.S. citizens via higher prices and a loss of jobs to those employed in U.S. businesses that rely on imports. Closing off Free Trade would have drastic negative effects to the U.S. economy and Free Trade was in NO way responsible for the current crisis.
By the way, trade deficits are determined by the difference in domestic savings and domestic investment. Since low interest rates (and other factors) have discouraged saving by U.S. citizens, it was necessary to go abroad to fill the gap needed to fund the rest of our investments. This in turn leads to a trade deficit. Trade deficits have nothing to do with the "free"-ness of trade, but rather with the level of savings.
If you have something else in mind for Free Trade, like moving production to places just for the sake of cheaper labor, then you should come up with a different term. Free Trade means something entirely different. Free Trade is desirable and has contributed greatly to our economic prosperity. Free Trade should not be attacked by defining as something it is not.
You said
About ten years ago a report came out and said this about the Trade Deficit. The lost values due to the Trade Deficit could translate into the U.S. giving every single American family $50,000 to buy a home. This means there would have most likely never been a mortgage crisis and a breakdown of the financial markets surrounding it. It means a value of $50,000 in value was lost for every family in the USA.
The trade deficit represents us importing more value than we export. How can this mean the U.S. has lost value? Also, your conclusion that their never would have been an economic crisis if we just gave every American family $50,000 does not seem like a logical argument.
You said,
The lost of jobs were due to Free Trade. How can anything good come from 700,000 workers in steel industry, 400,000 in auto mfg and more than a million workers losing their jobs in the computer industry. This too was the result of unfair so called Free Trade. Due to Free Trade, the U.S. has gone through the most massive dislocation of jobs in history including the Great Depression.
Unemployment rates have been extremely low since America has become more intertwined with the global economy. More jobs have been created in the U.S., that pay more, than destroyed. As well, studies show that other factors are much more responsible for any job losses than trade (i.e. FED monetary policy, technology). It is not at all accurate to fault trade for lost jobs.
You seem to ignore that U.S. citizens gain via cheaper goods from abroad. If a citizen were forced to "buy domestically" it would be more expensive. Thus leading to lower "real" wages. Americans gain from engaging in voluntary transactions with the rest of the world.
Also, businesses clearly do not just gravitate toward the lowest wages, or else there would be huge investment in Africa, where wages would be the lowest, but this is not the case.
My question is clearly not self-evident, and your answer does not make it any more clear.
As for the forecasts, predicting an economic crisis does not mean that if it happens your reasons are correct. I could, starting today, predict that an economic crisis will occur in the next 20 years because MLB tickets have gotten more expensive. If a crisis occurs, then I will look like a prophet for making this prediction, but the crisis probably occurred for an entirely different reason.
Also, your post about the reasons just lists things, places an equal sign, and then "economic crisis." I am quite knowledgeable on this subject, yet I disagree with these reasons.
First off, I think you may be defining Free Trade and Globalization differently than me. True free trade would be simply the elimination of all barriers to trade. Globalization would be the free flow of labor, capital, goods, information, etc. across borders. As far as my research goes, these two things have led to millions upon millions of people escaping poverty in the world. As well, in the U.S. and generally everywhere, free trade and globalization have led to higher compensation.
Also, a trade deficit is not inherently a bad thing. It means that we are giving up less value than we are gaining. You run a massive trade deficit with your grocery store, "importing" thousands of dollars worth of goods without "exporting" a single item to them. Would you call this deficit a loss?
I agree that "making money on money" is likely not sustainable. I agree that going into massive debt is also likely not sustainable. I however do NOT agree that these have been caused by "free trade and globalization." These have been due to the government distorting financial markets and the FED promoting spending instead of saving.
First off, a trade deficit is not inherently a bad thing. It means that we are giving up less value than we are gaining. You run a massive trade deficit with your grocery store, "importing" thousands of dollars worth of goods without "exporting" a single item to them. Would you call this deficit a loss?
Also, teh Maquiladoras exist to such a high degree because of a clause in NAFTA that states products shipped from the U.S. to Mexico can either be shipped back to the U.S. duty-free or, if they stay in Mexico, taxed, This will obviously distort free trade and prevent Mexicans from gaining wealth in their country. That said, the Maquiiadoras do offer an increased wage to Mexican workers compared to what they made before these factories were available. For the U.S., people working in these factories can now allow Mexicans to work these jobs and move to a higher-paying job in the U.S. This is the specialization and division of labor of free trade.
Also, I'm not sure what a stimulus to Mexico has to do with anything?
You are right that NAFTA is not really free trade, but you are wrong that it is an experiment by "Globalists and free traders."
Mexico's trade with the U.S. has, and will, continue to assist in their ascent out of poverty, meaning a better living standard for virtually all their people in the long run. To rally against FREE trade in the aim of helping the poor will only result in hurting the poor.
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Comment by Dr. Liberty
on Tea Party may be brewing the wrong tea
Borderless World
Political Craft
MLB Analyst
1. To the extent that the global economic arena locks out real free enterprise, I agree with you. The best global economy is one built on free enterprise.
2. Thank you for clarifying what you meant in regards to the Biblical phrase. That is concerning that so many people feel that way. Still, I dont think that free markets/free enterprise by definition mean that people cannot treat each other well. Free markets are simply a system that allows the individual actors to determine how much doing good is worth. So it is more the underlying morals of people that lead to this phenomenon. Also, note that, generally, Communist nations make Christianity illegal.
3. I think one of the main reasons our views conflict is in how we define free trade, free market, and globalization. To me, free trade simply means a country having no barriers to trade with any other countries. Free markets simply means a system where the government has little to no influence in the actual functioning of the markets, although government is necessary to uphold contracts, laws, etc. Globalization is just the free movement of people, goods, capital, ideas, etc. across borders.
My definitions are at the theoretical level, while you seem to be more concerned with how these concepts have been played out at the political level in practice. I think both of us bring something important to the table. I see that the countries in the world with the least poverty are those where globalization has impacted the most. On the other hand, those places that are off the grid so to speak are where people still have life expectancies in their 40s and 50s. Same for free trade and free markets. You, on the other hand, note that corporations/politicians have done a great deal of harm by promoting what they call free trade, even when it is far from the free trade that I envision. This is a valid point.
I agree with you that these shortcomings of the actual globalization movement should be pointed out. However, I think it would be dangerous to throw away the idea of the theoretical concepts that I promote. True free trade and free markets would be a tremendous benefit to the world.
4. Again, just a slight nitpicking, but the U.S. economy certainly does still make stuff. In fact, U.S. manufacturing output increased by 50% from 1994 to 2006. Jobs in manufacturing has been on a downward slide for a long time, but that is due to increased productivity, not trade, that allows for factories to make more stuff, with fewer people. I consider this a good thing on net.
I have not had the time yet to check out all of the resources you provided, but I certainly will.
www.borderlessworld.net