EssaysVolume1
The Collected Essays of
Richard A. Stanford
Economic Implications Essays
These essays were derived from lectures and lessons presented to his students by Professor Stanford in a variety of introductory and upper-level courses at Furman University, Greenville, South Carolina.
CONTENTS
NOTE: You may click on the symbol <> at the end of any section to return to the CONTENTS.
Economic Implications of ...
1. Automation
2. Business Firms
Climate Change
3. Global Warming
4. Atmospheric Emissions
Deficits
5. Budget
6. Saving
7. Trade
8. Comparative Advantage
9. Contributions
10. Deflation
11. Distributional Equity
12. Dumping
13. Emigration and Immigration
14. Environment
15. Ethics
16. Exchange Rates
17. Externalities
18. Globalization
19. Growth
20. Industrialization
21. Industrial Policy
22. Inequality
23. Interest Rates
24. Marginalism
25. Markets
26. Medicines
27. Minimum Wage
28. Monopoly Power
29. Nation State
30. Payments Balances
31. Policy Activism
32. Population Growth
33. Poverty
34. Productivity
35. Protectionism
36. Risk
37. Self-Adjustment
38. Tariffs
39. Trade War
40. Unemployment
41. Universal Basic Income
42. Universal Healthcare
43. War
<Blog Post Essays>
<This Computer Essays>
Shayndi Raice, writing in The Wall Street Journal, January 13, 2017, notes the results of a study by the McKinsey Global Institute:
Less than 5% of all occupations can be fully replaced by the technology we have today, a McKinsey Global Institute study released Friday found. But most industries have some tasks that can be replaced by automation. The study found that 60% of all occupations have about 30% of tasks that could be turned over to automation. Half of today's work tasks could be automated by 2055, give or take 20 years, according to the report. http://blogs.wsj.com/economics/2017/01/13/labor-force-needs-to-work-with-robots-not-be-replaced-by-them-study-says/)
Over the next 40 years, we should expect automation by technological advance to far outstrip "the technology that we have today." Automation that accompanies and facilitates existing jobs will not be threatening, but if as much as half of today's work tasks might be automated by 2055, it is inevitable that the number of jobs available to the U.S. work force will be reduced.
A 2019 study by researchers at MIT (described by Edd Gent on the SingularityHub website, https://singularityhub.com/2019/09/16/mit-future-of-work-report-we-shouldnt-worry-about-quantity-of-jobs-but-quality/) notes that while companies stress that advancing technology augments human labor across the board, the greater benefit is to higher-skilled occupations. The application of new technologies to lower-skilled occupations is automation to save labor costs. Advancing technology that improves productivity of higher-skilled occupations while automating lower-skilled jobs tends to worsen the already-skewed income distribution.
Since great social transformations are rarely completed within a generation, many of the current generation who are less capable, less well-educated, and either unable or unwilling to retrain will become victims of the rush to automation. It is the next generation, and the ones following that, which will face the challenge to prepare for occupations commensurate with the increasing automation.
Automation that increases productivity can promote economic growth. But as the McKinsey Global Institute authors note, economic growth depends upon human-kind's ability to learn to work with the newly automated technology:
The authors estimate that automation could lead to productivity growth of 0.8 to 1.4% annually and gross domestic product growth of 0.9 to 1.5% annually for 19 of the major global economies, plus Nigeria. In order for that growth to happen, workers would have to shift their skills so they can work together with technology. If the labor force were to contract in the face of automation, the benefits to growth won't come.
The U.S. labor forces of the future may indeed contract as population growth slows, as immigration decreases, or as the labor force participation rate declines, but it is possible that automation will decrease the number of available jobs at an even faster pace. A job reduction process will diminish the potential to earn incomes sufficient to pay for food, housing, and health care. Only those who can equip themselves by education and training to capture the declining number of jobs involving robotized production and health-care processes will be able to sustain themselves and their dependents by earning income sufficient to pay for food, housing, and heath care.
If this were to happen, society would need to rethink what to do to enable survival of those who are unable to gain employment or to earn sufficient incomes in the jobs that they can obtain. Some means may be needed to provide sufficient income to the less capable, less educated, and unemployable members of society so that they can sustain themselves and their dependents. Continually expanding existing social safety net programs will be both cumbersome and potentially disastrous for government budgets.
Another possibility is to replace existing social safety net programs with a universal annual income provided by government. But this won't resolve the government budget problem if there is popular pressure to increase the amounts of the income distributions. If some guaranteed income is good, more is always better.
Financing ever-increasing income distributions may imply the need for ever-rising tax rates on the incomes of the declining number of those who are employed. Taken to a logical extreme, the endpoint of this process is tax-rates approaching 100 percent of earned income so that all who are employed essentially are working for the government. A negative of ever-rising income tax rates is eventual impairment of incentives for those who are employed to continue to work to earn taxable income that can be used to support the non-employed.
Although it may be unthinkable at this stage, the extreme solution to advancing automation may involve government socialization of production (i.e., government taking over production processes) to capture profit, and then using the captured profit revenue to finance guaranteed annual income distributions. However, socialism (i.e., state ownership and management of production processes together with centralized distribution of product) has never been shown to be an efficient means of organizing production and distribution.
A lower-level consideration, but one that may be no less vexing, is how to occupy (or entertain) the growing number of unemployed and underemployed who find themselves with too much time on their hands. We have all heard the old saw, "Idleness is the Devil's workshop." Playing digital games or attending public spectacles (e.g., sports attractions, theatrical and film productions, musical performances, etc.) may serve this end to some extent, but eventually even these possibilities may become tiresome to the idle as the Romans discovered a couple of millennia ago. Beyond the requisite to feed the unemployable, an even worse thing that a government can face is increasing numbers of people standing around on street corners grumbling about the lack of jobs and fomenting revolution against the government. "Let them eat cake" won't suffice.
Automation can both enhance and threaten the well-being of U.S. labor forces of the future. The challenge is to capture the benefits of increasing productivity while providing rewarding employment opportunities to those who want to work, and satisfying non-working activities to those who choose not to work or are otherwise unable to work.
Business firms, a.k.a. commercial enterprises, in economies organized as market capitalism have various contacts with societal constituencies, and they make numerous contributions to the societies that host them. First and foremost is the provision of the goods and services demanded by the society. The private enterprises of Western market economies have demonstrated to the world their great capacities both to provide a flood of high quality goods and services, and to generate tremendous wealth in the process.
In a social context where the principle avenue to consumption is by productive employment to earn spendable income, business firms are the chief providers of jobs. Western market economies have demonstrated abilities to provide productive employments to well over ninety percent of their growing labor forces. The production of goods and services thereby serves to generate incomes that are distributed to both the owners and the employees of the firms. In western market economies early in the twenty-first century, the proportion of the generated income that has been distributed as wages and salaries has gradually risen from around two-thirds to exceed three-fourths.
Business firms are tax payers, and thereby constitute important sources of revenue to governments at all levels. Business-related revenue sources have included property taxes on the firms' assets, floor taxes on their inventories, value-added taxes, sales and excise taxes, import tariffs, import and export license fees, payroll taxes, business licenses and associated fees, and corporate income taxes. It is not unusual for business-related taxes to account for forty percent or more of governments' revenues in western market economies.
Business firms themselves are citizens of their societies. Firms organized as corporations also are legal persons. Whether corporate persons or not, citizen firms have presences in their communities. Their offices, plants, and warehouses have significant impacts upon the appearances of the communities within which they are situated. Their employees are active in the schools and churches of their communities. Many firms make valuable monetary and in-kind contributions to their communities.
Even as business firms contribute to their communities, they also incur responsibilities in their communities. While the roles mentioned above reveal the significance of business firms to society, each is also fraught with the potential for misbehavior by firms. It is such misbehavior that may lead the society to become less tolerant of the continued unfettered operation of firms in the private sector.
Business firms in market economies come into contact with a great many different types of people as they conduct their productive activities. Their raison d'etre is to serve their customers by providing the goods and services demanded by them. Many business firms take only a passive role in attempting to discover demands that they may undertake to fill, but some firms aggressively attempt to create or manipulate such demands. The term consumer sovereignty describes the former case, whereas a firm that succeeds in first determining what it will produce and then creating a demand for it has exercised producer sovereignty. The host society may tolerate a significant amount of such producer sovereignty, but if it is perceived to become troublesome the government of the society may exercise state sovereignty to nationalize the firm and operate it as a state enterprise. This is much less likely to occur in the democracies of North America and Europe than in some countries of Africa, Latin America, and Asia.
Managers of private sector business firms must answer to a number of constituencies in addition to their customers. With the process of separation of ownership and management during the nineteenth and twentieth centuries, the owners became just another constituency of the firms being managed. As long as the owners maintain effective control of their firms, the managers must meet the owners' expectations of returns or other goals, and this may be a matter of satisficing (i.e., maximization subject to constraints) rather than absolute maximization. But the widespread dispersion of the ownership of corporate stock may enable the management of a corporation to so gain control over its own destiny that it can pursue its own private goals without fear of owner interference.
The firm's employees are another constituency that may constantly tug at the managers of the modern business firm. The principal employee concerns are wages, working conditions, job security, amenities, and such benefits as health insurance and pension fund contributions. In a growing economy that experiences inflation, the interest of employees is in advancing wages at a rate fast enough to offset the effect of inflation that would decrease the purchasing power of their incomes, and to further capture as large a share of the fruits of growth as possible. The resulting tug-of-war is about the division of the growing "income pie" between the interests of labor and capital.
Each productive resource employed by the firm seeks to receive an income that is at least as large as the value of its marginal product (i.e., the addition the the firm's total revenue by using one more unit of the resource); if it fails to do so, it becomes the subject of exploitation. A potential problem for management is that labor may muster significant political influence over elected or appointed government officials to make them believe that labor is being exploited (whether it truly is or not), and that government should use its state sovereignty to curb the power of capital or redistribute income in the interest of labor. It is significant that in most Western democracies during the twentieth century, the proportion of national income going to wages and salaries has trended above sixty percent.
The firm's suppliers may become constituencies whose voices must be heard by the managers of the firm. In competitive resource markets, suppliers seek to gain the attention of the firm's purchasing agents, and thereby to gain supply contracts at the expense of competitor suppliers. If suppliers gain monopolistic advantage in the control of unique resources, they may be able to exercise their monopoly powers to raise resource prices above competitive levels, and thereby capture a larger share of the income pie at the expense of the firm. Such circumstances often encourage firms to extend their degrees of vertical integration by attempting to acquire their suppliers and thereby gain monopolistic position in regard to unique resources. If a firm can gain a monopsony position (monopoly as a buyer) in a resource market, it may be able to dictate price and delivery schedule conditions to its suppliers. But the attainment of monopoly or monopsony position may attract the attention of governmental authorities and invite unwanted responses.
In oligopolistic markets (in which a small number of firms are in effective competition with one another)), the firm's competitors constitute one of its most important constituencies. Because of the relatively small number of firms in each geographic and product market, each firm must be concerned not only with what each of its competitors may do, but also with how competitors may respond to any action taken by the firm. The potential for inducing undesirable competitive response may be so great that the firm's management finds itself in a mold of decision rigidity. But even if this extreme condition does not result, the firm's managers must assess the competitive response risks attendant upon any strategy that they are contemplating.
The dispersion of stock ownership also opens the responsiveness door to yet other constituencies as managers begin to feel some sense of social responsibility to third parties, i.e., innocent bystanders to the actions and activities of the firm. (see Marc Benioff's op-ed in the October 14, 2019, issue of The New York Times, https://www.nytimes.com/2019/10/14/opinion/benioff-salesforce-capitalism.html?te=1&nl=david-leonhardt&emc=edit_ty_20191014?campaign_id=39&instance_id=13058&segment_id=17865&user_id=86b0d837dd357b2a6e0e749321f6ed7f®i_id=74240569.) Sometimes the so-called "spillover effects" are positive externalities that benefit neighbors due to simple proximity to the business firm. Examples include better roads and street lighting. But there are also possibilities of negative externalities such as the various forms of environmental pollution and congestion associated with the firm's activities. Positive spillovers may be rewarded with plaques given at meetings of civic organizations, but complaints about negative spillovers often attract the attention of society at large and its elected or appointed government officials who tend to become ever less tolerant of the unconstrained operations of the firm.
These and other constituencies continually pull at the managements of modern business firms. It is unrealistic for the managers to try to pursue multiple goals simultaneously. What usually happens is that the "squeaky wheel gets the grease," i.e., the most vocal constituency at the moment captures the attention of the firm's management. That constituency's interest becomes the goal selected for primary pursuit, and all other constituencies' interests are either ignored or treated as constraints upon the pursuit of the primary goal. Once the constituency's concerns have been adequately addressed, some other constituency's concern will rise to the surface to dominate the attention of the firm's management. But if the management cannot or will not satisfactorily address the voiced concerns of its constituencies, it can expect intervention by some governmental authority.
Part I. Global Warming
I am not equipped to assess the scientific facts of whether or not climate is changing, and whether or not humans are the cause of climate change. For purpose of this essay, I assume that adverse climate change is occurring. This essay is focused on only one aspect of climate change, global warming that melts polar ice packs. It's not hard to see where this is going. Here are a few casual projections.
Increasing temperatures that melt ice packs will raise the sea level to inundate some coastal-plain areas and shift comparative advantages to inland regions of the same nation. Since this is a global phenomenon, comparative advantages may also shift internationally.
Social Transitions
Great social transitions rarely are completed within generations and may require the passing of generations. Older members of any population are more risk averse and less geographically mobile than are younger and more vigorous members of the population. The old and infirm are likely to remain as long as possible in coastal-area homes or until they pass on. Livelihoods will be lost in coastal areas, but occupational opportunities may be shifted to inland locales. Unemployment is likely to increase in the interim, the duration of which is unpredictable. The younger, more vigorous, and less risk averse people are the ones who can be expected to emigrate/immigrate internally from costal areas to higher-land locales. Some external emigration may occur. Some immigration from coastal regions of other nations may occur.
Climate change distress may cause birth rates to decrease and the national population may decline. National population decline may be arrested by immigration from coastal areas of other nations and by resumption of more normal birth rates as society adjusts to ensuing climate change.
Capital Stock
The nation's capital stock will decrease with destruction of some industrial, commercial, and residential assets in coastal areas. Coastal-area residence and tourism will suffer and move inland with receding coastlines, but mountain-area residence and tourism may flourish. Population decline and asset destruction will reduce the nation's productive capacity and slow the rate of economic growth. Economic growth rates in some nations may go negative, and global recession becomes a possibility.
But it's not all bad news. Capital asset reinvestment in higher-ground locales can provide opportunities for replacement of aging facilities with new plant and equipment that implements newer, more productive technologies. A construction boom in upland areas may avert recession. However, newer technologies entailing robotization tend to be labor-saving and thus unemployment-increasing. Unemployment compensation spending will increase. Programs to provide guaranteed government employment and universal basic income are likely to be advocated as solutions to ever-increasing technological disemployment.
Food Production
Depending on the height to which the sea level rises, some food production capacity in coastal areas will be lost. If the sea level rises high enough, crops historically grown in coastal plain regions may become scarce and more expensive. For example, truck farming of vegetables and fruits in coastal Carolina, Georgia, and south-central Florida may diminish variety and winter-season availability to the nation. Off-setting this loss of capacity and variety, new agricultural productive capacity may be developed in higher-ground locales subject to constraints of regional climate, fertility, and space availability. Production of rice may shift from coastal wet culture to inland dry culture. Loss of agricultural production capacity in coastal regions may provide impetus for research to enhance the productivity of existing dry-culture crops and develop new varieties.
Agricultural exports may decline, thereby precipitating or worsening trade deficits. Demand for food imports may increase, but since climate change is a global phenomenon, potential food-exporting nations are likely to be suffering similar distress. Globally, food supplies may decrease and food prices rise, increasing distress more among lower-income segments of society and worsening national and global income distributions.
Technological advances and investment may develop new marine food production capacity in inundated areas to alleviate food supply distress. Technological developments may change food consumption patterns and preferences.
Financing Responses
Government spending on programs to address climate change distress will expand, thus requiring either tax rate increases or deficit financing.* Tax rate increases and deficit financing may be averted if other categories of government spending (healthcare, infrastructure, education, military) are curbed (unlikely).
Tax rate increases can be expected to slow the rate of investment and economic growth. Slowing growth will impair further efforts to avert climate change and salve its negative effects.
Deficit financing requires issuance of ever more government bonds relative to the global demand for them that will tend to depress bond prices and increase yield rates (i.e., interest rates on bonds). Bond interest rate increases are transmitted to other financial markets via arbitrage. Similar activity will occur globally in nations that suffer coastline inundation. Similar responses to climate change distress will be occuring in other nations as well. Deficit financing and interest rate increases will become global phenomena as the global supply of bonds outpaces the global demand for bonds.
Implications and Possibilities
These are a few of the possible economic implications of climate change that come readily to mind. Others will emerge as climate change ensues, and other aspects of climate change will have economic effects. Some positives may follow from climate change, but the obvious inference is that on net balance adverse climate change, whatever its cause and however it manifests itself, will not bode well economically, either for the United States or for any other nation that that experiences similar effects or engages with the United States in trade, investment, or immigration.
Even so, four possibilities provide reason for some optimism: the earth has a phenomenal ability to recover and regenerate, albeit possibly without the human species; humans harbor strong will to survive and historically have exhibited great ability to adapt to changing circumstances; continuing scientific research may develop new technologies that alleviate climate change distress; and governments yet may invoke collective will to implement actions that slow or reverse climate change.
The current price tag of nearly $1.9 trillion for climate and other social spending might seem enormous — though less so than the original $3.5 trillion plan. But over the long term, either would be a pittance.
By zeroing in on those numbers, the public debate seems to have skipped over the economic ramifications of climate change, which promise to be historically disruptive — and enormously expensive. What we don’t spend now will cost us much more later. (https://www.nytimes.com/2021/10/28/opinion/climate-change-biden-spending.html?campaign_id=39&emc=edit_ty_20211029&instance_id=44082&nl=opinion-today®i_id=74240569&segment_id=72979&te=1&user_id=86b0d837dd357b2a6e0e749321f6ed7f)
I am not equipped to assess the scientific facts of whether or not climate is changing, and whether or not humans are the cause of climate change. This essay is focused on only one aspect of climate change, emission of matter into the atmosphere and the waterways. For purpose of this essay, I assume that particulate matter, carbon dioxide, and other noxious gasses are being emitted into the atmosphere, and that agricultural fertilizer run-off and garbage and sewage disposal are polluting streams and the ocean. What are the economic implications of such emissions?
On-Going Transition
It should be noted that the economic effects of climate change are among fundamental changes that the U.S. economy has been experiencing since the beginning of the Industrial Revolution in the mid-19th century. Agriculture, accounting for more that 80 percent of U.S. employment before the Industrial Revolution, now accounts for less then 2 percent of employment in the U.S. economy. With progressing industrialization, employment in mining and manufacturing reached a peak of around half of the U.S. labor force during World War II, but early in the 21st century it declined to less than 10 percent of U.S. wage employment and income generation.
The technological and knowledge revolutions begun in the late-20th century will cause further contraction of both industrial production and agricultural employment as the U.S. economy continues its transition toward a service economy, irrespective of climate change issues. Since the bulk of the material goods that the U.S. population consumes is produced in other nations, the U.S. balance of trade will shift further toward importing consumable agricultural products and manufactures, and exporting educational and financial services.
Doing Nothing
Assuming that climate change is a global phenomenon and that nothing is done to diminish water and atmospheric pollution, human productivity can be expected to decline across the globe as worker heath suffers the effects of noxious gas emissions into the atmosphere. Diminished soil productivity brought about by ground water pollution and the decline of human effort in the cultivation of crops are likely to cause food shortages and rising prices that will have ever greater effect on lower-income regions than on higher-income areas, thus making the global distribution of income more unequal.
The deleterious effects of climate change will be felt more in regions where industrial production is concentrated than in agriculturally dominant regions and regions that specialize in producing services, e.g., education, banking, finance, information processing and dissemination. Robotization may cause rising human unemployment, but the displacement of human effort by machines may render the productive capacity of the economy less subject to mounting atmospheric pollution.
Exports of U.S. manufactured goods and agricultural products will continue to decline as they are displaced by increasing exports of services and financial instruments (money, stock shares, bonds, insurance policies, etc.). But this in itself is not a problem. Aside from Mr. Trump's lack of understanding of the balance of payments, all that is necessary to balance a nations payments is that the total value of "things" imported be paid for by an equivalent total value of "things" exported, irrespective of whether they are tangible agricultural and manufactured goods or are intangible services.
With changing export content, international comparative advantage shifts will occur and likely aggravate a worsening distribution of global income between higher-income nations that produce and export services, and lower-income nations that produce and export manufactured goods and agricultural products. In this respect, the United States and Europe may benefit at the expense of the industrializing nations of southeast Asia, e.g., China, Korea, Viet Nam. Increasing atmospheric pollution will cause densely-populated South Asian nations (India, Pakistan, Bangla Desh) and many African nations to struggle to feed their populations.
Doing Something
If nothing is done to curb worsening atmospheric and water pollution, the earth will become ever less hospitable to human habitation. If this process occurs slowly enough and is recognized in time, technological efforts may be directed toward discovering other planets capable of supporting human habitation and mounting efforts to enable human emigration to them. There is of course no certainty that such efforts will be successful.
Suppose that some governments invoke the political will to diminish the adverse effects of climate change and possibly to reverse climatic deterioration. Employment and incomes generated in industries causing atmospheric and water pollution may contract as regulations and pollution penalties (e.g., a carbon tax) induce or force contraction. These include various extractive industries (e.g., petroleum, coal, other mined minerals) and manufacturing that emits chemical and particulate matter into the atmosphere.
Industries that diminish pollution or produce non-polluting subsitutes will become growth industries. Employment and income generation in those industries will increase, but there is no certainty that either will be sufficient to offset the losses of employment and income in industries that have been the main causes of atmospheric pollution.
Workers
It is unlikely that workers who are disemployed from polluting industries and agriculture will possess the job skills necessary to gain employments in more technologically advanced industries that pollute less. Older workers often feel that they should have lifetime rights to employment in occupations that they have held for many years, and thus will be resistant to occupational shifts, especially if they require any more than trivial technical reeducation and retraining. Higher income industrial and agricultural workers may find that jobs in lower paying service industries are the only ones for which they are qualified. Great social transformations often are not completed within a generation, and adaptation to climate change may take the passing of the present generation together with the requisite technical education and training of next generation workers.
The on-going transition from an industrial economy to a service economy may be accelerated by climate deterioration. Since unemployment may rise during the transition, income inequality is likely to increase between older, less educated workers with training in former agriculture, manufacturing, and mining occupations, and younger workers who are better educated and trained in more technically oriented occupations. Unemployment compensation spending will increase. An increase of civil unrest may include calls for guaranteed government employment and universal basic income.
Financing Response
Efforts to address climate change, whether global warming or atmospheric pollution, will be expensive. Nations with large populations and near poverty-level average incomes may claim inability to mount significant contributions to the effort, thus defaulting the effort to higher-income nations that should be better able to afford it.
Wherever climate change is addressed, increased spending accompanied by monetary expansion to keep interest rates low is likely to precipitate inflation. The minimization of inflation pressures will require tax rate increases or displacement of other government spending on social programs, e.g., healthcare, education, infrastructure, and the military. Tax rate increases can be expected to slow the rate of investment and economic growth.
Since governments usually try to avoid social program spending reductions, budget deficits are likely to increase. Deficit financing of expanding climate-change programs will require issuance of ever more government bonds relative to the global demand for them. Increased issuance of government bonds will tend to depress bond prices and increase yield rates (i.e., interest rates on bonds). Bond interest rate increases are transmitted to other domestic and international financial markets via arbitrage. Deficit financing and interest rate increases will become global phenomena as the global supply of bonds outpaces the global demand for bonds.
Possibilities
Whether humans do anything about climate change or not, it will be costly to global society. However, as noted in the Climate Change Part I essay, four possibilities provide reason for some optimism: the earth has a phenomenal ability to recover and regenerate, albeit possibly without the human species; humans harbor strong will to survive and historically have exhibited great ability to adapt to changing circumstances; continuing scientific research may develop new technologies that slow undesirable climate change; and governments yet may invoke collective will to implement actions that slow or reverse climate change.
5. Economic Implications of Budget Deficits
Societies employing democracy as the vehicle for organizing their polities exhibit a proclivity to ever-increasing public spending to meet social needs and achieve political objectives. This has led to ever-increasing government budget deficits that cumulate as ever-increasing public debt.
It should be no surprise that the public debt of a society that prefers democratic polity has become a serious political issue. The prospect was noted nearly two centuries ago by Alexis de Tocqueville in 1835 after traveling for two years in the United States. De Tocqueville wrote a book entitled De la Democratie en Amerique (Democracy in America). In his Chapter on "Government of the Democracy of the United States," Tocqueville noted that when universal suffrage provided legislative empowerment to the poor and property-less, society would soon discover that it could vote itself benefits quite apart from any ability of government to finance the provision of them. If some benefits are good, then more (and ever more) benefits must be better.* The basis for out-of-control public debt in American democratic polity was noted as early as 1835 by a French visitor to the United States. The wonder is that it took nearly two more centuries for the problem to materialize.
Budget deficits occur if tax revenues fall short of spending requirements. There are only two ways to finance budget deficits: the creation of money issued by the central bank or printed by the treasury department of government, or the issuance of debt in the form of bonds by the treasury department of government. There is no special or reserved place for government to place its bonds; they have to be sold in the same financial markets in which private sector companies are hoping to raise investment funds by selling the bonds that they issue. Advocates of Modern Monetary Theory propose the merger of a democratic polity's monetary authority and treasury department so that the treasury department itself can issue money.
Money issuance to finance government spending virtually ensures elevating rates of inflation that reduce the purchasing power of incomes. A few lesser-developed countries still use the printing presses to meet their spending needs, and nearly universally pay the inflation price for their profligacy.
The issuance of additional government bonds relative to the existing demand for bonds portends falling bond prices and rising yield rates. The rising yield rates can be expected to increase interest rates across financial markets by the process of arbitrage. The rising interest rates may crowd-out private sector borrowers from the financial markets. As their interest costs rise, businesses can be expected to cut back, delay, or cancel investment plans. Increasing unemployment is an inevitable follow-on consequence.
Compounding the bond issuance problem is the fact that the increasing public debt may become "monetized" as the central bank engages in open market bond purchases in the effort to avert rising interest rates. A central bank purchase of bonds adds to the reserves of commercial banks and increases their capacity to create money as a by-product of lending. The monetization of debt increases the money supply no less so than does the direct creation of money to finance government spending. The likely consequence in either case is inflation that reduces the purchasing power of wage earners.
In an open-economy world, bond prices and yield rates vary with both domestic and international demand for and supply of bonds. Depreciation of the nation's currency may be a result of chronic trade deficits, or it may signal that the global supply of the nation's bonds exceed the global demand for them. The nation's exchange rates with other nations' currencies may be managed by issuing more bonds or purchasing or redeeming outstanding bonds. However, if the government devotes fiscal policy to managing exchange rates, it gives up the ability to use fiscal policy to address domestic needs unless the fiscal policy to address domestic needs coincides with that required to manage exchange rates.
A crucial aspect of the Democrats’ economic agenda is its popularity. |
Expanding Medicaid is so popular that it has won voter referendums in red states like Idaho, Missouri, Oklahoma, Nebraska and Utah. Adding dental coverage to Medicare — another proposal in the Democrats’ original plan — is favored by about 70 percent of voters, polls suggest. Most Americans also favor larger child tax credits and federal funding for pre-K. |
The level of support for each idea can vary depending on the precise wording of poll questions, but the overall pattern is clear. A majority of Americans, including many swing voters and some Republicans, supports larger health care and education programs, tax cuts for the middle class and tax increases on the rich. (The tax increases would help pay for the other policies.) The popularity of these ideas is why some observers believe that a future Congress might choose to extend any temporary measures that Democrats pass now. Throughout U.S. history, government programs providing broad-based economic benefits have rarely been eliminated once created. (https://www.nytimes.com/2021/10/25/briefing/biden-congress-democrats-spending-bill.html) |
The dominating factor of the late 1990s in the U.S. economy appears to have been a communications and computing revolution of force similar to that of the Industrial Revolution in late nineteenth-century England. The salient economic feature of this "New Industrial Revolution" was an ever-growing U.S. saving deficit relative to U.S. gross private domestic investment, i.e., I > S so that (I - S) < 0. Early in the twenty-first century, the measured U.S. saving rate approached historic lows (negative during some quarters) even as investment boomed. In a closed economy (no international trade), a saving deficit could be financed by a government budget surplus, i.e., T > G so that (T - G) > 0. But as U.S. government spending has increased relative to tax revenues, U.S. federal budgets have exhibited deficits of ever increasing magnitudes. And since the U.S. economy is an open-economy with flows of both imports (M) and exports (X), the two growing deficits, saving and budget, have had to be financed by ever-increasing trade deficits, i.e., M > X so that (X - M) < 0.
It may be obvious how a government budget surplus could help to finance a saving deficit, particularly when the surplus is used to retire public debt, but how can a trade deficit help to finance a saving deficit or a budget defict? In order to explain this, it would be a convenience to interpret the trade balance as the Current Account in the nation's Balance of Payments. The nation's Balance of Payments is comprised of three sections, the Current Account, the Capital Account, and the Official Settlements Account. The Current Account is comprised of three subsections: the Trade Balance, Net Unilateral Transfers (i.e., the net of gifts by citizens of the nation to foreigners less foreign gifts to citizens of the nation), and Net Income Earned Abroad (i.e., the net of income earned abroad by citizens of the nation less income earned in the nation by foreigners). Since net transfers and net income earned abroad are of relatively minor magnitudes and often offset each other in the U.S. economy, the trade balance, (X - M) or -(M - X), accounts for the bulk of the U.S. Current Account. We shall thus ignore net transfers and net income earned abroad so as to treat the Current Account balance solely as the trade balance.
In a fixed exchange rate system such as the pre-Depression Gold Standard or the post World War II Bretton Woods System, flows of gold or international reserves were necessary to keep the exchange rates of the subscriber nations' currencies unchanged vis-a-vis gold or other currencies. A byproduct of the process of fixing exchange rates was that the Current Account and the Capital Account balances for a nation could differ in amount totals, with the difference being made up in the Official Settlements Account. Since the early 1970s, the world has been on a nominal flexible exchange rate system, though one in which governments of nations occasionally attempt to manipulate exchange rates.
If exchange rates were completely free to vary in response to market forces, the Official Settlements Account total for each nation would be zero because exchange rates would change to bring about an equivalence of the Current Account total with the Capital Account total, or vice versa. A Current Account deficit must be offset by a Capital Account surplus, and vice versa. If a nation imports more from the rest of the world than it exports to the rest of the world, the nation must export the ownership of enough capital to "pay for" the trade deficit. In fact, the U.S. has experienced trade deficits through most of the years beyond the early seventies when flexible exchange rates became a reality. The Current Account deficits necessarily have been offset by Capital Account surpluses.
A Capital Account surplus may be comprised of a combination of long term capital exports (e.g., foreign purchases of stocks, bonds, and real assets in the U.S.) and exports of short term instruments (e.g., increased foreign ownership of U.S. bank account balances and other liquid financial obligations). The Capital Account balance must be the negative of the Current Account balance when exchange rates are flexible. It is in this sense that a Current Account deficit (most of which is composed of the trade deficit) can help to finance saving and budget deficits. The corresponding Capital Account surplus involves a net export of the ownership of capital, which is the same as to say an inflow of funds from abroad. A trade deficit (a Capital Account surplus) is thus a natural concomitant of saving and budget deficits, and is necessary to finance the twin deficits.
How is this "financing" of the saving and budget deficits brought about by a trade deficit? Market economies contain within themselves adjustment forces that are invoked when prices or incomes are too high or too low for equilibrium. These forces of adjustment are the unmet intentions of market participants. Prices are the primary adjusters of the market economy, but if prices change too slowly or are fixed or manipulated by government authority, domestic income (and correspondingly output and employment) will become the shock absorbers of the market economy.
Much anxiety has been vented since the 2016 presidential election about the loss of manufacturing jobs to overseas producers. But is such anxiety warranted?
U.S. official Balance of Payments statements show balances on goods (merchandise trade or "visibles"), on services (or "invisibles"), and on trade (the sum of the balances on goods and services). During the last quarter of the twentieth century and on into the twenty-first century, the U.S. has incurred substantial and growing deficits on merchandise trade as U.S. merchandise imports have increased even as U.S. merchandise exports have declined. Concomitant with growing U.S. merchandise trade deficits has been declining U.S. employment in merchandise manufacturing industries as U.S. manufacturers have shifted increasing amounts of production to overseas sites. Presidential candidates have promised to bring manufacturing jobs "back home" to the U.S. even through many of the jobs "lost" to foreign producers and sites are of the low-wage variety.
The increasing merchandise trade deficits as yet have been only partially offset by growing surpluses on trade in services. But prospects are for service trade surpluses to continue to grow and eventually to eclipse the merchandise trade deficits during the twenty-first century. The phenomenon is part and parcel of a long-term transition of the U.S. economy from an industrial economy to a service-based economy. Historically, merchandise trade has been focal and services trade has been discounted in the U.S. press. The print and video media today often report and despair over what are perceived to be adverse changes in the balances on merchandise trade.
The only relevant distinctions between a good and a service are the tangible characteristics and the duration of life of a good compared to the intangible nature and shortness of life (approaching zero) of a service. These distinctions can be reconciled by noting that few goods are desired for themselves or their innate characteristics (examples might be antiques and other collectibles); most are wanted for the stream of services that can be rendered over the lives of the goods.
Services have to be produced (or provided) no less so than do goods. People are employed and costs are incurred in rendering and delivering the services, just as in the production and delivery of goods. While goods are produced by the exertion of physical human effort, i.e., the "sweat of the brow," services are produced with less sweat, "work" just the same, but usually of a more cerebral type. This is to suggest that the distinction between goods and services in Balance of Payments accounting is an irrelevancy. Americans should not bemoan the passing of the industrial economy or the rising merchandise trade deficit. They should celebrate the emergence of the service economy and a growing surplus on trade in services.
An even greater irrelevancy, but one which often is reported and disparaged in the media is the bilateral trade balances between pairs of countries or with respect to particular categories of goods or services. While the U.S. runs a cotton textile trade deficit with the rest of the world, the U.S. runs trade surpluses with the rest of the world in many other goods and even more so in services. Specific service or commodity trade imbalances are natural concomitants of specialization according to comparative advantages. The relevance of such commodity or service trade imbalances lies with the vested interests who perceive themselves to be harmed by the nation's despecialization in producing a commodity or providing a service for which they no longer have a comparative advantage.
It is irrelevant that the U.S. runs a bilateral merchandise trade deficit with China for at least two reasons. One is that the U.S. enjoys a substantial services surplus with China. A second is that the U.S. runs trade surpluses with other countries while China runs trade deficits with many of those same countries. Bilateral trade balances are increasingly irrelevant in a multilateral trading world. In an open global economy, what matters for each country is its overall Current Account and Capital Account balances vis-a-vis the rest of the world.
Economists subscribe to the so-called principle of comparative advantage to explain regional specialization in the production of goods and services. According to this principle, people in each region of the world should specialize in producing those goods and services that can be produced most efficiently in their region compared to other regions. "Most efficiently" means at least opportunity cost (in terms of other goods and services foregone) compared to the other regions. Since the production of goods becomes geographically specialized, people in different regions must trade their specialties for the specialties of people in other regions.
Generalization in consumption is enabled everywhere through trade even though there is regional specialization in production. It can be shown with theoretical exercises as well as empirical information that those who specialize their production according to the principle of comparative advantage and trade with one another enjoy higher welfare than they would under conditions of autarky.
It is sometimes suggested that there are regions of the world that are essentially devoid of productive advantages, whereas other regions seem to possess all of the advantages (veritable "Gardens of Eden"). We can resolve this issue by further refining the definition of comparative advantage. A region's absolute advantages include all of those things that it can produce at lower opportunity costs than can be achieved in other regions. A region's absolute disadvantage is anything that can be produced elsewhere at lower costs in terms of other goods and services which must be foregone.
It may well be that opportunity costs of most things are lower in one region relative to all others, but this does not mean that the region should generalize in production. Its comparative advantages lie in those things for which it has greatest absolute advantage(s), while the comparative advantages of other regions lie in the things for which they have least absolute disadvantages. They should still specialize in production, but the one in its greatest absolute advantage and all the rest in their least absolute disadvantages. It follows logically from this refinement of the comparative advantage principle that it is not possible for a region to have no comparative advantage(s). Furthermore, it can be shown that all of the regions of the world, the sparsely endowed as well as the abundantly endowed, will enjoy higher welfare with specialization according to the principle of comparative advantage and trade with one another unencumbered by politically imposed constraints.
Modern elaborations of the theory of comparative advantage recognize at least five bases for regional comparative advantages: resource endowments, cultural preferences, known technologies, scale economies, and company-specific knowledge. The first three are endogenous to locale; the last two technically are independent of geography, but they may become location specific at the discretion of production decision makers.
The world is composed of many regions, some of which are similar to others in respect to resource endowments, preferences, or technologies, and different from the other regions in various respects. The basis for comparative advantage of each may lie in one of these areas or a combination of them. Empirical evidence suggests that a larger volume of the world's trade is conducted among regions that are similar in income levels and preferences, than among regions that are widely divergent in any of these areas.
But regions don't seek and identify comparative advantages, individuals and business enterprises do. Business decision makers, seeking profitable investment opportunities, attempt to "outfox" rivals by discovering competitive advantages (new demands for goods and services) of their own and other regions, and then to exploit market opportunities to supply goods and services both locally and abroad. Regional comparative advantages can develop only when microeconomic business decision makers "see" potential competitive advantages. The process of discovering and exploiting markets is central to comparative advantage specialization.
If government officials do not become involved, the private-sector pursuit of competitive advantages can be counted on to achieve comparative advantage specialization that provides goods and services at least opportunity costs (what must be given up) to all parties through interregional trade. The by-products of specialization and trade are welfare increases of the trading regions.*
Certain qualifications to the comparative advantage principle should be acknowledged. One is that comparative advantages, whether attributable to resource endowments, preferences, or technologies, are not "struck in stone," i.e., they are changeable. Circumstances of resource depletion can terminate a former comparative advantage based on the richness of a resource endowment. The discovery of a new deposit or pool of a natural resource can confer a comparative advantage. Population growth or immigration may confer a comparative advantage in producing labor intensive goods where one formerly did not exist. By the same token, emigration may result in depletion of a former comparative advantage based on labor abundance. Natural disasters such as a volcanic eruption, a hurricane, or a freeze that destroys a crop stock may bring to an end some historic comparative advantage. Changing preferences away from "old" goods and toward newly developed ones may shift comparative advantage from regions specializing in the "old" and toward regions specializing in the "new."
One of the most significant forms of comparative advantage comes about through technological advances that develop new items or new processes that economize on scarce resources. Another significant phenomenon which may change comparative advantage is capital investment. Regions that formerly were capital scarce may become capital abundant, as for example the newly industrialized countries ("NICs") of South Asia. The reason that these two forms of comparative advantage transition are significant to managerial decision making is that they are implemented at the discretion of managers of firms. It is by mounting an effort at research and development (R&D) or by capital investment that managerial decision makers may seize entrepreneurial opportunities and deliberately change the competitiveness of their firms and the comparative advantages of their regions.
I’m proposing new legislation to take a big first step: the Make in America to Sell in America Act. Under this plan, officials at the Department of Commerce and the Department of Defense will identify goods and inputs they determine to be critical for our national security and essential for the protection of our industrial base. These goods would then become subject to a new local content requirement: if companies want access to the American market for these critical and essential goods, then over 50 percent of the value of those goods they sell in America must be made in America. (https://www.nytimes.com/2021/10/29/opinion/hawley-supply-chain-trade-policy.html?campaign_id=39&emc=edit_ty_20211029&instance_id=44082&nl=opinion-today®i_id=74240569&segment_id=72979&te=1&user_id=86b0d837dd357b2a6e0e749321f6ed7f)
9. Economic Implications of
Contributions to Religious Institutions
Richard A. Stanford
In his book The God Delusion (Houghton Mifflin Company, 2006), biologist Richard Dawkins acknowledges the impossibility of proving the non-existence of something (p. 49), but he makes an argument from science that the existence of an invisible god is highly improbable (p. 158). Based upon this premise, he deduces that religions that worship such a god are extravagant and wasteful of society's resources (p. 163).
The real or economic cost of something is what must be given up in order to acquire it, what economists call its "opportunity cost." Opportunity cost is not the money price that must be paid for something, but rather the highest-valued (personal, not market) alternative that is foregone in order to acquire it.
The opportunity cost implications of Dawkins' contention can be considered on both the societal and personal levels. Before we dive into the implications for society, let's see how worship of an imaginary "sky god" might affect one's personal finances.
People typically make only small-change contributions to their churches prior to beginning their careers. Early in their careers they may make modest contributions, but they may tend to increase the size of the contributions as their careers advance and their incomes increase. In the table above, the assumed contributions are zero for years before the career begins, $100 per month for the first ten years of the career, then $200 per month during years 11 through 20, $300 per month during years 21 through 30, and $400 per month during years 31 through 40, after which the hypothetical person retires and makes no further contributions to his church.
Four combinations of investment yield and inflation are depicted in columns (c), (d), (e), and (f). In the simplest situation depicted in row (1), column (c), the person contributes $100 per month for 10 years, for a total contribution amount of $12,000 which earns no investment yield and suffers no inflation. Escalating contributions are made in subsequent decades as illustrated in column (c), rows (5), (9), and (13).
At the end of the 40-year period, the person has made church contributions totaling $120,000. An economist would question what is the opportunity cost (or loss) of the $120,000, i.e., the highest valued alternative use of those funds. Possibilities might include making payments on a home mortgage, purchasing one or more motor or leisure vehicles, paying for a child's or grandchild's college education, contributing to one's retirement fund, and yet other possibilities. These and other alternatives are foregone in favor of making the church contributions.
Column (d), row (2) illustrates the result of investing the first decade of contributions, $12,000, in securities that yield interest at the rate of 3% per annum, compounded monthly. The value of the $12,000 investment at the end of the first ten years is $13,974.14, for a gain of $1,974.14 in interest income. Then the amount $13,974.14 is invested in row (2), column (a) at 3% per annum during years 11-40, at the end of which it has grown to $34,332.26, row (2), column (d). This amount plus the $13,974.14 totals $48,306.40, which is more than 4 times the 10-year contribution amount of $12,000.
Suppose that the hypothetical person finds investment opportunities that yield 5% per annum, compounded monthly. As depicted in column (e), the $12,000 will have grown to $15,528.23 + $69,376.16 = $84,904.39 over the 10-year period. The point here is that the opportunity cost of the $12,000 church contribution is higher, the higher the investment yield that is foregone.
Columns (c), (d), and (e) are illustrations of yields assuming a zero rate of inflation. But if inflation occurs, it has the effect of decreasing the purchasing power of the contributions and investments. Column (f) entries are computed assuming a 2% rate of inflation over the entire 40-year period. It is obvious that inflation "eats into" the investment yield, but investment yield may serve as a hedge against loss of purchasing power due to inflation.
As long as the investment yield rate exceeds the rate of inflation, the value of the investment can grow, causing an increasing opportunity loss if contributions are made to the church instead of being invested. If there is good news here, it is that inflation diminishes the opportunity loss of making the contributions. If the rate of inflation should increase to exceed the investment yield rate, the so-called "real interest rate" (yield rate - inflation rate) would become negative and provide motivation to borrow, to spend, or to make church contributions instead of investing. At higher inflation rates, lower-income people may decrease their contributions in favor of spending on essentials because their incomes don't go as far as they used to. We should note that these criteria apply to other charitable contributions as well as to church contributions. They also may apply to any on-going subscriptions (e.g., newspapers, internet, cable TV, video access, streaming services, insurance premiums).
Similar computations are depicted in rows (5) through (8) for years 11 through 20 with monthly contributions of $200, in rows (9) through (12) for years 21 through 30 with monthly contributions of $300, and in row (13) for years 31 through 40 with monthly contributions of $400. The respective column totals on row (14) illustrate the opportunity costs of making the contributions under the yield and inflation conditions indicated at the tops of the columns.
One observation to be drawn from this exercise is that there is opportunity loss due to making church contributions even if the funds are not invested. Another observation is that the loss is greater the higher the investment yield foregone but lower the higher the rate of inflation. And the sheer magnitude of accumulated contributions over a lifetime becomes obvious. My guess is that most church contributors make their monthly contributions with little thought as to how much the contributions cumulate over their lifetimes, and perhaps few contributors are financially savvy enough to take into account the foregone income yields and the deleterious effects of inflation.
Recognition of these amounts and effects raises the question whether the opportunity losses were "worth it." A true believer in salvation to an afterlife might respond, "Of course it's worth it!" but deny that his or her contributions were purchasing the salvation which is understood to be provided by deity as a matter of grace. But Dawkins and others who are doubtful of an afterlife and skeptical of the existence of a sky-god may regard the "worth-it" question more seriously.*
It can be argued that contributions to churches produce social, psychological, emotional, and perhaps other non-financial and non-tangible benefits, but it is far beyond the ability of an economist to impute "cash values" to such benefits. The “worth-it” issue is a matter to be evaluated by each individual contributor.
While it is possible to play around with hypothetical contribution numbers on a personal level, it is virtually impossible to assess the magnitude of expenditures over millennia on churches, synagogues, temples, and mosques. Religious authorities have extracted incomes (voluntary contributions, sale of "indulgences," payment of land rents, etc.) from parishioners or congregants sufficient to build magnificent religious structures, many of which were constructed over decades or even centuries. The incomes extracted from parishioners to pay artisans to construct these structures could have been paid to workers constructing other social infrastructure facilities such as roads, schools, hospitals, community centers, etc. These are the opportunity costs of religious structures.
The timber, stones, concrete, steel, and other physical resources embedded in religious structures could have been used in construction of social infrastructure facilities. It can be argued that churches and mosques function as social infrastructure facilities, but again there is the ever-present “worth-it” question that can be answered only by each society, but only if the opportunity costs can be accurately assessed and compared.
__________
*Why would one who is skeptical of the myths underlying Christian ideology continue to support its religious institutions? In a New York Times opinion column dated March 15, 2022, Ilana M. Horwitz offers a rationale:
But one can agree with the liberal critique of conservatism’s moral and political goals while still acknowledging that religion orders the lives of millions of Americans — and that it might offer social benefits.
In other words, religion and the institutions that host it serve as vehicles of social control. Horwitz goes on to elaborate this point:
So, even as church attendance continues to fall off during the twenty-first century, it may be "worth it" for non-believers to tolerate, engage with, and support religious institutions with their contributions in spite of the apparent high financial opportunity costs to individuals.
Indoctrination with Christian ideology may help to curb undesirable behavior in younger people, males in particular, but there is a qualification to this social benefit. Their particular variant of Christian ideology may include a scriptural directive to share the ideology with others, i.e., to "evangelize" the world, hence the label "Evangelical." But as they age, many Evangelicals become ever more conservative and develop an affinity for conspiracy theories.
There have been several efforts to explain this affinity. One explanation that seems plausible is that early religious indoctrination followed by sermons heard during on-going church attendance may condition religious believers to accept on faith unverifiable aspects of the Christian ideology. Since they are already conditioned to accept such beliefs, it becomes natural for them to accept unverifiable conspiracy theories as well. Conspiracy theory acceptance may also include a sense of compulsion to evangelize their conspiracy theories to any who do not already hold them. It is thus no accident that conservative Christian Evangelicals often subscribe to and promote conspiracy theories.
Advocations of unverifiable conspiracy theories are reminiscent of Alice's conversation with the Queen:
Conservative Christian Evangelicals seem to be well practiced in believing "impossible things," both before and after breakfast.
It is also no accident that
conservative Christian Evangelicals prefer an authoritarian Trump presidency,
or that Orthodox Russians prefer an authoritarian Putin presidency. Conservative Christian ideology includes the perception of an all-powerful
(omnipotent) God who is "in control" and who, through his son Jesus,
exercises "all authority in heaven and on earth" (Matthew 28:18).
This perception implies suppression of individualism and submission to
authority, whether the authority is called God, Jesus, Pope, Fuhrer,
King/Queen, President, or some other title. Conditioning to this perception by
teaching and preaching militates in favor of authoritarian rather than
democratic polity.
Political, religious and business leaders have promoted this vision for centuries, from Capt. John Smith’s decree that slackers would be banished from the Jamestown settlement to Silicon Valley gurus’ touting work as a transcendent activity. Work is our highest good; “do your job,” our supreme moral mandate.
But work often doesn’t live up to these ideals. In our dissent from
this vision and our creation of a better one, we ought to begin with the
idea that each one of us has dignity whether we work or not. Your job,
or lack of one, doesn’t define your human worth.
This view is simple yet radical. It justifies a universal basic income
and rights to housing and health care. It justifies a living wage. It
also allows us to see not just unemployment but retirement, disability
and caregiving as normal, legitimate ways to live. (https://www.nytimes.com/interactive/2021/09/23/opinion/covid-return-to-work-rto.html?action=click&module=RelatedLinks&pgtype=Article) 43. Economic Implications of War In the
February 21, 2022, edition of "The Morning" newsletter in The New
York Times, David Leonhardt describes the relatively peaceful era of the
second half of the twentieth century and beginning of the twenty-first century
as "Pax Americana" under the tutelage the United States of America
and its military establishment acting as a global policeman. Leonhardt says, But the world’s most
powerful counties have rarely used force to expand their boundaries or set up
client states in their region. Instead, they have generally abided by the
treaties and international rules established in the 1940s. The phrase “Pax
Americana” describes this stability. (https://messaging-custom-newsletters.nytimes.com/template/oakv2?campaign_id=9&emc=edit_nn_20220221&instance_id=53851&nl=the-morning&productCode=NN®i_id=74240569&segment_id=83445&te=1&uri=nyt%3A%2F%2Fnewsletter%2F2d32e7a5-6e80-56e7-a25f-b4462b2c407e&user_id=86b0d837dd357b2a6e0e749321f6ed7f) David
Brooks, writing an opinion column in The New York Times on February 17,
2022, put it this way: If America was to be secure,
Americans would have to plant the seeds of democracy, but also do all the work
of cultivation so those seeds could flourish. Americans oversaw the creation of
peaceful democracies from the ruins of military dictatorships in Germany and
Japan. They funded the Marshall Plan. They helped build multinational
institutions like NATO, the World Bank, the International Monetary Fund. American
military might stood ready to push back against the wolves who threatened the
world order — sometimes effectively, as in Europe, but oftentimes, as in
Vietnam and Iraq, recklessly and self-destructively. America championed
democracy and human rights, at least when the Communists were violating them
(not so much when our dictator allies across, say, Latin America were).
(https://www.nytimes.com/2022/02/17/opinion/liberalism-democracy-russia-ukraine.html?te=1&nl=the-morning&emc=edit_nn_20220221) Leonhardt indicated the benefits of the relative
peace that society has enjoyed, The relative peace has had
enormous benefits. Living standards have surged, with people living longer,
healthier and more comfortable lives on average than their ancestors. In recent
decades, the largest gains have come in lower-income countries. The decline in
warfare has played a central role: By the start of this century, the rate at
which people were dying in armed conflicts had fallen to the lowest level in
recorded history, as Joshua Goldstein, Steven Pinker and other scholars have
noted. A Russian invasion of
Ukraine would look like the kind of war that has been largely absent in the
past 80 years and that was once common. It would involve a powerful nation
setting out to expand its regional dominance by taking over a neighbor. A war
like this — a voluntary war of aggression — would be a sign that Putin believed
that Pax Americana was over and that the U.S., the European Union and their
allies had become too weak to exact painful consequences. We are now
(early May, 2022) in the third month of the unprovoked Russian invasion of
Ukraine. America, Europe, and other parts of the "free world," lulled
into complacency during more than a half century since WWII, have now been shocked to
the reality of a bloody war in eastern Europe. This provides the occasion to
review the economic implications of war, something that we have not seriously
considered for several decades. We readily acknowledge that
the humanitarian effects of war may far outweigh the economic effects, so this
essay focuses exclusively on the economic implications based largely on the
economist's concept of opportunity cost. The real
or economic cost of something is what must be given up in order to acquire it,
i.e., its "opportunity cost." Opportunity cost is not the money price
that must be paid for something, but rather the highest-valued (personal, not
market) alternative that is foregone in order to acquire it. Brooks also
noted that, Just as America’s founders understood that democracy is not natural,
the postwar generation understood that peace is not natural — it has to be
tended and cultivated from the frailties of human passion and greed. So, even during times of relative peace, "American military might stood ready to push back
against the wolves who threatened the world order." The opportunity cost
of the American military establishment lay in the alternate uses of the
physical and human resources devoted to American military might and which
become unavailable to build social infrastructure facilities and foster
economic growth Conscription
in America was a continuing means of filling the military's manpower
requirements during WWII and until the end of the Vietnam war. The American
military now is entirely voluntary. A volunteer military has to bid potential
enlistees away from their civilian employment opportunities. The opportunity
cost of voluntary enlistment might be minimal for those members of society who
have no other viable employment opportunities than military service and who
meet military acceptance requirements. This implies that a voluntary enlistment
that is accepted for service entails the best of the alternate uses of the
enlistee's capabilities, so there is no explicit opportunity loss due to
his/her voluntary service in the military. But
conscription still is used to fill manpower requirements by the Russian army,
and militaries in other countries may rely upon national service requirements for
all citizens who reach a certain age. The opportunity costs of conscription or
national service lie not only in delaying or diverting human resources from
civilian occupations, but also in the fact that conscripts and national service
participants usually are paid at a scale far below their market values in
civilian occupations. The
opportunity costs of the military bases and physical facilities that host and
train military personnel are factories, schools, hospitals, civic centers, and
other potential uses of those facilities. The stockpiles of equipment, parts,
and ordinance that enable the exercise of military might are accumulated in
lieu of consumable goods that could have been produced. Ships, aircraft, and
transport vehicles are produced for the military instead of for private
industry and commerce. All
opportunity costs mentioned thus far have occurred during peacetime or during a
so-called "cold war" period. But then there is the expenditure of
munitions during a hot or shooting war like that currently (May, 2022) ensuing
in Ukraine. Civilian production must be displaced as ever more munitions are
required to replace that which has been expended in returning fire or are
destroyed by opposing forces. The U.S. Department of Defense now is
"backfilling" military equipment that has been forwarded by NATO
members to the Ukranian army; the back-filled equipment must be produced at the
expense of civilian goods that might have been produced with the resources
required for its production. Open
hostilities inevitably distort or terminate trading relationships and thereby
prevent specialization in the production of goods and services by natural or
acquired comparative advantages. National security needs may eclipse economic
possibilities, and some combatant nations may attempt to achieve autarkic
self-sufficiency. Trade diverted from enemies who possess comparative
advantages (e.g., Russian oil, natural gas, fertilizers) to allies (e.g., NATO member
countries) may contravene comparative advantage specialization. Hostilities, or
the threat of them, also may precipitate migrations which can change
comparative advantages. Economic
growth slows as trade and specialization are diminished, and economies may
contract if their rates of growth become negative. The diminished production of
goods for civilian consumption can be expected to decrease aggregate supply
relative to aggregate demand and contribute to inflationary pressures.
And finally,
in addition to human injuries and deaths attributable to hostilities, the
destruction of plant and equipment constitutes absolute losses to society, and
the losses may change comparative advantages. Decisions must be made whether to
replace losses and how to finance the reconstruction that would not have been
necessary had there been no hostilities. Does
anything good come from military preparedness and war itself? Technological
advances developed for new military processes and equipment has been spun off
into civilian uses to great benefit. Personnel may gain valuable training and
managerial experience while serving in the military. And the unemployment rate
may be lower than it might have been if so many young women and men had not
been required to staff the military. Offsetting these possible gains is the
loss of human productive capability of those who are injured or killed during
hostilities. But it is uncertain (unlikely?) that the gains from military preparedness
and action during hostilities can fully offset the opportunity losses of
maintaining a military capability and using it to press perceived national and political needs. This
suggests that there are opportunity gains to be had in a peaceful world. It
would not be necessary to divert human or physical resources to military
preparedness or hostilities. Trade and migration could ensue to enable
comparative advantage specialization across regions. And economic growth could
occur commensurate with population growth, technological advances, and capital
investment.
Deflation and inflation often have occurred over the phases of business cycles in Western market economies. Deflation or disinflation (slower inflation) typically accompanies slower growth or absolute contraction with some lag during the downswing phase, and inflation at a faster pace begins to manifest itself as recovery continues to ensue during the upswing. Cyclical deflation and inflation episodes typically are short-run phenomena lasting only a few quarters.
Deflation Episodes
But there have been several longer-run episodes of inflation and deflation in the history of the U.S. economy, all of which eventually gave way to opposite-direction price level changes. A decade-long period of deflation ensued after Andrew Jackson vetoed the Second Bank recharter bill in 1836 and had all government funds moved from commercial banks to the U.S. Treasury. The Civil War brought a nearly decade-long period of inflation as the Union Treasury Department issued copious amounts of "greenback" currency to finance the war. A twenty-year period of deflation began after the Civil War in 1870 when the Treasury Department implemented a process intended to restore convertibility of the dollar into gold by withdrawing much of the greenback currency that had been issued during the war.
During the twentieth century, the "roaring twenties" decade was characterized by emerging real-estate and stock price bubbles. A long-term episode of deflation ensued after the 1929 stock market crash that ushered in a decade-long period of depression and halting recovery. World War II brought a half-decade long period of suppressed inflation which manifested itself in actual rising prices in the late-1940s after price controls were lifted at the end of the war. Many of these episodes of price level direction change have been precipitated by government actions, and the reversals of the direction of price-level change often have occurred without the intervention of monetary or fiscal authorities.
The post-World War II era in the United States has been characterized by faster or slower rates of inflation rather than periods of inflation alternating with episodes of actual deflation. Most of these price level variations have been shorter-term and have followed cyclical patterns. However, the recovery following the 2008 "Great Recession" has been slow with inflation well below the two percent per annum target preferred by Federal Reserve officials. This has spawned monetary policy efforts to stimulate not only faster real growth, but also inflation at a pace fast enough to reach the Fed's target.
Historical Perspective
Some economists have become concerned with the prospect of longer-term deflation, and to have dismissed the possibility of inflation in the foreseeable future. Is the phenomenon of inflation now an anachronism, unlikely to be experienced in the future? A brief overview of the earlier history of deflation and inflation in the West may serve to provide perspective on this question.
Trade in primitive (pre-money-using) societies was conducted by barter, i.e., by exchanging things for things. Because barter trade is inconvenient and inefficient, money was invented to facilitate trade. With the increasing use of money, markets emerged and commodities became priced in terms of so many common money units. Both barter and money-price trade occurred side-by-side in markets during the late Middle Ages. The world of the late Middle Ages was one of general economic stagnation characterized at times and in various places by falling commodity prices, i.e., by deflation.
Beginning around the sixteenth century as both domestic and foreign trade were becoming more common, commercial interests advocated mercantilism to increase "the wealth of the nation" and avoid deflation. Fear of deflation led mercantilists to prefer a favorable balance of trade, i.e., exports greater than imports to cause foreigners to pay the difference in gold or silver.
Deflation followed from the scarcity of enough precious metals to serve as money for conducting trade during the so-called "Age of Discovery," also beginning in the sixteenth century. European monarchs were motivated to commission voyages to the "New World" by adventurers in search of gold and silver, both to enhance their own wealth and to avert deflation. They also commissioned "privateers," essentially crown-sponsored pirates, to capture gold and silver from each other on the high seas.
The influx of precious metals, largely through English, Spanish, and Portuguese seaports, funneled out into western Europe through trade, alleviating incipient deflation but eventually causing unprecedented inflation in western Europe. The influx of so much new money sparked growth processes and an industrial revolution that required ever more money to circulate in support of the growing volume of trade in order to prevent a return to deflationary conditions.
Monetary Transformation
Fear of deflation due to the shortage of precious-metal money relative to the increasing needs of commerce elicited over the next three centuries a great monetary transformation from using costly precious metal money to using much cheaper "promise to pay" paper money. Gresham's Law came into its own: bad money drives out good money, and cheap money drives out dear money. By the late-twentieth century, bank account money was displacing paper money as the preferred mode of conducting trade. The monetary transformation was essentially complete as precious-metal money ceased to be used almost everywhere in the world.
During the commodity money era, fortuitous discoveries of precious metals led to gold or silver "rushes" that intermittently destabilized economies due to uncontrolled growth of the money supplies. The persistent shortage of enough precious metals to serve as money in a growing world economy was instrumental in precipitating a search for cheaper media to serve as money.
A momentous money transformation over the past three centuries has left very little commodity money still in use anywhere in the world. Now, virtually all modern monies are debt (or credit) monies in the forms of token coins, promise-to-pay paper currencies (which are liabilities of governments), and checkable deposits (which are liabilities of commercial banks). This transformation came about through a sequence of innovations in the emergence of commercial banking that include the depository operations of metal smiths, written orders to pay, bank notes, the recognition that depositors typically withdraw only a small fraction of the valuables (e.g., gold) which they have on deposit, the possibility of lending gold while it is on deposit, and ultimately the possibility of lending a multiple amount of the deposited gold as long as borrowers make payments to parties, all of whom redeposit the borrowed gold back in the same bank.
Two other important innovations are warehouse receipts (e.g., gold and silver certificates) for the total values of the deposits and the possibility of multiple warehouse receipts in conventional denominations for the total value of any deposit. Eventually, warehouse receipts in the form of gold and silver certificates were demonetized in the United States, only to be replaced by pure "promise to pay" bank notes which are not redeemable in any amount of precious metal and not even backed by any amount of precious metal. This progression of innovations has served to transform money into ever more abstract forms.
During the precious-metal money-using era, the quantity of money in circulation was limited strictly by the amount of precious metals that could be found, extracted the ground and rivers, refined, and not used for non-monetary purposes (e.g., jewelry, flat and hollow tableware). After the great monetary transformation, there no longer has been a limit to the amount of paper and bank-account money that could be brought into circulation by the treasury departments of governments and by commercial and central banks. This has enabled the potential for inflation far beyond that precipitated in the sixteenth and seventh centuries by influxes of precious metals into western Europe, or in the nineteenth century by the over-issue of paper money.
Permanent Transition
The contention that the world now has made a permanent transition from inflation and rapid growth to deflation and slow growth, and that inflation will never again be a problem, strains credulity. The six-year period of low inflation since the Great Recession is still short compared to earlier episodes of deflation in the U.S. economy and the larger world. And it is a period still too short to warrant a conclusion of a permanent transition to deflation and slow growth.
Inequality in the distribution of something across a population is a descriptive or factual matter. Inequity is a subjective matter, a matter of perception that the degree of factual inequality is unsatisfactory. A national income that is perceived to be too unequally distributed across the population of the nation may be judged to be inequitable. By the same token, a perfectly equal distribution of income across a society that values productive contribution and rewards merit also might be judged to be inequitable. In such a society, some distributional inequality attributable to reward for meritorious productive effort might be accepted as equitable.
The more unequal the distribution of a society's income or wealth, the more likely it is to be judged inequitable. The economic implication of distributional inequity is opportunity loss of consumer spending discretion at the lower end of the income spectrum. Even though parties toward the upper end of the income spectrum may enjoy greater spending discretion, it is rarely enough to offset the loss of spending discretion at the lower end. The poor often spend most or all of their incomes, and some may even spend more than their incomes by increasing debt. But the more affluent typically spend a smaller proportion of their incomes.
The perception of distributional inequity may result in social and political unrest that leads to demands for redistribution. It may culminate in protests and ultimately revolution to overturn the government.
In economic thought, an equitable distribution of income results if all resources (human as well as physical) receive returns (incomes) that are equal to their marginal revenue products. Marginal revenue product is the addition to total revenue from selling what is produced by employing one more unit of the resource.
An equitable distribution of income is not likely to be a perfectly equal distribution of income. Resources have differing capacities to generate additional product due to varying inherent characteristics, designs, education, training, entrepreneurial drive, etc. Also, products have differing market values. The marginal revenue product of an item varies with both physical productive efficiency and market demand for it. Even if the physical production of an item is very efficient, insufficient demand for it will cause its marginal revenue product to be low.
Marginal revenue product is thus a merit-based criterion for income distribution, but one that is likely to be rejected by socialists. Socialists (and progressives) likely would prefer to prevent even merit-based wealth accumulation, and to redistribute any accumulated wealth to achieve a more-equal distribution of income, whether equitable or not. Incomes generated by criminal activity or the exercise of monopoly power do not qualify as merit-based.
The merit of entrepreneurial income is more difficult to assess. Positive entrepreneurial income is the reward for assuming risk in launching a new venture that is successful, but there is no guarantee of success in launching a new venture. Entrepreneurial losses result from failed entrepreneurial ventures. Net entrepreneurial incomes (gains less losses) accumulate as additions to wealth. It may not be possible to separate out entrepreneurial income from incomes obtained by criminal activity or the exercise of monopoly power. That entrepreneurial wealth appears to have increased over time implies that entrepreneurial successes have outweighed failures. It may be debated whether entrepreneurial income qualifies as a merit-based justification for wealth accumulation.
Ignorance on the part a clientele may enable exploitation in product markets. Exploitation occurs when some members of society are able to exploit customer ignorance, exercise monopoly power relative to competitors, or engage in criminal activity to capture returns greater than their marginal revenue products. A lingering question is whether successful entrepreneurship achieves unwarranted monopoly power to exploit resources. Did Bill Gates accumulate his wealth by successful entrepreneurship or by exercise of monopoly power (or both)?
Those who receive returns less than the values of their marginal products are exploited and become (or remain) poor. Slavery (humans owned as chattel property) is the ultimate form of exploitation by marginal revenue product extraction. Does employment of non-human resources constitute exploitation? Does it matter that non-human resources are exploited to accumulate wealth, or is exploitation relevant only to human resources?
The "rich" may (or may not) use their accumulated wealth for charitable purposes that benefit the poor, but even if they do so they are exercising discretion over the uses of society's wealth. The exploited poor are unable to exercise any such discretion over the use of wealth that they could have accumulated had they not been exploited. In the absence of exploitation, they may not have been or remained poor.
In a biblical New Testament story (Luke 19:1-10), Zacchaeus used his Roman appointment as tax collector to collect excessive commissions (over and above the tax revenue that Rome required) to exploit poor Jewish tax payers, thereby accumulating wealth to become "rich." Any definition of "excessive" compared to "normal" is subjective. Are normal commissions exploitative?
Is it more socially desirable for Zacchaeus (or Bill Gates) to exercise discretion over his accumulated wealth for whatever purposes (charitable or otherwise), or for the poor to exercise discretion over their non-exploited incomes, and thus to have greater opportunity to escape poverty?
The Zacchaeus story ends by noting that Zacchaeus promised to give half of his possessions to the poor and to pay back fourfold any amount he had gotten by cheating. Jesus concluded that "Today salvation has come to this house...." This is similar to the ending of the story about a man asking Jesus what he must do to attain eternal life (Matthew 19:16-26). Even if it is easier for a camel to pass through the eye of a needle than for the rich to enter the Kingdom of God, "with God all things are possible," even the salvation of the rich.
Even so, charitable giving by the wealthy, as socially redeemable as it may seem, does not excuse exploitation that enabled the accumulation of wealth.
Foreign producers often are perceived to "dump" their products in domestic markets as a means of driving domestic producers from the market, thereby conferring monopoly power upon the foreign producers. Although lower prices of foreign products may reflect lower direct (variable) production costs, another rationale for such apparent dumping is that overhead costs typically have been fully allocated by the foreign producer to the output produced for its domestic market. In this case the price of output destined for foreign markets needs to cover only the direct (or variable) costs. Hence the price of the output produced for the foreign market (excluding any allowance for overhead costs) can be lower than the domestic price (including full allocation of overhead costs.
Technically, "dumping" means that a foreign producer is selling in a domestic market at a price below the foreign producer's full cost of production (including overhead cost allocation). However, it is virtually never possible for one who charges another with dumping to gain adequate information about the other's costs (direct or overhead) of production. For this reason, the "political" definition of dumping is sale by the foreign producer in the domestic market at a price below the domestic producer's full cost of production (including overhead cost allocation). Sometimes domestic producers claim that the foreign producer is dumping when the price is simply below domestic prices. This is a "political" definition because it usually serves as the basis for an appeal by domestic producers to their governments for protection from the foreign producers who are reputed to be engaged in dumping.
The problem with the political definition of dumping is that it really cannot be distinguished from the phenomenon of competitive pricing. For example, if another domestic producer were selling at a price below our own preferred price, or even at a price below our own per-unit cost of production including overhead cost allocation, we could hardly charge our domestic competitor with dumping. The most that we could do is complain about competitive pricing which may be predatory in nature. But if a foreign firm engages in exactly the same behavior, domestic producers are quick to charge dumping and appeal to their governments for relief.
Factor Mobility
Economists conventionally identify four so-called "factors of production" that may be combined to produce consumable goods and services: land, labor, capital, and entrepreneurship. Land is thought to be least mobile and labor to be the most mobile of resources because land is physically situated in specific locales but workers can move from any locale to another if their movement is unhindered. Entrepreneurship shares the same mobility characteristics as labor since it is carried by highly-motivated humans who are innovative and willing to assume risk. However, it turns out that labor and entrepreneurship may be less mobile than capital simply because human mobility is hindered by preference of place and family concerns, and humans often find the costs of moving from one locale to another to be prohibitive.
It appears that capital may be the most mobile of all resources since it has no particular human attachments or preferences. Financial capital can easily be shifted among regions in banking transactions, and physical capital can be physically moved by managerial direction without exhibiting any particular habitat preference. An Islamic adage states that if Mohammad won't go to the mountain, the mountain will come to Mohammad. Applied here, if labor won't go to where it is needed to work with capital assets, capital investment will go to where it can find a willing labor force.
Semantics
A couple of words pertain to this matter. "Emigration" means to depart one locale of habitat with intention to permanently relocate and establish residence in another locale. The implication is that the intent of emigration is more permanent than tourism or short-term visitation. "Immigration" is the other side of the emigration coin. It means to arrive in a certain locale having moved from another locale, also with the intention of establishing permanent residence. Both terms may refer to movement among locales within a country or from one country to another.
What might overcome the human preference of place and the costs of moving to render labor geographically mobile? Reasons to emigrate include terrorism or persecution, inadequate or expensive food supplies, impotable water, disease or other dangerous health conditions, undesirable climatic conditions, unbearable poverty, poor employment or investment opportunities, natural disaster destruction, and war. Choice of locale to which immigration may occur include better employment or investment opportunity, better climate conditions, safer and more peaceful residential environment, and the possibility or reuniting with relatives that previously have immigrated.
Economic Implications
Emigration/Immigration is a population and labor force phenomenon that can have serious economic implications. The region experiencing emigration (net of immigration) will suffer decreasing population and labor force that can slow or reverse economic growth. The region enjoying immigration (net of emigration) will experience increasing population and labor force that may sustain economic growth even in the face of declining birthrates and population aging. Population increase that does not deplete the society's social services (education, health, income, housing support) may sustain economic growth. Immigrants who gain employment earn incomes, and they and their dependents become consumers. Labor force increase can contribute to economic growth by increasing the economy's capacity to produce consumable goods and services.
When people emigrate from low-wage regions to higher-wage regions, the supply of labor decreases in the low-wage region relative to the demand for labor. If the demand for labor has not also decreased, wages will tend to rise. But when people immigrate to higher-wage regions, the supply of labor there increases relative to the demand for labor, and if the demand for labor has not also increased, wages will tend to fall. Thus, emigration from low-wage areas and immigration to higher-wage areas tend to level wages across the areas.
Relative Wages
Perceptions of "high" and "low" wages may be relative between locales. Wages that are toward the low end of the wage spectrum for unskilled or lower-skilled labor in a relatively higher-wage area may be perceived to be high in a relatively lower-wage area. This perception may motivate emigration from the lower-wage area to become immigrants into the higher-wage area. And even skilled labor and persons with professional training who are emigrating from a lower-wage area may be happy to take unskilled work at low wages in a higher-wage area because the low wages there are still higher than the higher wages in a low-wage area. For example, if the medical credentials of a doctor trained in a "third-world" country (like Cuba) are not accepted in a higher-wage country (such as the U.S.), he might be willing to take a job as a taxi driver in the higher-wage country to earn more than he could earn as a doctor in the country from which he emigrated.
A well-understood emigration/immigration relationship is that the younger, more vigorous, less risk averse people in any society who are the ones who are mobile and thus more likely to emigrate. The older, infirm, and more risk averse folks are inclined to remain in their historically preferred habitats unless there is a prospect of joining younger family members in other locales. The implication is that the productive capacity of the region suffering emigration declines and wages tend to rise while the productive capacity of the region enjoying the immigration increases even as its wage level drops. This suggests that comparative advantages of labor-intensive agriculture and industry in low-wage regions will suffer from emigration, while comparative advantages of labor-intensive industries in higher-wage regions may be enhanced by immigration.
Marginal Productivities
In the microeconomic theory of production, when one factor of production is increased relative to other factors, the marginal productivity of the one factor decreases while the marginal productivities of the other factors increase. This happens both because the one factor is spread more thinly across the other factors, and the other factors now have more of the one factor with which to work. If one factor of production is decreased relative to other factors, the marginal productivity of the one factor increases because it now does the work formerly done by a larger quantity of the one factor, while the marginal productivities of the other factors decrease since they now have less of the one factor with which to work.
If these microeconomic concepts can be generalized to the macro environment, the loss of vigorous and capable labor that emigrates from a low-wage region may enhance the marginal productivity of its remaining labor force while decreasing the marginal productivity of capital. This may stall further capital investment in the region. With immigration of labor into a higher-wage region, the influx of new labor may reduce the marginal productivity of labor there, and it may increase the marginal productivity of complementary capital. The influx of labor thus may motivate additional capital investment in the region.
Emigration and Immigration
Emigration (net of immigration) can have negative economic implications for a country by slowing or reversing a positive rate economic growth, decreasing the marginal productivity of capital that may discourage capital investment, and reducing its labor force, particularly of its younger, more highly skilled, and more vigorous members. But emigration may have positive effects in reducing the consumer load on its food supply and by increasing the marginal productivity of its remaining labor force. A non-empirical impression is that the positive effects of emigration are unlikely to offset or outweigh its negative effects.
Political attention in the U.S. and some European countries recently has turned toward immigration. The negative effects of immigration (net of emigration) include increasing the load on the country's food supply and social services systems, decreasing the marginal productivity of labor, lowering the average wage rate or slowing wage increases, and the perception that local jobs are being taken by immigrants. The positive effects of immigration include additions to the country's labor force, increasing the marginal productivity of capital that may encourage capital investment, stimulating its economic growth rate, increasing the stock of higher skilled and more technologically capable labor in construction and industry, and provision of labor to perform menial work that can be done by lower skilled workers. Whether construed as positive or negative, immigration is likely to dilute the race, ethnicity, language, and culture of the country.
Some of the political concern focuses on the arrival of foreign workers who may capture jobs that are perceived to belong to domestic workers. However, domestic workers may exhibit little interest in performing the arduous work required in construction or in low skilled occupations at or near minimum wage. Until robotization renders menial tasks performed by humans to be obsolete, society will continue to need humans to perform low tech tasks, for example in lawn maintenance, hotel maid service, laundry processing, refuse collection, roadwork, delivery services, and some basic repair services.
An Empirical Question
While some politicians may overlook the positive effects of immigration and hold the view that immigration yields only negative effects, it is ultimately an empirical question whether the negative effects of immigration outweigh the positive effects. With the likelihood that the positive effects of immigration outweigh the negative effects, governments that attempt to choke off the flow of immigrants may be "shooting themselves in the foot."
Economics is about the scarcity of productive resources relative to the wants of humans for the products that can be produced from those resources. Economics is about economizing, conserving, and allocating those scarce resources to achieve efficiency and productivity (the ratio of outputs to inputs) in the process of enhancing the material well being of society.
By the very nature of their subject matter, economists are interested in conserving the environment, and they favor long time horizons that stretch to some number of future generations and their well-beings. There is no essential conflict between economic and environmental concerns as long as the sides of any environmental and growth discussion are given due consideration and benefits are rationally judged against costs. There is substantial overlap between the interests of growth economists and environmentalists, but if either pushes too far toward their respective extremes (environmentalists to stop growth, or growth economists to ignore environmental concerns), the mutuality of interest evaporates.
Benefits and Costs
There may be some asymmetry of assessment of benefits and costs between those who promote growth and those who favor environmental protection and restoration. Growth advocates go to lengths to identify the benefits of growth and may overestimate the values of them while overlooking or minimizing the costs of development. Avid environmentalists tend to the opposite extreme, i.e., identifying all of the costs of development and overestimating their magnitudes, while overlooking or undervaluing the benefits of growth.
Growth economists and environmentalists seem to have become more suspicious and skeptical of each other. Environmentalists often indict economic growth as the principal villain in despoiling the environment. Growth economists suspect that an ardent advocacy of environmental sustainability actually may be a veiled "stop-growth" movement. Growth economists are firmly convinced that on-going growth serves the larger humanity by improving material well-being across the income spectrum, and especially among the poorest in low-income societies. But there are always tradeoffs. A cost of growth that improves material well-being may be usage of resources that may be perceived as environmental damage. The rational question is whether the benefit is worth the cost.
Environmental advocates occasionally express the view that when some gain from the environment, others must have suffered loss. Most economists would not be sympathetic to that viewpoint, and would relegate it to the pre-Industrial Revolution era of Mercantilism. There is much evidence that economic activity is not a "zero-sum game," but rather a positive-sum game. Economic activity is quid pro quo, i.e., trading this for that. Unless such trading is dictated by authority, it is voluntary so that both parties to any such trade have to perceive that they will gain in order for the trading activity to ensue. When some part of the environment is despoiled by "greedy industrialists" (the development) who may gain profit (or suffer loss), there are other members of society who are made better off, namely the consumers of the products flowing from the industrial activity (the growth). Environmentalists seem to stress the "rapacious" nature of industrial despoilage but ignore the "pro quo" that accompanies it.
Resource Extraction
The extraction of mineral and petroleum resources certainly leaves less of them in the earth so that it appears that stocks of natural resources are being depleted. However, at the end of World War II the best estimates available were that the world may have had around 40 more years of coal if it continued to be extracted at mid-twentieth century rates. Early in the twenty-first century, and with accelerating extraction of coal, current estimates are that we may have two or more centuries worth still available. How can this be? Technological advance has increased the efficiency with which we use our coal resources, and processes of exploration and discovery have identified and proven previously unknown coal deposits. And, technology is advancing with respect to the ability to burn coal (or coal-derived products) with ever-less ejection of carbon and particulate matter into the atmosphere. There are even hints of technologies to be developed that may be able to extract carbon from the atmosphere and either bury it below the sea floor or make other useful products with it. Similar stories can be told with respect to many other natural resources.
The very same process of technological advance that is making progress to conserve the earth's resources and enable more efficient and cleaner usage of them often is indicted by environmentalists for despoiling the environment. Growth economists maintain that even as the physical resource stocks of the earth's natural resources are depleting, the "effective stocks" continue to be increased by technological advances.
Global Warming
There is a good bit of "long-view" evidence that the earth has been cyclically warming and cooling through the ages. The present warming trend is not unlike that about twelve thousand years ago around the end of an ice age. Whether human activity is responsible for or has aggravated the present warming trend is uncertain. Global warming, whether a natural phenomenon or caused by human activity, may impair the productive capacity of tropical and arid regions of the earth, and thus further impoverish the populations of those regions. But global warming is also likely to extend the growing seasons of more northerly regions, and thus enhance their productive capacities. Environmentalists seem to focus on the former and underestimate the latter possibility.
Since it is not yet apparent that human effort can actually suspend the global warming process, the solutions to the human problem lie in open borders. This means trade and immigration, unilateral transfers (e.g., foreign aid and benevolence by religious and other charitable organizations) from those regions that are gaining to people in regions that are suffering from global warming. This also means the transfer of new technological knowledge to those regions that are suffering to enable them to adapt to the global warming process.
Religion
John Kay, in his January 9, 2007, column in the Financial Times, conjectured that environmentalism now has achieved all of the requisites of a religion in its own right. It possesses a myth story of "The Fall" in the form of the loss of harmony between man and nature caused by our materialistic society, and an apocalypse myth story in the form of human wickedness that has damaged our inheritance. However, there is no redemptive story in environmentalism that would provide an object of worship. It might be more appropriate to call environmentalism an advocative secular ideology rather than a religion. There is something to advocate from an ideological perspective, but nothing to worship from a religious perspective.
In comparison, economic growth emanating from the operation of market economy has an apocalypse myth story, the "dismal" population growth story told in 1798 by Church of England Parson Thomas Robert Malthus in his Essay on Population. In Malthus' story, continuing population growth will press upon the carrying capacity of the earth, causing per capita incomes to fall and hover about the subsistence level, and massive starvation if population growth should continue to grow beyond the carrying capacity of the earth. Malthus invoked the "four horsemen of the Apocalypse" described in the New Testament book of Revelation as the vehicles that would ultimately limit population growth: war, pestilence, famine, and disease.
But growth economics also has two redemptive stories in the forms of on-going technological advance that extends the carrying capacity of the earth, and demographic transition that curbs population growth. In a demographic transition, as people become more affluent they want to have fewer children, hence birth rates fall toward death rates. In this reality (more than a myth story), technological progress has enabled global output to outrun population growth, and demographic transition is reducing the global rate of population growth. On-going economic growth has enabled per capita incomes to continue to rise and alleviate poverty. The Malthusian Apocalypse is thus averted. Economic growth may be closer to being a religion (a secular religion) than is environmentalism.
Economic decision making involves complex interactions between producers and consumers, employers and employees, managers and owners, business executives and members of the communities in which their firms operate. While these relationships are essentially economic in nature, they also have ethical dimensions. Some of these dimensions include the work environment, the effects of pollution and depletion of natural resources, and the safety of consumers.
The ethical dimension of business decision making was not much discussed prior to the late twentieth century, perhaps because discussion of it might betray the existence of problems. There are now management courses with titles containing the term "ethics." Of course, there really is no such thing as a particular variety of ethics peculiar to the business decision setting. The discussion should be about ethics in the generic sense, but as applied to business decision settings.
Business decision making, whether in the profit, not-for-profit, or public sectors, must be based upon moral foundations if relationships are to be reliable and predictable. Nonetheless, we hear and read of a variety of practices in both public and private sectors that most people would judge to be unethical, among them bribery, embezzlement, breaking contracts, price fixing, collusion, deceptive advertising, falsification of expense accounts, underreporting of income or padding of expenses on tax reports, use of substandard materials, producing and selling products that fail to function as advertised, failing to divulge to consumers possible product dangers, and so on. Any of these behaviors may erode the moral foundation of commerce and make business activity both unreliable and unpredictable.
In the private sector, the pursuit of profit has traditionally been viewed as the chief motivation to engage in productive activity. The pursuit of profit cannot be regarded as a morally neutral activity, both because business decision makers may acquire monopoly power that enhances their profitability, and because the receipt of profit income may lead to inequality in the distribution of income between those who are entrepreneurially successful and those who are not or who do not choose to behave in an entrepreneurial fashion.
A challenge to the legitimacy and authority of privately owned and managed business enterprise emerged in the United States during the second half of the twentieth century. The challenge focused upon the legitimacy of business, its right to exist, and the right of people to own and use business property to their own private benefit. Statistical evidence in support of this contention is implicit in numerous surveys and polls that indicate that many Americans believe that the ethical standards of business are lower than those of American society as a whole.
In simplest terms, morality may be defined as what is good or right for human beings. Ethics involves choices in regard to moral precepts. A choice may be ethical or unethical depending upon whether behavioral rules are obeyed, or whether the choice yields good or right outcomes for those who are parties to the decision, and perhaps also for "innocent third parties."
Ethical relativism is the position that there is no one universal standard by which to judge the morality of an action. An ethical relativist may hold the same act to be morally right for one society, but morally wrong for another. A similar distinction may be applied to two individuals within the same society. An act that is taken to be moral in one set of circumstances may be regarded as immoral in another (situational ethics). A problem of ethical relativism is that each person's ethics are specific to the person; no comparative moral judgments are possible. An ethical relativist may base morality upon social customs and conventions. Students of international business often are urged to adopt a polycentric world view (tolerance and appreciation for cultures alien to one's own) incorporating ethical relativism. "When in Rome, do as the Romans do," even if it involves engaging in acts that would be unacceptable at home (like paying bribes).
At the opposite end of the ethical spectrum from ethical relativism is ethical absolutism. Ethical absolutists believe in the existence of universal standards of ethical behavior. For Immanuel Kant (1724-1804), ethical criteria were "categorical imperatives" in the sense that they are absolute and unconditional, irrespective of the consequences. Examples of Judeo-Christian scriptural dictums that may serve as categorical imperatives include those found in the Ten Commandments, scriptures relating to oppression, and the Golden Rule. Religious fundamentalists of the early twenty-first century, whether Moslem, Jew, or Christian, would perhaps be most comfortable with categorical imperatives in the form of scriptural dictums to guide their behavior.
The intermediate range of the ethical spectrum is occupied by a variety of positions that focus upon the outcomes of behavior. Consequentialism is the belief that the consequences of an action are the sole bases for judging whether an action is right or wrong. For a consequentialist there is no universal standard of ethical behavior; any action that yields a desirable outcome can be rationalized as ethical. For a consequentialist the end justifies the means as ethical, or if it is an undesirable end, the end indicts the means as unethical. Consequentialism dichotomizes into ethical egoism and utilitarianism.
Ethical egoism is the belief that every person ought always to act so as to promote the greatest possible balance of good over evil for himself. Therefore, an act contrary to one's self interest is an unethical act. Ethical egoists can argue that others' interests should be respected because treating others well also promotes their own self interest in the long run. In contrast to ethical egoism, utilitarianism holds that people ought to act so as to promote the greatest total balance of good over evil, or the greatest good for the greatest number. A rule utilitarian would obey those rules that experience has shown generally promote social welfare, even when doing so does not always lead to good consequences. An act utilitarian may hold that one ought to act so as to maximize total good even if doing so violates rules that usually promote social welfare.
Are business decision makers, by training, social conditioning, or innate character among those who select themselves into commercial occupations inclined to be ethical relativists, ethical egoists, utilitarians, or categorical imperativists? We are likely to find some of each kind in any walk of life, including commerce. A pure speculation is that the for-profit sector has a natural attraction for ethical egoists. Those who are intimately engaged in international business operations may become drawn to ethical relativism. Business decision makers who are religious are more likely to be rule utilitarians or categorical imperativists. Social liberals who are act utilitarians may be drawn into public sector decision settings or politics.
Although American business interests may be characterized by egoism as a predominant guiding principle of their ethics, Adam Smith's premise that there often is a convergence of private interest with the public weal goes a long way toward explaining why some may engage in actions that serve their own self interests while at the same time engaging in rhetoric to the effect that they are also contributing to the public welfare. Whether there is reality beyond the rhetoric is subject to scrutiny and debate. This issue is made more obscure because some in the non-business public take self righteous positions in criticizing the apparently selfserving actions of American business decision makers.
In the last few decades, the American business community has given the appearance of becoming more socially aware and responsible. This may be a manifestation of the quest for legitimacy in the face of the challenge to the power and authority wielded by business executives. Many businesses have created and displayed business ethics statements. Some have gone to great lengths to indoctrinate their employees to act upon the tenants of their company ethics statements. For others such statements may be little more than marketing ploys. To the extent that business executives take their corporate ethics statements seriously and back them up with civic generosity and ethical behavior, this suggests that they are becoming less egoistic and more utilitarian in ethical orientation.
How do economies adjust to international disturbances? The first avenue of response is the economy's exchange rates between its currency and foreign currencies.
An exchange rate is the ratio of the value of a unit of one currency expressed in units of another currency, for example the USDollar:Euro. Currencies are traded on foreign exchange ("forex") markets around the world. There may be as many exchange rates as currency pairs. Exchange rates may exhibit very short-term differences across forex markets, but any such differences are quickly eliminated by international arbitrage, i.e., the simultaneous purchase in a lower-price market and sale in a higher-price market to capture profit. Purchasing a currency in lower-price market will bid up its price, and selling it in the higher-price market will cause its price to fall until price differences across forex markets are eliminated.
On September 27, 2019, the USD:Euro exchange rate was $1:E0.9142, or E1:$1.09387, on American and European forex markets. This means that on that date an American tourist traveling to Europe could buy 0.9142 of a euro for each dollar, or a European exporter wishing to convert dollars to euros could get 0.9142 of a euro for each dollar. It also means that a European tourist traveling to the U.S. could buy 1.09387 dollars for each euro, or an American exporter with euros to convert to dollars could get 1.09387 dollars for each euro.
Dollar depreciation would occur after September 27, 2019, if the price of a euro were to rise above $1.0937, or the price of a dollar were to fall below E0.9142. Dollar appreciation would occur if the price of a euro were to fall below $1.0937, or the price of a dollar were to rise above E0.9142. As the dollar depreciates, the euro appreciates, and vice-versa. The unit equivalence of a dollar:euro exchange rate, i.e., $1:E1, may occur by coincidence in forex market trading, but it is not of significance except possibly as a comparative or expectational benchmark.
International Disturbances
Suppose that some international incident causes a decrease of foreign demand for domestically produced "things" (anything, including merchandise, services, financial instruments, direct investments, etc.). If this decreased demand impacts primarily the Current Account (merchandise and services) of the nation's Balance of Payments (BoP), the result is a decrease of exports (X). A similar BoP event might emanate from an internally-sourced increase of the demand for foreign-made things. If the increased demand for foreign things impacts primarily the Current Account, the result is an increase of imports (M). In either case, net exports (X-M) decrease, portending a decrease of aggregate demand, a fall of real output, and an increase of unemployment.
But the story doesn't end there in either case. When foreign demand for domestic goods decreases, the resulting decrease of the demand for for the nation's currency relative to its supply on forex markets to purchase domestic goods precipitates a depreciation of the nation's currency. The exchange rate adjustment mechanism also works when the domestic demand for foreign-made goods increases. The increasing supply of the nation's currency relative to its demand on the forex market to purchase foreign goods also precipitates depreciation of the nation's currency. Similar narratives can be offered for an increase of foreign demand for domestically produced goods, and for a decrease of the domestic demand for foreign-made goods, but with ensuing appreciation of the nation's currency.
Flexible Exchange Rates
Under a flexible exchange rate regime, if depreciation occurs concurrently with the decreased demand for exports or increased demand for imports, the lower foreign price of the domestic currency makes domestic goods appear cheaper to foreigners and foreign-made goods appear more expensive to domestic consumers. Both effects tend to offset or reverse the decrease of aggregate demand, and ideally will prevent any net decrease. In this best-case scenario, the exchange rate depreciation serves to insulate the domestic economy completely from the effects of decreased demand for domestically produced things or the effects of increased domestic demand for foreign-made things. Output doesn't fall and unemployment doesn't rise.
Exchange rates respond to a variety of influences other than what is happening in the Current Account, and they often respond sluggishly to changing international conditions. If the exchange rate falls too slowly or doesn't fall far enough to prevent a net decrease of aggregate demand, output and employment may fall, at least temporarily. In such less-than-ideal scenarios, exchange rate flexibility may not be sufficient to completely insulate the domestic economy from foreign disturbances.
A deliberate policy to cause a nation's currency to depreciate may be intended to stimulate the economy by increasing exports. However, even as a depreciating currency lowers the delivered foreign-currency prices of the nation's exports, it raises the domestic-currency prices of the nation's imports. As the depreciating currency makes the delivered foreign-currency prices of the nation's exports appear lower to foreign importers, domestic exporters may raise the domestic-currency prices of their export goods to cover the higher-cost imported content. The net effect is to offset or neutralize the stimulative effect of the currency depreciation. The offsetting effect is larger the greater is the import content of the exported goods. The offsetting effect diminishes the shock-absorber property of exchange rate flexibility as well as neutralizing the stimulative effect of the currency depreciation.
Fixed Exchange Rates
In contrast, under a fixed exchange rate regime there is virtual certainty that international disturbances will impact the domestic economy. How they do so depends critically upon the strengths of secondary effects. One way in which exchange rates may be fixed is for government to specify an official exchange rate, and then to employ the police power of the state to punish transactions at any exchange rate other than the official rate. With an overvalued currency that cannot depreciate, increasing imports or decreasing exports cause a growing current account deficit that decreases aggregate demand. Output and income fall and unemployment rises.
Secondary effects may ameliorate the contraction. Consequent upon the falling incomes, the demand for money decreases, causing an excess supply of money at the current interest rate. In the Keynesian transmission mechanism, the excess supply of money causes the demand for bonds to increase, raising bond prices and depressing interest rates. As interest rates fall, interest-sensitive consumer and business investment spending increase. In the monetarist transmission mechanism, some to the excess money supply goes directly to consumption spending, irrespective of interest rates. In either case, the increased spending causes aggregate demand to recover, thereby ameliorating the initial contraction.
But other secondary effects may dampen the amelioration. The emerging BoP deficit has to be paid for by an outflow of money, represented by the excess supply of dollars to the forex market. In David Hume's 19th century discussion of the price-specie flow mechanism, gold would flow out in payment for the imports. In the 21st century, the money outflow usually is accomplished by foreigners acquiring ownership of dollar-denominated bank balances in payment for the excess of imports over exports. The money outflow decreases the account balances of local citizens and the reserves of their commercial banks. This outflow of money and reserves has the effect of decreasing the money supply. This diminishes the excess supply of money and may prevent the interest rate from falling.
If the outflow of money and reserves is sufficient to eliminate the excess supply of money, bond prices won't rise, interest rates won't fall, output won't increase, and the price level won't rise. This implies that when exchange rates are fixed, an international disturbance is likely to have adverse impact on the domestic economy when all of the secondary effects are taken into account. This also implies that in the case of a fixed exchange rate regime (like the 19th century gold standard or the 20th century Bretton Woods regime) the BoP deficit will persist and there is no effective mechanism to relieve international disequilibria.
In the more liberal (market oriented) implementation of a fixed exchange rate regime, a designated government agency (central bank or treasury department) enters the open market for foreign exchange when the exchange rate departs too far from the official rate (i.e., above or below specified boundaries on either side of the official rate). The exchange control authority purchases or sells foreign exchange by selling or purchasing the domestic currency. The net export decrease also decreases aggregate demand. Output and income falls, and unemployment rises.
As income falls, the demand for money decreases. In the foreign exchange market the excess supply of dollars can be eliminated by a central bank or treasury purchase of dollars by selling enough foreign currency. This amounts to an open market sale in the foreign exchange market, the side effect of which is to destroy money and bank reserves. This has the effect of decreasing the money supply to eliminate the excess supply of money caused by the decrease of money demand. If the central bank or treasury keeps the local currency from depreciating by selling foreign currency, the domestic economy is likely to be impacted adversely by the external disturbance. As long as the BoP deficit persists, there is no effective mechanism to alleviate international disequilibria. And, since domestic monetary policy has been dedicated to fixing the exchange rate, the central bank cannot use it to address domestic macroeconomic issues such as inflation or unemployment.
Unfortunately, there is a severe limit to the ability of a nation's central bank or its treasury to prevent depreciation of its own currency. It can prevent depreciation only as long as it is able to supply the foreign currency to the foreign exchange market in buying back its own currency (thereby reducing the domestic money supply and the reserves of domestic commercial banks). Once the central bank or treasury stocks out of the foreign currency, it can no longer prevent depreciation of its currency. Depreciation ensues until the BoP deficit is alleviated. Experience during the post-Bretton Woods era (since 1972) suggests that central banks, singly or in coordination with other central banks, rarely have the will or enough foreign exchange reserves to fully alleviate BoP deficits.
A caveat to the fixed-exchange rate mechanism applies to interregional disturbances within a nation as well as to international disturbances among nations. Among the regions of a single nation in which the same currency is used throughout, the exchange rate among the regions implicitly is fixed at a 1:1 ratio. This means that no exchange rate variation can occur to provide insulation to a region from disturbances caused in other regions. Any disturbance originating in one region within a common-currency nation will be transmitted through the price, income, and employment adjustment mechanisms to other regions of the nation. This phenomenon may apply as well to the member states of an international common-currency area such as that within the European Union.
Exchange Rate Manipulation
A government may engage in exchange rate manipulation in order to promote growth and provide employment for its labor force. By keeping exchange rates between its currency (the yuan or renminbi) and other currencies fixed at sub-market levels, the government of China has created an artificial advantage for its manufacturing enterprises. This artificial advantage has promoted growth and sustained Chinese employment by enabling perpetual trade surpluses for China and corresponding trade deficits vis-a-vis China for many of its trading partners, including the U.S. and many E.U. member countries.
Keeping a nation's exchange rate undervalued on forex markets tends to cause unemployment in the trading partners. U.S. and E.U. officials have pressed Chinese officials to cease fixing yuan exchange rates, thus allowing the yuan to appreciate relative to the currencies of its trading partners. Yuan appreciation would discourage imports from China and encourage Chinese imports of goods and services from the trading partners, thus alleviating the trade imbalances with China and unemployment in the trading partners. At the behest of its trading partners, during the early years of the twenty-first century China has begun to allow its currency to appreciate in stages.
Policy Implications
As the world economy becomes progressively more open and economically integrated, the vehicles for macroeconomic adjustment to internationally-sourced disturbances attain ever greater significance. Basically, there are only three macroeconomic adjustment vehicles: exchange rates, domestic prices (including interest rates), and domestic employment (and incomes). A progression of "if statements" identifies the relevant adjustment possibilities:
1. If exchange rates are allowed sufficient flexibility, they may serve as "shock absorbers" for the domestic economy against internationally-sourced disturbances.
2. If exchange rates are fixed by government authorities, domestic prices and incomes assume the burden of adjustment.
3. If domestic prices are insufficiently flexible, the adjustment process must descend upon domestic employment and incomes.
4. If government authorities employ macropolicy to stabilize domestic prices and incomes, exchange rate flexibility must serve as the adjustment vehicle.
5. If government authorities attempt both to stabilize domestic prices and employment and to fix exchange rates, there is no effective vehicle of macroeconomic adjustment to international disturbances. In the absence of an effective adjustment vehicle, payments imbalances will persist.
An important conclusion emerges from these considerations: the degree of domestic macroeconomic stability of a nation may depend upon the degree of flexibility that its government accords to rates of exchange between its currency and other currencies. As a general rule, we may expect domestic macroeconomic conditions in any economy to be more volatile in response to international (or interregional) disturbances the less flexible are its exchange rates. Fixing or stabilizing exchange rates forces the adjustment to international disturbances upon domestic macroeconomic conditions of prices, incomes, and employment.
Externalities to production processes are also known as "spillover" benefits and costs because they affect parties other than the producers and consumers of the products. The causers of the effects neither enjoy the benefits nor suffer the costs. In both cases, the effects are external in the sense that they descend upon third parties.
The economic implication of externalities is that they are not registered in the production costs, the product prices, or the producers' profits. In this sense they are distortions that send false signals to producers about how much of products entailing spillovers to produce, and to consumers about how much of the products to buy.
The market demand for a product entailing a spillover benefit fails to recognize the benefit, so it is lower relative to market supply than it would be if the benefit were recognized. The product price is too low to recognize the spillover benefit, so less of the product is produced than would be produced if the external benefit were recognized by market demand.
The market supply of a product entailing a spillover cost is greater than it would be if the spillover cost were recognized. This causes the price of the product to be too low since the spillover cost is not included in production costs. Producer profits are greater than they would be if the external costs were internalized. At the low price that fails to cover the external cost, too much of of the product is demanded and produced.
Developed nations with market economies often adopt market-modification approaches for dealing with spillover effects. Market-modification approaches have included subsidies to encourage the production of more of those goods yielding spillover benefits (e.g., health and education services) to third parties, and taxes levied upon goods causing spillover costs in order to discourage the production and consumption of as much of those goods.
These approaches enhance enterprise freedom to produce goods yielding positive spillovers but constrain enterprise freedom to produce goods causing negative spillovers. Subsidies that encourage the production of goods yielding spillover benefits broaden the range of consumer choice; taxes that discourage the production of goods causing spillover costs narrow the range of consumer choice. The "trick" is to provide just enough subsidies or impose just enough taxes to achieve optimal enterprise freedom and consumer sovereignty, but this has proven a difficult task for even the most sophisticated and well-intentioned democratic governments.
The tax on spillover-cost pollution internalizes the externality by raising the cost of continuing to pollute. The polluter can avoid the cost of the pollution tax only by diminishing the pollution. But the equipment necessary to diminishing the pollution (filters, scrubbers, coolers, noise dampeners, etc.) must be purchased, and this too tends to internalize the external cost. Once a pollution tax has been levied, a second-level approach, but one rarely implemented, is for the government to use the tax revenues to compensate the innocent third parties who have suffered the adverse effects of the spillover costs. More often than not, governments find other uses for such tax revenues that are unrelated to the pollution that was taxed.
Another, but more controversial, market-based approach to dealing with spillover costs is to specify rights to pollute at levels that society deems tolerable (in current political discussion, a "cap" on pollution), and then allow (and promote) market trading of the pollution rights among firms in polluting industries. In a so-called "cap and trade" approach to dealing with environmental pollution, the expenses that firms incur to buy such pollution rights cause them to internalize the spillover costs of pollution so that they show up in the firms' income statements. Firms that sell their pollution rights have to incur the expenses of diminishing their pollution, thereby internalizing the spillover cost. However, if pollution rights are set too high or are given away to current polluters, the cap and trade system will be meaningless.
In centrally planned economies, externalities can be dealt with simply by planning to increase the production of (allocate more resources to) those goods yielding spillover benefits, and to diminish the production of (divert resources away from) goods causing spillover costs. Unfortunately, neither spillover costs nor spillover benefits were high in the central planning priorities of the Soviet Union or its satellite states. Education and health services were typically underfunded, and pollution often was ignored.
Developing nations in the so-called "third world" rarely are able or willing to address either spillover benefits or spillover costs. Some developing nation-governments have been known to invite polluting industry relocation from "first world" countries with stringent anti-pollution requirements in order to gain the job creation and income generation benefits, in spite of the pollutants that will descend upon their citizens and their neighbors.
Market modification approaches, when they are successful, may head off extreme approaches to replace market capitalism with more authoritarian forms of economic organization.
Globalization is not a new phenomenon. The ancient Greeks followed by the Romans effected early globalizations of their known worlds by conquest. Genghis and Kublai Khan accomplished globalization from Austria to the Pacific Ocean by both conquest and trade. Globalization ensued with Spanish, Portuguese, Dutch, and English exploration and colonialization. The Soviets and the Nazis attempted their own versions of globalization via invasion and subjugation. Post-WWII American dominance effected the recent form of globalization through trade and investment.
The dispersion of the Jewish diaspora through Europe and much of the rest of the world has been a form of globalization effected by expulsion and migration. Both Catholic and Protestant churches have conducted their own versions of globalization through missionary efforts. ISIS is attempting globalization of its version of Islam via migration and terrorism.
For better or worse, all of these episodes of globalization inevitably resulted in cultural dilution, dispersion, merger, and assimilation. All have induced migrations of various magnitudes, and each of has elicited popular reactions, often by nationalists and nativists wishing to preserve their cultures, religions, languages, and ethnic or racial identities.
Globalization-induced migrations cause least social disruption when the migrants willingly and quickly become acculturated to their new environments. Frictions occur when the migrants insist upon maintaining their own cultures and the recipient societies fail to tolerate multiculturalism.
The latest episode of globalization has occurred via international commerce and investment, education, and television, and it has been driven by the spread of technological advance and the internet. These phenomena have elicited emigration of more intellectually/scientifically/mathematically capable people from India, China, and other regions to the U.S. It is well-understood that the capable and fittest (i.e., the risk-assuming entrepreneur types) get up and go, leaving the aged, incapable, and risk averse to fend for themselves.
Twenty-first century globalization is driven by advancing technology and the near-universal availability of technological and political information. Populist governments may attempt to slow the process of globalization, but they are unlikely to prevent globalization from affecting their populations unless they can interrupt the information flow and opt to close their economies and polities in favor of complete autarky.
Economists distinguish between economic growth and economic development. "Growth," taken to be an improvement in the material well being of humans, is usually measured as the rate of increase of per capita real income or output of a society. "Real" means that adjustments have been made to eliminate the effects of inflation so that the real component of nominal income increase can be examined. "Per capita" means that some measure of the total output of a society, typically its Gross Domestic Product (GDP), has been divided by the population of the society to get a measure of income on a per-person basis.
"Development" is understood to mean change in the structure of society. The various dimensions of social structure include economic, social, political, moral, religious, and environmental. Development is both a requisite of growth and a consequence of growth--they are inseparable.
A serious problem is that development is typically disruptive of social structures, and thus entails costs. While by definition growth yields only benefits, development seems to involve mostly costs. A rational judgment of whether a process of development cum growth is desirable should be based on the relationship between the benefits of growth against the costs of development, i.e., Bg/Cd. If the value of the ratio of Bg/Cd is greater than 1, the growth-development process is desirable. It is undesirable if the value of the Bg/Cd ratio is less than 1.
Economists make the case that the most effective poverty-alleviating vehicle over the past couple of centuries has been economic growth, and that market economies are more favorable to growth than are authoritarian economies.
A modern economist is led to the suspicion that the suffering of the poor may be less amenable to relief by sharing the existing wealth than by a process of economic development that increases the society's stock of capital (which is part of its physical wealth). The poor are helped via the "spill-over effects" of employment and income generation, and in terms of a growing volume of lower-priced consumables that are more affordable to the poor.
There is a good bit of evidence in the literature of economic development that with continuing growth of the global economy, income per capita has risen. Even the poor at the lower end of the income spectrum usually enjoy welfare gains, although the gap between their incomes and those of the wealthy (successful entrepreneurs) may widen. This is not to deny that some elements of any society may become worse-off as economic development ensues, but the same probably would be happening in a stagnant economy. Even so, I am compelled to the conclusion that there is likely to be greater potential for relief of poverty in entrepreneuralizing the world's scarce resources than in socializing them. The most likely outcome of the latter is to ensure the perpetuation of poverty.
Because of continuing economic growth over the past couple of centuries, most people have become materially better-off than their predecessor generations. And those who live in the societies that have enjoyed the fastest rates of economic growth may “live like kings” relative to people in societies that have experienced little or no growth. An “international demonstration effect” occurs when people in low-income societies become aware of higher living standards in societies that have enjoyed faster rates of economic growth. International demonstration effects have motivated people in low-income countries with authoritarian political regimes to try to achieve the benefits of faster economic growth by replacing their regimes with democratic polities coupled to market economies.
It is a rough and imperfect analogy that "A rising tide floats all boats." Economic growth makes a society on average better-off, but some become better-off faster than others, and some may actually become worse-off, thereby worsening both local and global distributions of income and wealth. Even if those toward the lower end of an income or wealth distribution have become materially better-off, a widening distribution tends to breed resentful envy among those at the lower end of the distribution toward those closer to the top.
Resentful envy may spill over into social dissatisfaction and political unrest. Possible outcomes might be parliamentary efforts to curb the income earning or wealth accumulation abilities of those toward the upper end of the distribution, or to redistribute income and wealth from those at the upper end of the distribution to those at the lower end. A more extreme outcome might be a movement (parliamentary or revolutionary) to replace market capitalism with some form of socialism.
In the early twenty-first century, we see low-income societies with authoritarian regimes attempting to achieve the growth benefits of successful market economies with democratic polities. It is ironic that at the same time we find in higher-income market economies with democratic polities efforts to achieve distributional equity by socializing the distributions of income and wealth.
Prior to the middle of the 18th century, most regions of the world were primarily agrarian in character. A number of mechanical and power inventions in the second half of the 18th century ushered an "industrial revolution" into European and North American regions. The new inventions replaced animal power with steam powered primarily by fossil fuels, first coal and subsequently petroleum. An emerging avalanche of mechanical inventions increased productivity and enabled economic growth to become a recognized phenomenon.
In the United States, agricultural employment dropped from over 80 percent of the U.S. labor force in 1750 to less than 2 percent by the turn of the 21st century. Manufacturing and commercial employments filled the gap. Manufacturing employment peaked at nearly 50 percent of the U.S. labor force during World War II, and then fell to under 20 percent by the turn of the 21st century. Commercial and professional employments grew toward 80 percent of the U.S. labor force by the early decades of the 21st century. Today, service employments in wholesale and retail distribution, education, healthcare, and design, repair, and maintenance services account for an ever-increasing portion of U.S. labor force employments.
A second "industrial revolution" unfolded in the 1990s in the forms of emerging digital and information technologies. Manufacturing industrialization never was destined to be a permanently dominant feature of the U.S. economy. It served as a bridge between the U.S. agrarian economy prior to 1750 and the so-called "service economy" that we know today.
After his election in 2016, President Trump elevated the revival of U.S. manufacturing industry as a top priority. This strategy entails a willingness to forego the welfare benefits of specialization by comparative advantages and trade in favor of manufacturing job preservation and creation.
The U.S. economy undoubtedly possesses comparative advantages in a number of manufacturing industries, prominent among which are chemicals, pharmaceuticals, and aircraft. But manufacturing comprises a small and declining share of U.S. economic output and employment. The U.S. now employs fewer than 20 million workers (under 13 percent of its labor force) in manufacturing and mining but more than 120 million workers (over 80 percent of the labor force) in service establishments (https://www.bls.gov/emp/ep_table_201.htm).
In 2014, the U.S. exported $1.6 trillion worth of manufactured goods while importing nearly $2.4 trillion of manufactures (https://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf). It exported $743 billion of services while importing $481 billion of services. So, in 2014 the U.S. ran a trade deficit of $752 billion in goods, but a surplus of nearly $262 billion in services. The U.S. continues in the process of shifting from its historic identity as an agrarian economy, through its bridge identity as an industrial economy, to its current and future identity as a service economy.
What's the difference between a good and a service? A good has tangible characteristics and a life of some duration depending on whether it is immediately consumable, a non-durable (by convention, with life up to about three years), or a durable good (with life longer than three years). The typical life of a service is the instant that it is rendered. A service may exhibit no tangible characteristics although the provision of the service has tangible effects. Except for things like antique furniture, old-master paintings, classic cars, and other things that may convey impressions of wealth or elitism, people want goods not for themselves but rather for the stream of services that they can render over their lifetimes. It's really all about services, irrespective of tangible characteristics or duration of life.
Mr. Trump seems willing to sacrifice the welfare gains of free trade for a population of more than 320 million souls to the revival of manufacturing industries for which the U.S. may no longer have comparative advantages. So why is Mr. Trump putting such emphasis on bringing sweaty, hard-work, low-wage manufacturing jobs back to the U.S.? Most of the jobs lost to foreign manufacturers were not "good" (high-wage) jobs anyway. The Trump administration's emphasis on reviving a declining manufacturing sector runs counter to U.S. comparative advantages and is unlikely to increase labor force participation or to bring about wage increases.
The U.S. economy exports services to pay for many manufactured goods that it imports from foreign suppliers who possess comparative advantages relative to the U.S. Rather than promote the revival of manufacturing industries for which the U.S. lacks comparative advantages, the Administration would better serve the needs of the U.S. economy by promoting the growth of higher-wage U.S. service employments (e.g., in information technology, logistics, education, finance, insurance) for which the U.S. does possess comparative advantages so that their services can be exported to pay for manufactured imports.
Industrial policy has been described as government picking winners and identifying losers among the resident industries within the nation, and then acting to encourage and support the chosen winners. A special variant of industrial policy that has been practiced in several so-called "third-world" nations is "import-substitution industrialization" under which the government of the nation promotes the development of domestic industries with the intention of decreasing imports, acquiring comparative advantages, and modernizing its economy.
The idea of an industrial policy has been mostly dormant in American political thought and policy discussions now for nearly thirty years. Historically, American presidential administrations have shied from implementing industrial policies, although until recently Democrats seem to have been more open than Republicans to discussing the possibility. But the election of Republican Donald J. Trump to the U.S. presidency in 2016 has brought industrial policy to the fore again.
Ideas about governmental implementation of some sort of industrial policy may be dated to as early as the pre-Industrial Revolution era of mercantilism. Mercantilist policy, though represented in no single coherent statement or document, stood upon three pillars: detailed regulation of domestic crafts and emerging industry, maintenance of colonies, and pursuit of a favorable balance of trade to accumulate wealth. Jean-Baptiste Colbert was France's finance minister under Emperor Louis XIV. Through Colbert's dirigiste policies, the French government supported domestic manufacturing enterprises in a wide variety of fields. The authorities established new industries, protected inventors, invited immigration of workers from foreign countries, and prohibited French workers from emigrating.
The approach pioneered by Colbert in France came to be known as the "Colbertist model" of industrial intervention. It was practiced as well during the Industrial Revolution by German, Japanese, Russian (later Soviet), and other governments from the mid-nineteenth century forward. It became the main vehicle of European industrialization leading up to World War I and continued as such between the world wars. It became a tenet of European development policy in the post-World War II era.
Although several U.S. presidential administrations have been tempted to adopt a European-style of selective industrialization, they generally have eschewed a national industrial policy. Democrats historically have been more favorably disposed than Republicans toward implementing an industrial policy. During the U.S. presidential campaign of 1984, Democratic candidates came out in favor of implementing some form of national industrial policy, but Ronald Reagan's election to the U.S. presidency quelled such interest at the national level. More recently, Democrat Barack Obama's administration engaged in implicit industrial policy during the so-called "Great Recession" of 2008 and the follow-on period of recovery by bailing-out certain financial institutions and automobile manufacturers that were deemed "too big to fail."
Various U.S. states have practiced forms of industrial policy in their efforts to attract industry or particular firms to locate plants within their borders. The economic principle underlying state-level industrial policy is the contention that since capital is generally more mobile geographically than is labor, capital should move to sites where it can employ capable and well-trained labor. States vie with one another to demonstrate that their labor forces are capable and well-trained, and that they possess the physical and financial infrastructure to support the sought-after industry.
Most recently, President Trump has taken up industrial policy via tweeting and shaming specific companies for proposing to move production to Mexico. Why might President Trump's industrial-policy-by-twitter-post fail? Or if it initially appears to succeed, why might it lead to more bad policy? Prior American administrations generally have shied from implementing industrial policies in recognition that bureaucratic selection of industries to support is usually inferior to the "wisdom of markets." This is because competitive advantages among firms often are prerequisites to discovery of comparative advantages of regions, and markets usually are superior to political authorities at identifying competitive advantages among firms.
The most likely reason for an industrial policy to fail is that bureaucratic choices of national-champion industries may not correspond to the nation's natural or acquired comparative advantages. If an administration chooses to support non-comparative-advantaged domestic industries, production costs will be higher than in potential trading-partner nations that do possess the respective comparative advantages. Consumers of the nation will pay higher product prices for domestically-produced goods and enjoy lower levels of welfare than they might have enjoyed if they had consumed comparable imports from regions possessing the respective comparative advantages.
A reason that an initially successful industrial policy might lead to more bad policy is that the initial successes may encourage the administration to try to acquire or develop comparative advantages by deliberately choosing to support non-comparative-advantaged industries within its borders. The hope is that the "infant" industries may mature to the point that they eventually becomes globally competitive and achieve comparative advantage status. This hope may motivate government to fund research, to subsidize the chosen industries, and to implement tariff and NTB protections of them. Until the comparative advantages are achieved (if ever), its domestic consumers will suffer welfare losses because it is not importing lower-priced goods from regions that do possess the respective comparative advantages.
So, the crucial question for any national leader is whether he or she possesses the requisite acumen to pick actual or potential comparative-advantaged industries for the nation. If not, he or she may only be protecting and supporting non-comparative-advantaged industries and preventing them from offshoring new production facilities to foreign sites where the true comparative advantages lie.
Any society exhibits distributions of wealth and income ranging from the poorest at one end to the most affluent at the other. Inequality of wealth holding and income earning capability is inherent in differential physical abilities, intellects, education, experience, attitudes toward risk, entrepreneurial drives, and abilities to "game the system" among individual members of the society. Even if an all-powerful authority were to effect a one-time perfectly equal distribution of wealth and cause every individual to receive the same income as every other individual, the perfectly equal distributions would be disrupted almost instantaneously by the exercise of the differential characteristics of the individuals.
Inequality and Inequity
Inequality in the distribution of something across a population is a descriptive or factual matter. Inequity is a subjective matter, a matter of perception that the degree of factual inequality is unsatisfactory. A national income that is perceived to be too unequally distributed across the population of the nation may be judged to be inequitable. By the same token, a perfectly equal distribution of income across a society that values productive contribution and rewards merit also might be judged to be inequitable. In such a society, some distributional inequality attributable to reward for meritorious productive effort might be accepted as equitable.
From a strictly economic perspective, an equitable distribution of income would occur if every single economic resource received income equivalent to the value of his or her marginal product (i.e., the addition to total product consequent upon using one more unit of the resource). This outcome should obtain under ideal circumstances of perfect competition in all product and resource markets. But of course the real world is something less than ideal in that some economic actors are able "to game" the system by establishing monopolistic position in their respective markets. Others without monopoly power find themselves exploited in those same markets.
Monopoly power enables economic actors to capture returns greater than the values of their marginal products, and they are thus able to impose incomes less than the values of marginal products on economic actors in their employ or otherwise under their control (slavery being the ultimate vehicle to extract product value). Economic actors who establish monopoly power and capture gains greater than the values of their marginal products may either spend their gains on consumables or invest them in financial or physical capital assets. Gains so invested accumulate as wealth. The judgment that the wealth distribution of a society is inequitable is based on the exercise of monopoly power by some at the expense of others.
Redistribution
In democratic societies, a market-modification approach is typically used in dealing with the perception of inequity of the income distribution. The usual approach is to couple progressive income taxation with a transfer payment system. Progressive income taxation applies ever-higher tax rates to a succession of higher personal income tax brackets, thereby to level disposable incomes "from the top." The tax proceeds, or some of them, are then redistributed to lower-income members of society upon some pre-established means criteria to raise disposable incomes "from below." Leveling disposable incomes from the top and raising the income floor from below has the effect of moderating the degree of inequality of the income distribution.
The ideal would be to tax away all income captured by exercise of monopoly power, but not to tax entrepreneurial profits. Resentful envy of entrepreneurial success will ensure that entrepreneurial profits must be taxed at some non-trivial rate, but taxing entrepreneurial profits at a too-high rate may serve only to "kill the goose that lays the golden eggs." Since a further difficulty is that it is virtually impossible to distinguish monopoly income from entrepreneurial profits, the trick is to tax all profits at a rate that is just high enough to capture monopoly income, but not so high as to impair entrepreneurial incentive.
The intent of a redistribution strategy is to enhance the exercise of consumer sovereignty and broaden the range of consumer choice at the lower end of the income distribution spectrum at the expense of enterprise freedom toward the upper end of the income distribution spectrum. An unintended side effect of income redistribution is likely to be impairment of incentives at both ends of the income spectrum. Why should a higher-income recipient continue to work as hard and assume so much risk if an ever-larger proportion of his additional income is taxed away? Why should a lower-income recipient continue to work as hard if his subsistence and comfort requirements can be met by ever-richer transfer payments (e.g., welfare entitlements)?
Complaints about distributional inequities also may be based in non-economic perceptions of unfairness in the means of acquiring wealth or capturing income. They may be based on the perceived obscenity of the width of the range between the smallest wealth holding and the largest wealth holding, or the range of abilities to earn or otherwise capture income. The concern about distributional unfairness may be a matter of resentful envy in the minds of those toward the bottoms of the distribution ranges when they observe the wealth held or incomes captured by those toward the top of the distribution ranges.
Public Policy
Inequality in the U.S. distribution of income was a prominent issue in the 2016 U.S. presidential election, and it has been a topic discussed in 2020 Democratic presidential debates. In a democratic polity that values "rule of law," citizens are declared to be equal under the law, but they are in fact not born equal. The principal causes of inequality are inherited abilities, diverse educational opportunities, and entrepreneurial orientations. Of these, only educational opportunity can be addressed by public policy. While universal educational opportunities can be provided, it isn't possible to make people avail themselves of them (one can take a horse to water but he can't make it drink). And, the myriad other possible causes of unequal distribution may be even less amenable to public policy treatment.
The liberal or "progressive" approach to redressing the imbalance between the upper and lower halves of the income distribution has been redistribution. A more centrist or conservative approach has favored relying on economic growth via entrepreneurial investment to "float all boats." The problem has been that the "boats" of the upper-income recipients have risen while those of the lower-income recipients seem to have remained at about the same level over the past 30 years.
Trading Venues
The venues in which goods and services are traded for each other or for money are euphemistically called "markets" by economists. Markets exist both locally and globally and may be populated by as few as two parties or as many as the populations of whole nations or the entire globe. There may be as many markets as there are discrete and identifiable items for sale and locales in which they are traded.
The items traded in markets include both tangible items and such intangibles as personal and professional services and human labor. Personal services include such things as hair cuts, manicures, and entertainments. But tangible goods are desired for the stream of services that they render over their lifetimes which may be as short as the food consumed at lunch (a so-called consumer non-durable), or they may stretch for years as in the case of a washing machine (a consumer durable). Services have short lifetimes, often approaching the instant of provision. The only significant difference between a tangible good and a service is the duration of time that the service stream is rendered.
Professional services include health care, education, consulting, and the transmission of technological information. Professional services also involve the exchange of a variety of financial instruments including stocks and bonds, insurance policies, banking services, and currencies. In earlier times, monies in tangible forms (copper, gold, or silver coins) were traded in local and foreign markets. Today, currencies recorded in digital formats on the books of banks are intangibles that are traded internationally on foreign exchange (forex) markets.
Signaling Change
In so-called "market economies," markets are the venues in which resources are allocated to production processes, and they serve as the vehicles for distributing produced goods and provided services to consumers and users. Market prospects and outcomes serve to allocate resources and motivate adjustments to production volumes, including starting new ventures and terminating production processes.
Markets accomplish these functions with price changes that signal changing opportunities to market participants. Prices rise when demand for an item increases relative to supply of it, or supply of the item decreases relative to demand for it. Prices fall when demand decreases relative to supply, or supply increases relative to demand.
Consumers tend to purchase less of items when their prices rise, and more of items when their prices decrease. The rising price of an item signals producers to increase its production; a falling price signals them to decrease production. Increasing prices dampen demand even as they stimulate supply. Falling prices discourage supply even as they stimulate demand.
Market Imperfection
Markets have turned out to be imperfect motivators of production, allocators of resources, and distributors of products. Some market participants inevitably accumulate market power and learn how to "game the system" to their advantages. In so doing they may capture incomes higher than warranted by their productivities, and this may enable them to accumulate great wealth and indulge in "conspicuous consumption." This inevitably leads to inequality of income and wealth distributions that become perceived as inequitable and which may breed resentful envy among the less fortunate.
Even in nominal market economies, government officials sometimes judge market outcomes to be unsatisfactory. A government may attempt to change market outcomes by subsidizing favored industries, firms, or products, or by imposing tariffs on imported goods that compete with domestic products. Subsidies provided to the manufacturer may lower the delivered price of a product by offsetting production costs, or it may simply enable the manufacturer to pad its profit margin. A tariff provides an implicit subsidy to domestic manufacturers if it causes the domestic market price of the product to rise. Tariffs often are imposed to offset or neutralize (i.e., "level the playing field") foreign producers' comparative advantages.
Market economy exhibits a democratic characteristic in that it enables widespread (though not universal) participation in market activities. Only those with sufficient purchasing power, either from income or wealth, can participate in markets. The unemployed, poor, and homeless have lesser abilities to participate in markets than do those who earn greater incomes or possess sufficient wealth. Distributional inequalities constrain market participation by those toward the lower ends of the distributions even as they provide exceptional participation opportunities to those toward the upper ends of the distributions.
Basically there are only three ways to get something that you want: to work and earn income to buy it, to be given it by a benefactor, or to steal it. Regrettably, some people with little purchasing power have circumvented markets by resorting to theft to fill their needs and wants. And markets are amoral in the sense that they accommodate sales and purchases of any type of product, including the things (e.g., military style weapons) and substances (e.g., opioid drugs) that cause negative spill-over effects which harm the public.
Government Roles
Governments may try to avert negative spill-over effects of market transactions by using the police power of the state to prohibit the production, import, sale, or consumption of things or substances that cause negative spill-over effects. But prohibition has rarely been found to be effective. The alternative to prohibition is to tax (or otherwise penalize) the production or consumption of such substances (e.g., tobacco products) in order to cause their market prices to rise.
If the demands for such substances are at all elastic (i.e., responsive) with respect to price changes, the higher prices will decrease the quantities demanded of such substances. But the demands by addicts may be quite inelastic with respect to price. Since higher prices have little effect on the volume of their purchases, addicts may devote ever larger portions of their incomes or wealth to purchasing those substances until their resources are exhausted. In desperation they may resort to criminal activity to get what they want.
Government manipulation of market prices distorts market outcomes by sending false signals to producers and consumers. A government that regards a market-determined product price to be too high or too low may impose a price ceiling or a price floor, respectively. Price ceilings often have been imposed in the wakes of natural disasters in order to prevent "price gouging" in the sale of essential items. But rising market prices would serve to stimulate production and dampen demand, and to ration short supplies across the greater market demands until the the crises have passed.
A price ceiling set below the "equilibrium price" (i.e., the price that would clear the market) will deplete inventories and cause shortages of the product. A price floor set above the equilibrium price may lead to excess production and inventory build-up. A price ceiling signals producers to decrease production, while a price floor signals producers to over-produce the product. A price ceiling below the market price may induce consumers to try to purchase more of a product than is available or can be produced. Perceptions of excessive profits in the pharmaceutical industry have induced governments to consider imposing drug price ceilings to reduce profitability. However, price ceilings set too low would discourage production and may cause drug shortages.
A price floor set above the equilibrium price in a market will discourage consumer purchases. A minimum wage imposed by government in a labor market functions as a price floor unless it is set below prevailing wage rates. A minimum wage set above prevailing wage rates discourages companies from offering employment and may motivate investment in labor-saving technologies.
Market Alternatives
Market economy is thought to be more compatible with democratic polities rather than with authoritarian regimes. Markets are the principle vehicles that accomplish resource allocation and product distribution in economies organized as capitalism (i.e., an economic system based on the private ownership of the means of production that are operated for profit).
Fascism has been described as authoritarian capitalism. In a fascist regime, the dictator (or his minion) may determine the economy's product mix but leave the ownership of production in private hands and rely upon markets to handle resource allocation and product distribution. Because the authorized quantities of some items may be less than market demand, rationing may be used to ensure that favored parties get the available quantities.
Advocates of socialism have resolved to replace markets with decision making by all-knowing authorities to determine what goods and services to produce for their societies, allocate resources to production of those goods and services, and distribute output to consumers and users. But the "all knowing" part has become the Achilles heel of the socialist quest. Even though efforts to establish functional socialism in the former Soviet Union and several nations following the Soviet model may have been able to determine the product mix, the resource and consumer needs knowledge requirements were so great that the authorities still had to rely upon markets to allocate many resources and distribute most outputs to consumers and users.
Bureaucratic morass led to the fall of the Soviet Union in 1990. This failure illustrated the contention that all of us together participating in markets are smarter and more efficient than a bureaucratic elite attempting to make resource allocation and product distribution decisions based on inadequate information. After the demise of the Soviet Union, most of the nations that were attempting to follow the Soviet example gave it up in favor of a market economy approach.
North Korea is an authoritarian holdout, but even the regimes in Cuba and China have acquiesced in allowing market mechanisms some roles in allocating resources and distributing products. It's ironic that developing economies in the world today seem to favor a market economy model rather than authoritarian socialism even as the polities in some of the more developed nations of Europe and North America are flirting with socialism.
Policy Requisites
Given the acknowledged flaws in the functioning of markets, the appropriate role of polity is to establish and enforce the "rules of the game" that encourage competition, avert the accumulation of monopoly power and punish the exercise of it, and prevent distortions to market processes.
The brand name of each of the items in this list is a registered trademark. The following list is not exhaustive. I am sure that there are other items that can be added to the list.
The 1938 Fair Labor Standards Act that "ensures a minimum standard of living necessary for heath, efficiency, and general well being of workers" was based upon an unspoken premise that may not be sustainable for the future, i.e., that the well-being of a person and his dependents is determined by the income earned by working.
It is not at all certain that in the future (50 or more years on), with on-going technological advances and continuing automation, enough jobs can be provided by the economy or the government to ensure adequate earned incomes. In the future it may be necessary to rethink the working-income-eating nexus, with a shift from thinking about minimum-wage adequacy to thinking about minimum-income adequacy that is not based on working. There already are in place various income-floor programs that are not premised upon working, so maybe the burden of income adequacy should be placed upon those programs, and not at all upon the minimum wage.
If the goal of minimum wage legislation is to decrease poverty, a more effective way to do so would be to promote economic growth by (1) encouraging investment that increases productivity, and (2) promoting education and training that would enable workers to function in more productive occupations. Productivity increase can accommodate higher wage rates, whether or not a minimum wage is imposed.
An economic truism is that employment is offered only if it is justified by productivity. If a wage job won't pay for itself, it will not be offered, or the tasks formerly conducted by humans will be replaced by machines. An enforced increase of a minimum wage will result in automation if the mandated higher wage is not justified by productivity gains. If moderate increases of the minimum wage do not have employment decreasing effects, the implication is that the minimum wage increases may not have been needed at all, i.e., employers may have been increasing wage rates toward the minimum wage level commensurate with increasing labor productivity.
The federal minimum wage has been $7.25 per hour since July 24, 2009. During 2019 worker protests in a number of states have pushed to increase the federal minimum wage to $15 per hour, and this has become a topic discussed in the debates among Democratic presidential candidates. The imposition or increase of the federal minimum wage (or, for that matter, a state-imposed minimum wage) may have little adverse effect on employment if it only causes wage catch-up to productivity that has already increased. But if a mandated minimum wage rate becomes higher than justified by productivity increases, it is likely to curb employment increases and may precipitate actual unemployment.
If minimum wage increases lead and exceed productivity increases, they will hasten the process of substituting capital for labor as has happened in some states with mandated minimum wage rates that exceed the federal minimum wage. New capital investment will almost certainly entail automation that disemploys lower-skilled workers to seek jobs in other, lower-productivity jobs if they can find them.
Some older workers who become disemployed by automation may choose to retire and live on Social Security distributions and incomes from any savings that they have accumulated. Others, not finding jobs commensurate with their training, skills, and work experience, may become discouraged and drop from the labor force to live on social safety-net distributions (food stamps, housing supplements, etc.). Some workers may be able to retrain to undertake advanced-technology employments. The smaller number of still-employed workers who are capable of filling advanced-technology jobs may enjoy wages above the mandated minimum wage rates.
If newly mandated state minimum wage rates precipitate automation investment, it is possible that unemployment in those states might increase so that gross state incomes (GSI) could decrease even as their average wage rates rise. If this happens, poverty will not only be perpetuated, but it may become even deeper and more widespread as the divide widens between wages earned by the mass of conventionally-trained workers and those earned by the smaller cohort of higher-tech elites. State differentials in minimum wages may cause increasing income inequality. Lower wages in states without laws mandating minimum wages above the federal minimum may attract industry relocation that demands even more workers with higher-tech training.
Minimum wage rates increased in 20 states at the beginning of 2017. While the increases put more money in the pockets of lower-wage workers, it is likely to have resulted in fewer hours offered (e.g., decreasing over-time work). It also may have given employers less incentive to add to their payrolls. Making labor more expensive encourages businesses to invest in automation that eliminates jobs, and some jobs are lost to off-shore production facilities in lower-wage countries. Minimum wage increases also may dissuade firms from expanding because higher payroll costs cut into profit margins.
Income inequality is perpetuated between states that do and do not have minimum wage laws. A number of lower average income Southern states, Alabama, Louisiana, Mississippi, South Carolina, and Tennessee, have no minimum wage laws. These states default to the federal minimum wage as states with minimum wage laws progressively increase their minimum wage rates above the federally-mandated level. Minimum wage increases in the U.S. also may perpetuate income inequality between the U.S. and foreign sites where American companies off-shore production, but the U.S. government has no standing or authority to impose a federal minimum wage on actual or potential off-shored sites.
The decision options of an enterprise manager are constrained by the types and intensities of competition confronting the enterprise in the market for its products. The range of competitive types may be described along a continuum between two extremes called "pure competition" and "pure monopoly." In broad terms, the two extremes represent a maximum intensity of competition at one end and no effective competition at the other end. It must be admitted that very few industries and markets in today's world can be characterized by conditions at either extreme.
Prior to the middle of the nineteenth century, most business enterprises were organized as proprietorships or partnerships, and were generally quite small compared to many current business firms. Under these circumstances the hypothetical construct that economists have labeled pure competition may have been more than adequate to the task of analyzing business behavior.
With the popularization of the corporate form of business organization during the latter half of the nineteenth century, the scale of business enterprises grew rapidly. Business entities competed fiercely during the late nineteenth century, driving some of their competitors out of business and combining with others to effect what economists came to understand as monopoly. Indeed, Alfred Marshall's first edition of Principles of Economics in 1890 contained essentially complete expositions of both competition and monopoly, but mentioned nothing in between. Very little has been added to our understandings of pure competition and pure monopoly since 1890. But perhaps these two model types may have been adequate for describing and analyzing most real-world commercial and industrial contexts of that day.
As business organization, management, competition, and particularly governmental involvement in the commercial and industrial sectors evolved in the twentieth century, economists became ever more acutely aware that their theories of competition and monopoly represented polar extremes that were no longer descriptive of real markets. These theories served progressively less satisfactorily to describe and analyze the emerging competitive situations between the extremes. By the 1930s, economists were attempting to devise theories to fill the void between the extremes, and the adjective "pure" became the common descriptor of the theories at the ends of the competitive continuum.
By the late 1940s the emerging intermediate theories became classified into two broad categories that became known as monopolistic competition and oligopoly. Monopolistic competition entails a large number of small sellers who are essentially oblivious of each other's identities. Oligopoly entails a small number of highly competitive sellers in the market, each with significant pricing discretion and acutely aware of each other's identities and market practices.
We may question whether there are any good examples of monopolistically competitive markets. But this may be the wrong question to ask. The better question for any particular market under examination is whether monopolistic competition is an appropriate description. If there is a relatively large number of fairly small sellers in a market that is easy to enter, then either pure competition or monopolistic competition is indicated. If the managements of the firms can be observed to be trying to differentiate their products, then either monopolistic competition or oligopoly is appropriate.
There are two acid-test criteria for distinguishing monopolistic competition from oligopolistic competition. If competitors are essentially oblivious of each other's identities and profits tend to be dissipated due to entry of new firms into the market, then the market is best described as monopolistic competition. On the other hand, if the competitors are conscious of each other's identities to the point of devising market strategies to counter specific competitors, this is a sure sign that the market is best described as oligopolistic competition.
The number of competitors is not stressed as a critical distinction between monopolistic competition and oligopoly due to the importance of the relevant geographic market. In any Standard Metropolitan Statistical Area (SMSA) there may be hundreds of retail gasoline stations that are differentiated from each other by brand name and locale. Many of the stations likely are owned by a few distributors who dictate price changes to their station managers. This implies an oligopolistic market structure. The owners or managers of independent stations may set their prices vis-a-vis the prices of those other stations within sight up and down the street so that the relevant geographic market consists of a half-dozen or fewer stations in the near neighborhood. This also makes retail gasoline distribution essentially oligopolistic.
The critical criterion is not number of sellers, but rather consciousness of identities of competitors. Experience indicates that the majority of real-world competitive contexts are more appropriately described as oligopolistic markets than as monopolistically competitive markets. And we might be hard pressed to identify any actual pure monopolies apart from a remote gasoline station in the middle of the desert, fifty or more miles from any other gasoline station.
The term "monopoly power" has come into use in regard to market contexts. Monopoly power consists in the ability of a competitor to adjust product prices, differentiate their products from those of competitors, negotiate prices of inputs, and devise competitive strategies. Technically, market power pertains to the strength of the inverse relationship between price and quantity demanded (the shallowness or steepness of a curve in graphic space that depicts the price of a product relative to the quantity demanded of it, i.e., the "demand curve").
If a purely competitive market actually existed, the competitors would be "price takers" in the sense that they would have virtually no market power to set or change their product prices apart from market forces. Monopolistic competitors may exert some small market power with respect to their product prices, but their market power lies in efforts to differentiate their products from those of their competitors.
Pure monopolists and oligopolists may exercise significant market power to manipulate their product prices and adjust product designs. A pure monopolist would have absolute market power (discretion) to set its product prices and determine product designs, but it must accept the consequences with respect to quantities sold in the market. Oligopolists may both initiate and respond to competitors' price changes and product design changes, but they too must accept market consequences with respect to the quantities of their products that they can sell.
The implication of the possession and exercise of market power is the ability of business firms with sufficient market power to capture profits that exceed normal returns by exploiting employees, suppliers, and customers. Exploitation here means that a resource or employee receives a return (price or income) less than its marginal revenue product, enabling the employer to capture returns greater than its marginal revenue product. (The marginal revenue product of an input is the addition to total revenue from selling what is produced by employing one more unit of the input.)
Wages less than marginal revenue products serve to impoverish labor. Exploitative returns enable businesses to pay salaries to executives and governing board members that are higher than warranted by their marginal revenue products. Excessive executive salaries accumulate as wealth that aggravates distributional inequality and enables "conspicuous consumption" spending. Exploitation with respect to customers means that the seller is able to charge product prices greater than the sum of the costs of producing the products, thereby adding to profit and enabling executive salaries that are higher than warranted by their marginal revenue products.
How do businesses accumulate market power? The means of accumulating monopoly power include creating and launching new products, successful product differentiation of existing products, aggressive product marketing that may not be completely truthful, acquisition or merger with competitors (horizontal integration), acquiring sources of supply of inputs (vertical integration), blocking the entry of new competitors into their markets, and predatory pricing behavior intended to eliminate competitors. This is not an exhaustive listing of the possible means of accumulating monopoly power.
Economic thought acknowledges four broad types of resources: land, labor, capital, and entrepreneurship. Marginal revenue product can be used as a criterion to judge the presence of exploitation only with respect to inputs that can be varied incrementally. These include physical inputs, human labor, and the usage of existing capital equipment. But land, new capital investment, and invention/entrepreneurship entail acquisitions and implementations that are discrete and often large-scale events that are not subject to incremental change. The presence of exploitation cannot be judged with respect to discrete events.
Invention involves the creation of a new product or process; entrepreneurship occurs when risk is borne in attempting to market the invention on commercial scale. There is no guarantee of entrepreneurial success, and many entrepreneurial efforts fail. An inventor who succeeds as an entrepreneur is by definition a monopolist when the new product or process is introduced on markets. We would expect that in a competitive world, the inventor's initial monopoly power would be dissipated by entry into the market by product emulators. An entrepreneur may attempt to sustain the initial monopoly position with anti-competitive practices noted above.
Land acquisitions and capital investments that build the scale of an enterprise may constitute barriers to entry of potential competitors who cannot afford to "jump into the market" at large-enough scale to be competitive. The attendant monopoly power enables profitability and the accumulation of wealth by enterprise owners, executives, and governing board members.
It is clear that the accumulated earnings of an inventor or an entrepreneur cannot be assessed against marginal revenue product. Bill Gates, the inventor/entrepreneur of the MS-DOS operating system (and successive Windows incarnations), has accumulated substantial wealth. A debatable question is whether Mr. Gate's accumulated wealth is attributable to successful entrepreneurship, to the acquisition and retention of monopoly power in the oligopolistic market for computer operating systems, or to both.
Wealth also has been accumulated by successful trading in financial and currency markets (buying low and selling high). Successful trading is enabled by training, gaining experience, astute perception of changing market conditions, timing of purchases and sales, and sheer good luck. But unsuccessful trading results in losses that may occur about as often as gains. All traders are attempting to "beat the market," but over the long haul many traders are fortunate to break even. Yet some are successful and accumulate significant wealth. Wealth also has been accumulated by earning commissions on the management of other peoples' wealth.
It can be argued that successful market trading and wealth management activities provide valuable social benefits by adjusting the allocation of financial resources that enable the acquisition of real resources in economically efficient applications. Whether financial trading and wealth management are merit based or socially justifiable is open to debate, but it is clear that incomes captured in market trading and wealth management activities are not subject to marginal revenue product assessments.
Although it may not be possible to assess any such wealth accumulations against a measure of marginal revenue product, wealth accumulated by wealth management, financial market trading, and successful entrepreneurship may be perceived as warranted and socially tolerated. But wealth accumulated by exercising monopoly power may be judged to constitute exploitation to the extent that products may be priced to exceed their costs of production plus allowance to cover normal overhead expenses. The resulting profitability implies that the resources employed in producing the product received returns less than their respective marginal revenue products. Unfortunately, it is virtually impossible to separate any accumulated bit of wealth into entrepreneurial and monopolistic components.
Profit-motivated businesses in a capitalistic economy are driven to acquire monopoly power in any way that they can, but the exercise of monopoly power is likely to make the society's distributions of income and wealth ever more unequal. An ideal distribution of income and wealth would occur if all productive resources received returns equal to their marginal revenue products (i.e., there is no exploitation). The accumulation and exercise of monopoly power causes distributional inequality that eventually becomes perceived as inequitable.
Wealth accumulated by successful entrepreneurship may be tolerated by its society. But if distributional inequity is a social malady caused by the exercise of monopoly power, how should public policy be directed toward exploitation attributable to the accumulation of monopoly power? The needed treatment is to prevent the accumulation of monopoly power, to eliminate any that is acquired, and to curb its use if it cannot be eliminated. Antitrust and antimonopolies laws have been legislated and enforced in Western market economies to treat the accumulation and exercise of monopoly power.
The emergence of the nation state over the past four centuries has become a serious problem for global welfare.
Specialization and Trade
Economists have enunciated the principle of comparative advantage to explain regional specialization in the production of goods and services. According to this principle, people in each region should specialize in producing those goods and services that can be produced most efficiently in their region compared to other regions. "Most efficiently" means at least opportunity cost in terms of other goods and services foregone compared to the other regions. Since the production of goods and services becomes geographically specialized, people in different regions must trade their specialties for the specialties of people in other regions.
Even with production specialization, generalization in consumption is enabled everywhere through trade. It can be shown with theoretical exercises as well as empirical information that those who specialize their production according to the principle of comparative advantage and trade with one another enjoy higher welfare than they would under conditions of autarky (i.e., economic self-sufficiency and independence).
In the so-called "pure theory of trade" there is no distinction between interregional and international trade. The emergence of national identity and the nation state over the past four centuries have enabled two additional factors that provide for regional differentiation: nationalism and the operations of government.
Nationalism and the Nation State
Nationalism is a sort of emotional cement that binds together people of the same cultural background. They may share a common history and heritage; they may be more-or-less homogeneous with respect to race and ethnicity; typically, they subscribe to the same religion or various sects or denominations of a common religion; the vast majority of them speak the same language; and, most importantly, they share a common vision about what it means to be a citizen of the nation. The term is often used to describe a "nation of people" or simply "a people" in the biblical sense (the "Children of Israel" in the Bible are an example of a nation in this sense). The emotional cement of nationalism may reveal itself in the form of patriotism, i.e., love of homeland, its cultural and political heritage, its flag.
Nation states are political entities defined by boundaries encompassing areas that may coincide closely with that populated by a "nation of people" in the biblical sense. Sometimes a nation state encompasses two or more nations of peoples. American Indian tribes have often been referred to as "nations"; there were many nationalities in the former Soviet Union; modern India encompasses numerous tribal peoples. In the early 1990s, the various nationalities contained by both the Soviet Union and Yugoslavia began to pull apart. China deals with some of its nationalities by incarcerating and attempting to reeducate them.
Occasionally political boundaries separating nation states divide peoples of the same nationality. The post-war political division of Europe left the German people separated by walls as well as borders. In South Asia, the Bengali tribal people are split by the India-Bangla Desh border. The Pakistan-Afghanistan border divides the Baluchi people, while the Pakistan-India border separates Punjabi tribal people. Separatist movements in these and other areas may have as their goal the reunification of peoples of the same nationality that have been separated by political boundaries.
Nation states also may not coincide with economic regions that are characterized by the possession of natural resources. Both the United States of America and the Russian Republic include numerous uniquely definable economic regions. Sometimes national boundaries split a common resource endowment region. Europeans often have redrawn national boundaries across the rich coal and iron deposits of the Alsace-Lorraine region.
The analysis of nationalism would be much simpler if every nation state were associated exclusively with a certain nation of people. But this is not the case. Whether we are speaking of the nation state or a particular nation of people who share a common heritage, the principal implication of nationalism is that there are significant differences among populations that yield important consequences for trade and the location of economic activity. These differences may spring from natural phenomena such as heritage, customs, language, etc., or they may be artificially imposed by the behavior of the governments of the nation states.
Even if political relationships are not involved, differences of national heritages and languages lead to suspicions about the customs and intentions of "foreigners," and in extreme cases to xenophobia, i.e., fear and hatred of foreigners. An extreme economic consequence of xenophobia is the attempt to achieve autarky. The important point is that nationalism, whether emanating from cultural differences or state sovereignty, tends to diminish the potential for gains from interregional and international specialization and trade. In the extreme, nationalism can completely eliminate such potential gains if sovereign national governments pursue strategies of extreme political isolation and economic autarky.
The principle of comparative advantage presumes that regional differences are due to differential resource endowments. Because of nationalism, it is necessary to recognize that comparative advantage also may be based upon regional preferences and cultural heritage, even if the regions were to have identical resource endowments. It is also necessary to note that natural comparative advantages may be enhanced or neutralized by the discretionary actions of government officials.
The interests of governments in international commerce have necessitated qualifications to the comparative advantage theory. The government of a nation state may attempt to protect an old domestic industry in order to preserve a comparative advantage that is fleeing to foreign regions. The government may attempt to neutralize another state's comparative advantage, or it may take "compensatory" action to offset some policy being implemented by the government of another state. In any of these cases of protection, the effect will be to diminish any potential for gain by comparative advantage specialization.
The essential characteristic of the nation state is its possession and exercise of national sovereignty by the government of the nation state. "National sovereignty" means that the government of the state has the authority and the power to do anything it wishes with respect to the peoples and resources contained within its political boundaries. This power includes the ability to determine the form of economic organization of the economy of the state (until recently, the government of the former U.S.S.R. mandated socialism), and to impose protectionist measures with respect to the industries within the economy (the government of the U.S.A. has a long history of protectionism). It includes the right to insist upon the use of a national currency within the realm and to exclude the of currencies preferred by others. Sometimes this authority and power leads to human rights abuses to which people and authorities in other nation states raise objections. Such exercise of discretion by the state is constrained only by the tolerance of its citizens and by attitudes and military prowess of other nation states.
National Currencies
One of the most critical factors that sets international trade apart from interregional trade is a consequence of the exercise of national sovereignty: the use of different currencies in different nation states. Because the dollar in used in the U.S. economy while the euro is accepted by most member states of the European Union, the balance of payments between the U.S. and the E.U. is important to economic and political considerations in both regions. The dollar-euro exchange rate is critical to the volume of goods and services entering into international commerce between the two regions at any point in time.
Where the same currency is used throughout a region, these matters become irrelevant. In the United States, who is concerned about the balance of payments between South Carolina and New York? And what about the exchange rate between the currency used in South Carolina and that accepted in New York. Both use the U.S. dollar, so the implicit exchange rate is 1:1, i.e., 1 South Carolina dollar to 1 New York dollar. In the European Union the British still insist upon using the pound sterling while most of the other E.U. member states use the euro. The U.K.-French and U.K.-German balances of payments continue to be issues, as does the sterling-euro exchange rate. This is true especially since governments in some of the E.U. member states might prefer to stabilize the sterling-euro exchange rate while the U.K. government is inclined to allow exchange rate fluctuation as the means of correcting balance of payments disequilibria between the U.K. and the E.U.
Currency matters spill over upon the commercial sectors of the international trading partners. Balance-of-payments issues become irrelevant in Europe among the member states that use the euro because payments balances are settled by changing income differentials and flows of labor and capital. But there still will be balance-of-payments problems between the U.S. and Europe and with the dollar-euro exchange rate until such time that Americans and Europeans agree to use a common currency.
Protectionism
Governments sometimes attempt to contravene the comparative advantages of their regions by creating artificial advantages for their domestic producers or neutralizing the comparative advantages of their trading partners. They do this by implementing protectionist measures that offset the comparative advantages of their trading partners. Protectionism becomes manifest in the enactment of tariffs on imports, subsidies for domestic producers, and so-called "non-tariff barriers" (NTBs, e.g., quotas on imports, health and safety restrictions on imports, import packaging and labeling requirements, discriminatory performance standards for imports, etc.) that are intended to curb imports or raise their delivered prices. Protectionist policies may expand or preserve employment and enterprise opportunities for the country's own workers and companies, but it diminishes freedom of enterprise and employment opportunities within the trading partners. Labor unions are almost universally in favor of "leveling the playing field" (i.e., neutralizing the foreigners' comparative advantages) by implementing protectionist policies.
Protectionist policies implemented by the government of a nation also limit the consumer sovereignty of its own people by narrowing their range of consumer choice, but at the same time they increase the range of consumer choice for people of its trading partners. When a government implements protectionist policies, it risks eliciting rising protectionist pressures in its trading partners. Rising protectionism is dangerous because it tends to induce reciprocal protectionist responses by trading partners. The US Smoot-Hawley Tariff Act of 1930 did just this, and it spawned global protectionism that aggravated the Great Depression. President Trump's current trade wars ("easy to win") with China and Mexico have elicited reciprocal responses that dissipate the advantages of regional specialization and trade.
Development Policies
During the second half of the twentieth century, governments in a number of countries (mostly Latin American and East Asian) pursued import-substitution industrialization (ISI) policies in efforts to contravene their natural comparative advantages or develop new or latent comparative advantages ("infant industries"). The usual vehicles of ISI policy implementation have been subsidies for domestic producers and tariffs on imported goods that would compete with domestically produced goods, with the intent of reserving the domestic market for exploitation by domestic companies.
ISI development policies have failed almost universally, not only because they contravened the comparative advantages possessed by those nations that implemented them, but also because they induced more imports of raw materials, machinery, and technology than the reduction of imports that were tariffed. While ISI policies have attempted artificially to broaden domestic entrepreneurial opportunities at the expense of foreign firms, they have also narrowed the range of consumer choice to higher-cost domestic goods. In most countries where ISI policies have been attempted and failed, they have been succeeded by export-oriented investment (EOI) policies that exploit the country's natural comparative advantages.
Given the deleterious effects of government efforts to contravene comparative advantages with protectionist policies and exchange rate manipulation, most economists (other than those who are on the payrolls of government agencies and labor unions) come down on the side of free trade and advocate trade liberalization, i.e., the elimination of tariffs, subsidies, and other NTB constraints on trade. President Trump's trade advisor, Peter Navarro, is an exception to "most economists."
A Current Issue
A current issue in the so-called Brexit debate in U.K. (September, 2019) is what happens to the open border between the Irish Republic and Northern Ireland. Northern Ireland currently is a province of the United Kingdom. With the current open ("soft") border, Irish in both Northern Ireland and the Republic can freely move between the regions and are able to specialize, trade, and enjoy benefits of comparative advantage specialization. A "hard" Brexit, i.e., exit of the U.K. from the European Union without negotiated mobility and trade agreement, may force the institution of identifiable borders, border controls on immigration and trade, and the use exclusively of the euro in the Republic and the pound sterling in Northern Ireland. Since the majority of the populations in Scotland and Northern Ireland appear to prefer remaining in the European Union, a "no-deal" Brexit may spawn separatist movements that bring an end to the "United Kingdom" and leave "little Britain" (together with Wales) to make its way in an increasingly globalized world. If U.K. breakup ensues and hard borders are established, the comparative advantage benefits of specialization and trade are likely to diminish.
Demise of the Nation State
All of this begs the question of whether the world might be better off with the demise of the nation state and the disappearance of national governments, national boundaries, and national currencies. This likely would be a "hard sell" to nationalists who want to preserve their ethnicities, racial purities, cultural heritages, languages, and currencies, all at the expense of the benefits of comparative advantage specialization and trade. But if nationalism and all of its attendant aspects were to evaporate, the ensuing freedom of interregional movement of people and non-human resources would enhance global welfare by facilitating interregional specialization and the sharing of its benefits through interregional trade.
External Balance
External balance refers to a nation's trade, investment, and official reserves transactions with the rest of the world. A nation with an absolutely closed economy, i.e., one that is perfectly isolated from the rest of the world, would have no external transactions to balance. The external balance for an open economy that enjoys substantial private sector trade and investment discretion is indicated by its Balance of Payments. Balance of Payments (BoP) accounting, strictly speaking, is not part of the process of accounting for National Income and Product, but BoP accounting information feeds into the NIPA process of compiling GDP. A nation's BoP presentation requires only three sections, a Current Account section, a Capital Account section, and an Official Reserves section. It is the Balance on Trade in the Current Account that becomes part of the GDP compilation each year as exports less imports, (X - M).
In principle, for a nation that allows its exchange rates to freely flex or float in response to changing market forces, the BoP presentation needs only two sections, Current Account and Capital Account. In the long run and in equilibrium, the totals for these two sections should perfectly offset each other because exchange rates should adjust to stimulate trade and capital flows to offset market induced changes. If in long-run equilibrium the Current Account balance has a positive sign, the Capital Account balance would be of equal magnitude but have a negative sign, and vice versa. In the short run, discrepancies might occur between the magnitudes of the two section balances until exchange rate changes bring the magnitudes of the two sections into equivalence (though with opposite signs).
The third section in a BoP presentation, Official Reserves Transactions, might have a non-zero balance if the government of the nation manipulates its exchange rates. Since the demise of the Bretton Woods international exchange system in 1971, the global economy nominally has been on a flexible or floating exchange rate system, although it has never been a so-called "clean-float" system because governments, singly or in concert with other nations (like the G7 grouping of nations), occasionally have attempted to manipulate exchange rates or prevent further changes of them. That the Official Reserves Transactions totals often are not zeros betrays the fact that the federal government of the United States has engaged in occasional efforts to cause exchange rates between the dollar and other currencies to change in desired directions, or to prevent further undesirable changes.
A nation's Balance of Payments statement must always balance, in principle by the requisites of double-entry bookkeeping when there are no errors or omissions, but in practice by inclusion of a Discrepancies line in the amount by which the Current Account total is not fully offset by the sum of the Capital Account and Official Reserves Transactions totals. Since the Balance of Payments always balances, an imbalance in the nation's external payments can be detected only by examining some parts of the statement in comparison to other parts of it. By convention, this has been accomplished by figuratively (if not literally) drawing a line across the Balance of Payments statement at a selected place, and then comparing totals "above the line" and "below the line." Today the Balance on Current Account serves most commonly as the basis for identifying imbalance in the international payments of nations.
Deficits and Surpluses
Are Current Account deficits good or bad? How about Current Account surpluses? And is either condition sustainable in the long run (i.e., over years stretching into decades)?
Eighteenth century mercantilists might have answered that a Current Account surplus is good because it increases the "wealth of the nation" by enabling citizens to acquire foreign assets (like gold) in exchange for domestic goods that can be exported. Correspondingly, a Current Account deficit would be bad because it decreases the wealth of the nation by enabling foreigners to acquire more of the nation's assets in exchange for goods exported to the nation. The modern answer is that, with caveats to be noted, neither imbalance condition is good. However, it does not necessarily follow that either imbalance condition is unequivocally bad. And for most nations, neither imbalance situation is sustainable in the long run. There appear to be at least a few exceptions to this generalization.
A positive of a Current Account deficit is that citizens of the nation are able to consume (or absorb) a larger portion of the world's output of goods and services than they are able to produce. Another positive is that the Capital Account surplus that must accompany a Current Account deficit supplies savings to the nation from foreign sources. This is especially important if the nation has been experiencing savings deficits relative to investment requirements because domestic saving rates are especially low. Since this situation has been typical of the U.S. economy during the last decade of the twentieth century and the early years of the twenty-first century, the foreign savings supplied via the Capital Account surplus (corresponding to a Current Account deficit) have sustained the phenomenal growth of the U.S. economy until the onset of the Great Recession in 2008.
Sustainability
The sustainability of a Current Account imbalance of any nation ultimately depends upon the global demand for and supply of financial instruments issued by citizens (including businesses, financial institutions, and government units) of the nation. If the global demand for the nation's stocks and bonds continues to keep pace with the increasing supply of them, it is possible for the nation's Current Account deficit (its Capital Account surplus) to persist indefinitely. However, once the global financial markets become saturated with the nation's debt and equity issues, the Current Account deficit (Capital Account surplus) imbalance is no longer sustainable, and international adjustment mechanisms (either exchange rates or domestic price level and incomes) will come into play to alleviate the imbalance.
When exchange rates are allowed sufficient flexibility, a Current Account deficit (a Capital Account surplus) may be automatically corrected by depreciation of the domestic currency relative to foreign currencies. So a clue as to the sustainability of a Current Account deficit (a Capital Account surplus) may be found in how its exchange rates are changing. As long as the world is willing to accept ever more of the nation's debt and equity issues, its currency may be stable or appreciating on foreign exchange markets, and its Current Account deficit (its Capital Account surplus) is sustainable. Once its currency begins to depreciate, the implication is that the global demand for the nation's financial issues has slowed or begun to decrease relative to the supply of them, and the Current Account deficit (Capital Account surplus) is no longer sustainable.
The comments in the previous paragraphs that have pertained to the sustainability of Current Account deficits (Capital Account surpluses) may of course be recast as to the sustainability of Current Account surpluses (Capital Account deficits) as are commonly experienced by certain European and East Asian countries.
Exceptions
The United States and the United Kingdom may be exceptions to the generalization that a Current Account deficit cannot be sustained indefinitely. This is due to the fact that both the U.S. dollar and the U.K. pound sterling have become international reserve currencies that are being used not only to effect both bilateral trade and financial transactions between their citizens and foreign interests, but also as global currencies to effect transactions among third parties. Also, the global demand for debt instruments issued by U.S. and U.K. governments has increased during times of uncertainty due to their safety and reliability in spite of their relatively low returns because neither government has ever defaulted on its debt issues.
Reinforcing this phenomenon is the fact that the dollar unofficially has become the preferred currency in a number of nations (e.g., Peru, Cuba), and the "dollarization" currency specified by government authority in some nations (Argentina, Ecuador). As the deliberate or de facto dollarization processes ensue, the global demand for U.S. currency (i.e., dollar-denominated short-term debt issued by the U.S. central bank) will continue to rise, thereby accommodating sustained U.S. Current Account deficits (with corresponding Capital Account surpluses).
Few other nations in the world are so fortunate as the United States in this regard, but the U.S. good fortune may evaporate in the future. Continuing annual government budget deficits that have to be financed by issuing government bonds has caused the public debt of the U.S. government to continue to increase.
A substantial portion of the U.S. public debt is held by foreign interests in Asia and the Middle East, but that portion cannot be known with any degree of precision. A rising concern is that Asian and Middle East holders of U.S. debt may become "spooked" to unload some (or all) of their holdings and wreak havoc on global financial and currency markets. The increasing supply of such debt instruments coming onto the financial markets would be expected to depress their prices (and raise their yield rates).
If the former debt holders receive the sale proceeds in any currencies (including dollars) other than their own, they likely would sell those currencies (including dollars) on foreign exchange markets to acquire their own or other non-dollar currencies or assets. The increased supply relative to demand for dollars on foreign exchange markets would precipitating dollar depreciation. The dollar depreciation would make foreign goods and services more expensive to Americans and American goods less expensive to foreigners, thereby diminishing the trade deficit.
Drives
Is there any reason to think that either the Current Account or the Capital Account dominates the other section in the BoP? The conventional approach to analyzing a nation's Balance of Payments has been to presume that trade decisions are discretionary and that they dominate the nation's international payments situation, i.e., the Capital Account must accommodate to "pay for" whatever happens in the Current Account. In this case, it might be appropriate to say that the Current Account "drives" the Capital Account. It is indeed true that the act of importing goods and services requires payment to foreign exporters. To the extent that foreign exporters are willing to accept domestic currency or bank balances denominated in domestic currency units, there is a short-term capital inflow (an outflow of funds) that increases the indebtedness of the nation to foreign interests.
But it is also true that a substantial portion of the Capital Account activity of any nation, whether involving short- or long-term financial instruments, is discretionary. Citizens and foreigners make deliberate decisions to acquire or sell financial instruments, irrespective of where they were issued and irrespective of the need to finance trade (Current Account) activity. This discretionary Capital Account activity causes changes of demand for and supply of currencies on foreign exchange markets, with consequent changes of exchange rates if they are not fixed.
For example, if citizens of a nation decide to acquire bonds issued by a foreign government or corporation, they may sell their own currency in foreign exchange markets in order to acquire enough of the foreign currency to purchase the bonds. Alternately, the foreign bond sellers may accept enough of the domestic currency in exchange for the bonds sold, in which case they will probably sell the acquired currency on the foreign exchange markets. In either case, the increased supply of the domestic currency coming onto the foreign exchange markets relative to the demand for it will tend to depreciate the domestic currency, i.e., appreciate the foreign currency.
A discretionary Capital Account surplus (a capital inflow involving an export of the ownership of domestic assets) may require a Current Account deficit (e.g., an excess of merchandise and service imports over exports) to "pay for" the Capital Account surplus. A nation with a discretionary Capital Account deficit requires a Current Account surplus to offset the Capital Account deficit. To the extent that discretionary Capital Account activity outweighs that which is necessary to accommodate the trade balance in the Current Account, it may be said that the Capital Account "drives" the Current Account rather than the converse.
This may have been the case for the United States through much of the post-World War II era as American companies invested heavily in production and distribution facilities in the outside world. The early-twenty-first century "offshoring" phenomenon may be instrumental to "pay for" new foreign direct investments.
Trade Gaps and Asset Transactions
The recent (summer 2019) widening of the U.S. Trade gap has occurred at the same time that foreign purchases of U.S.-issued bonds have increased in response to various sources of global uncertainty. If a nation's payments are to balance, a trade deficit requires an offsetting capital inflow (i.e., an export of the ownership of U.S. assets) to pay for the net import balance. But an export of the ownership of U.S. assets enables (or requires) an offsetting import of merchandise and services. Since trade is the largest part of the Current Account, and foreign purchase of U.S. bonds is a component of the Capital Account, how can we tell whether the Current Account deficit is driving the Capital Account surplus, or the converse?
A trade deficit would portend depreciation of the dollar as importers supply dollars to the forex markets in purchasing other currencies to pay for imports. Other things unchanged, an export of the ownership of U.S. assets would cause appreciation of the dollar as foreigners purchase dollars to pay for the assets. Since the dollar has been appreciating on net balance against most other currencies for the past several months, the implication is that the Capital Account surplus is driving the Current Account Deficit.
One of the tenets of Modern Monetary Theory (MMT) is that the management of the macroeconomy should be placed in the hands of a fiscal authority that is empowered to alter spending and tax rates as needed to meet all social needs and ensure macroeconomic stability. Inflation can be curbed by issuing bonds to withdraw money from circulation, and an economy in recession can be stimulated by having the fiscal authority to buy outstanding bonds to inject more money into the economy. If government overspends its tax revenues in any fiscal period, it may incur a budget deficit that must be financed by issuing bonds sufficient to cover the deficits. MMT proponents assert that government should increase spending until all social needs are met, and that budget deficits that add to public debt are inconsequential until inflation becomes excessive.
The MMT advocacy of delivering management of a macroeconomy into the hands of a fiscal authority is objectionable for a number of reasons. Twenty-first century partisan politics alone in the United States demonstrates Congressional gridlock and the inability of a democratically elected legislative assembly to make timely fiscal changes that would be requisite to achieving and maintaining macroeconomic stability. But there are other serious problems for fiscal policy as a macroeconomy manager.
Uncertainty
A fiscal authority that is empowered to adjust tax rates and approve or curb expenditures upon perceived need can create uncertainty of timing and magnitude in both the business and household sectors. Such uncertainty may disrupt domestic and international supply chains and adversely affect employment and production planning processes. It may foster a cottage industry that attempts to predict the timing and magnitude of such changes, and it may induce efforts to offset or counter expected fiscal changes. If expectations of future fiscal changes are accurate, they may contribute to a stabilization process by "pricing in" the expected changes, but if expectations are wrong, they are likely to disrupt production processes and aggravate macroeconomic instability.
Given our present state of macroeconomic knowledge, it is heroic to think that fiscal policy decision makers can accurately specify the magnitudes of needed tax rate adjustments or expenditure changes with any degree of accuracy, especially since the response to any such fiscal policy changes may have amplified effects via spending multiplier processes that are uncertain. If the fiscal policy decision maker implements a policy change that is too small to counter an undesirable macroeconomic condition, the condition will persist. If the fiscal policy decision maker implements a policy change that is too large, it is likely to aggravate the condition rather than ameliorate it.
Lags
Economists refer to the time between when a macroeconomic change occurs and when it is recognized by government officials as the recognition lag. They refer to the time between recognition of such a change and the taking of some action to offset it as the response lag. Needless to say, these lags are both variable in duration and themselves unpredictable. The response lag for monetary policy may be a matter of days or weeks, while that for fiscal policy may be months or quarters. In democratic polities, fiscal policy actions must be proposed, debated, and legislated, processes that may span years.
There is yet another lag that may eclipse the first two in duration. It is the so-called reaction lag, the period between when an action is taken and the effects of the action fully work through the economy. The reaction lag usually involves a multiplier process of consecutive rounds of respending. Experience in the U.S. economy suggests that the multiplier effect of a fiscal policy action may be completed in as little as a year, but it may not be fully worked out in more than two years. The duration of the reaction lag is therefore even less predictable than are the recognition and response lags. The three lags together may span a period of as little as a year, or as much as three or more years. These lags taken together put the government in the position of needing to implement a compensating policy even before some event shocks the economy.
Given these lags, another serious problem is that the natural adjustment mechanisms of the economy may have reversed the direction of change of the economy by the time that the policy designed to deal with the original problem finally has its effect. For example, in a contracting economy, an expansionary fiscal policy is called for. But by the time the contraction can be confirmed, expansionary policy implemented, and the multiplier process completed, the economy of its own volition likely will have begun its recovery. So the expansionary monetary policy impacts an already-expanding economy. A similar, but reversed, scenario can be depicted for an economy entering a period of expansion. Because of variable and unpredictable time lags in the implementation of macropolicy, government's well-intentioned efforts to stabilize the economy often end up destabilizing it--"booming the boom," or "depressing the depression."
Experience with these efforts has convinced many economists that deliberate policy activism often involves policy overreactions due to time lags in recognizing changing conditions, initiating policy actions, and the completion of adjustments. Today, economists are not so sure that deliberate manipulation of the government's budget in efforts to diminish macroeconomic instability doesn't inject more instability into the economy than would be present if the government simply left the macroeconomy to manage itself. When unemployment or inflation have "reared their ugly heads," bureaucrats usually have felt compelled to follow the admonition, "Don't just sit there, do something!" Because discretionary policy overreactions may tend to destabilize a macroeconomy rather than stabilize it, many macroeconomists have become leery of policy activism. But bureaucrats have difficulty following the reverse admonition: "Don't just do something, sit there!" The ability to wait patiently simply is not in the genes of political animals. Political inaction may be worse for a bureaucrat's career than policy overreaction.
Government Priorities
And finally there is an ultimate "deal-breaker" for fiscal policy as the vehicle for managing a macroeconomy. Domestic macroeconomic stabilization may not be the highest priority of the government, or at least not until the economy becomes seriously destabilized by excessive inflation or unemployment or both. Under more normal circumstances, particularly in democratic polities, the government's agenda may require it to become oriented mainly to program needs rather than economic stability. Program needs may include social, educational, military, and infrastructure projects. A democratic government may enact such programs almost irrespective of their financing requirements. The dominant fiscal motivation of a democratically elected government may be financing the program expenditures to which it has become committed, irrespective of the fiscal requirements of economic stability. The principal evidence of this phenomenon is that most governments' budgets tend to be in chronic deficit, irrespective of whether their economies are contracting or expanding. When the needs of program finance dominate public policy, the government loses its capacity to manipulate its budget in the pursuit of economic stability.
An Authoritarian Advocacy
Given the difficulties of managing a mixed market (capitalist) macroeconomy with a democratic polity, a prescription that macroeconomic stabilization should be implemented with fiscal policy would require a strong central fiscal authority that is imbued with sufficient knowledge and wisdom, and that is committed to the general welfare of its society, a veritable "philosopher king." Even a deliberative body along the lines of the Board of Governors of the Federal Reserve System may not be able to act expeditiously in response to macroeconomic change, much less to devise preemptive policy actions to head off predicted adverse changes. Ideally, the ability to vary tax rates, expenditures, and bond market activity in timely fashion to achieve and maintain macroeconomic stabilization would require the authority and power bordering that of a commissar or a fascist dictator. This would be a call for an authoritarian solution that may not be compatible with democratic policy or market economy.
Population growth can be a nation's boon or its bane. For a nation with a low birth rate and an ageing population, population growth can be its boon. For a nation with a high birth rate, ensuing immigration, and an already large population for its land and capital resources, further or faster population growth will be its bane.
Technical Issues
First, some technical issues. A nation's labor force increases as its population grows. Labor productivity may decrease when ever more labor is applied to existing land and capital equipment, when capital equipment depreciates, i.e., wears out and is not replaced, or when the fertility of the land is depleted. But labor productivity can increase when labor is provided with more and better (i.e., more "efficient") tools and equipment (physical capital) or additional fertile land. If labor productivity increases fast enough, it may accommodate wage increases without diminishing the profitability of production processes. And rising wages can accommodate population growth.
One more technical issue. One nation's comparative advantages relative to those of other nations depend very much on their labor forces and their stocks of land and capital. Nations with large endowments of labor but minimal arable land and little capital compared to other nations will have comparative advantages in producing labor-intensive goods in craft shops or primitive factories. Nations with ample capital stocks but small amounts of land and labor compared to other nations will have comparative advantages in producing capital-intensive goods in industrial facilities. Both types of nations can enjoy each other's products and increase their welfares by trading with one another. Emigration from the labor-abundant nation that becomes immigration into the capital-abundant nation will tend to increase labor productivity and wages in the former and decrease them in the latter. Emigration/immigration thus will tend to level wage rates across the two nations.
Nations with stable or declining populations often suffer low or negative rates of economic growth. Immigration may be just what a nation with low birth rates and an ageing population needs to spur and sustain its rate of economic growth. Although the new arrivals may tend to decrease average labor-force productivity, they will become consumers that stimulate the demands for domestically-produced goods and services and provide more employment opportunities.
The Malthusian Prospect
Thomas R. Malthus argued in his famous 1798 "Essay on Population" that population growth eventually may press upon the "carrying capacity" of the earth. A modern interpretation of Malthus' hypothesis is that as population grows, and with it the quantity of labor, per capita income will fall until it reaches the subsistence level. If it falls below subsistence requirements, Malthus thought that enough people would starve to stabilize the population with income levels hovering about the subsistence level. Malthus, a Church of England parson, invoked the "four horsemen of the apocalypse" (described in Chapter 6 of the Bible's New Testament book of Revelation) to represent the forces that would constrain population growth: war, pestilence, disease, and famine.
Population Dynamics
Two phenomena thus far have averted the Malthusian prospect on global scale, although it can be argued that it has been manifested in certain third-world countries. One is that technological advances in agriculture during the nineteenth and twentieth centuries have succeeded in vastly increasing the food production capacity of the earth. Problems of distribution of foodstuffs from excess production regions to deficit regions remain a problem.
The second phenomenon is demographic transition. Scientists concerned with population issues have observed that with the introduction of modern medical technologies into a low-income region with high birth and death rates, the death rate in the region falls, causing an increase of the population growth rate. However, as the per-capita income of the region increases with economic growth, people begin to have smaller families so that the birth rate tends to fall toward the lower death rate. This has the effect of reducing the population growth rate and stabilizing the population of the region. Why people tend to have fewer children as per capita income increases is a subject of continuing analysis and debate by natural and social scientists.
Population growth spurts in low-income, slow-growing countries imply that they are in the middle of their demographic transitions, with attendant problems of feeding their burgeoning populations. Some thinkers favor government action to address the population growth problem, but the proper role for government to play is a topic of ongoing debate. Some have advocated that governments and NGOs implement a "family planning" approach (a euphemism for birth control) in those regions. Others have posited that the best hope for reducing their rates of population growth lies in improving the status of women and promoting economic growth to raise their per capita incomes and induce completion of their demographic transitions.
The dual phenomena of technological advance and demographic transition have slowed global population growth, and there is a possibility that the global population may at some future time stabilize as high population-growth regions enjoy income increases sufficient to complete their demographic transitions. However, demographic transitions can go too far as revealed in several European countries. Birth rates in those regions have fallen so far relative to the declining death rates as to render population growth rates negative.
Immigration and Emigration
High-income nations with low or negative population growth rates may have difficulty achieving and sustaining positive economic growth. One way in which such nations can sustain positive economic growth is to tolerate and even invite immigration from low-wage, high population-growth-rate regions of the world. Those who emigrate from their low-wage and economically stagnant environments tend to be the more capable and driven members of those societies.
However, immigration, legal and otherwise, has been shown in many regions to precipitate local opposition on racial, ethnic, lingual, religious, and employment grounds. The employment issue is that immigrants who are willing to work at lower wage rates than locals take the jobs that "rightfully belong" to the locals, and thus tend to cause rising unemployment among the local labor force. The counter argument is that although in the short run immigration tends to have a wage-leveling effect, the longer-run effects are that the immigrants bring new human capital and entrepreneurial drive, pay taxes, and increase demand for the economic output of the region, thereby stimulating economic growth. And it has often been observed that the low-wage jobs that recent immigrants take involve sweaty hard work that citizens often try to avoid.
Exploitation
In his 1958 book, The Affluent Society, John Kenneth Galbraith asserted that poverty has been the normal lot of human-kind through the ages. Only in the last couple of centuries in parts of the world populated primarily by Europeans have a very few enjoyed unprecedented wealth. In ancient times, the impoverished masses were subjugated and exploited by tribal chieftains, monarchs, emperors, tsars, or other strong men and women. The impoverished today are subjects of exploitation by businesses that wield monopoly power.
In an ideal world, every economic resource, human as well as physical, would receive income equivalent to the value of its marginal product (i.e., the addition to total product consequent upon using one more unit of the resource). This outcome could obtain only under ideal circumstances of perfect competition in all product and resource markets. But of course, the real world always has been somewhat less than ideal. Some economic actors have been able to establish authoritarian or monopolistic position in their respective markets. Others without such power have found themselves exploited in those same markets.
Authoritarian and monopoly power enable economic actors to capture returns greater than the values of their marginal products. They are able to impose incomes less than the values of marginal products on economic actors in their employ or otherwise under their control (slavery being the ultimate vehicle to extract product value). Received income less than the value of marginal product is the basic economic cause of poverty relative to the more affluent whose incomes have exceeded the value of their marginal products. Economic actors who capture gains greater than the values of their marginal products may spend their gains on consumables or invest them in physical or financial assets. Gains so invested accumulate as wealth. The judgment that the wealth distribution of a society is inequitable is based on the exercise of authoritarian or monopoly power by some at the expense of others.
An economic implication of poverty that results from subjugation and monopolistic exploitation is the opportunity loss of consumer welfare from not being able to consume all of the goods and services that the impoverished might have enjoyed. And to the extent that the impoverished have experienced ill health and impaired work ability, their societies also have suffered opportunity losses of diminished production of consumable goods and services.
There is a welfare asymmetry between the consuming behavior of the poor who usually spend all or even more than their incomes, and the affluent who typically spend only a portion of their incomes. There may be a net loss of welfare to the society because the welfare loss suffered by the impoverished is not fully offset by the increased welfare of the affluent.
There are two ways to look at poverty: absolute poverty and relative poverty. Economic growth and good government enable absolute poverty relief. Redistribution of wealth and income may relieve absolute poverty at the cost of impairing incentives to work and engage in entrepreneurial ventures, but redistribution of outputs is less effective than entrepreneurialization of inputs (resources) to diminish poverty. There will always be relative poverty because there will always be some at the lower end of an income distribution.
Some social scientists seem to regard the continuing existence of poverty as evidence of a traumatic failure of the economic system. Since poverty has been the normal lot of humankind through the ages, the continuing existence of poverty does not necessarily imply that something bad has happened or that some systemic failure has occurred. The fact that poverty is abating worldwide implies that something good is happening. The good that is happening is economic growth, measured as rising income per capita.
Poverty Alleviation
Approaches to the alleviation of poverty have included eliminating or suppressing the accumulation of monopoly and authoritarian power, redistribution of wealth from the affluent to the impoverished, and promotion of the process of economic growth.
Many democratic governments in the West have legislated antimonopolies or antitrust laws in efforts to prevent or suppress the exercise of monopoly power, but the implementation and enforcement of such laws often is lax, spotty, and inconsistent. The absence or lack of serious enforcement of such laws may have facilitated the increasing profitability of large corporations that has enabled ever higher compensation of corporate officers and board members. Increasing corporate profitability, rising incomes of corporate officers, and stagnant wages of workers are evidences of the possession and exercise of monopoly power that has exploited employees by extracting productivity value from them.
Some on the left have advocated taxing away "excess" corporate profits and capping the incomes of corporate officers, but these non-market approaches amount to putting a "band-aid" on a deeper wound. The deeper problem of exploitation by exercise of monopoly power can only be addressed by legislating, implementing, and tightening the enforcement of antimonopolies laws to foster more competitive market conditions.
Since poverty resides at the lower end of the income/wealth distribution spectrums, some have advocated treating poverty more directly by redistributing income and wealth from the affluent to the impoverished. This too may be a band-aid solution to a deeper problem which can be treated only with better education and training that enhance abilities to master advancing technologies.
Governmentally-implemented redistribution via taxation coupled with social welfare nets has not been a particularly effective means of redressing the income distribution imbalance. The usual vehicles for ameliorating the income distribution inequality are yet more actions for government to undertake. As such, they fall well within the liberal-progressive arena, and many of them are already underway. Unspecified is any means by which the distribution of human and financial capital is to be equalized without some form of redistribution or quota allocation of opportunity.
Poverty, income distribution, and job loss due to automation are likely to be difficult economic challenges facing the U.S. during the twenty-first century. The idea of a universal basic income (UBI) has been proposed to eliminate poverty, to counter the negative income effect of job loss due to automation, and implicitly to reduce inequality in the distribution of income.
If a government can specify some arbitrary basic income for universal distribution (say, $1000 per month to every resident of the nation), a larger basic distribution always would be better and always will be sought (like demands for an ever-higher minimum wage). Such demands likely would increase budget requirements well beyond the current safety net cost. And the richer the UBI distributions, the greater the incentive to take the distributions and not work at all.
A 2019 study by researchers at MIT (described by Edd Gent on the SingularityHub website, https://singularityhub.com/2019/09/16/mit-future-of-work-report-we-shouldnt-worry-about-quantity-of-jobs-but-quality/) suggests that it is not the number of jobs that are at risk from automation, but rather the quality of the jobs. The automation process has hollowed-out the U.S. workforce, increasing the number of high- and low-skilled jobs at the cost of mid-skilled jobs. This phenomenon has worsened inequality in the U.S. as many routine mid-skilled assembly-line type jobs and administrative-support occupations have been replaced by machines. Disemployed mid-skilled workers often have had to take lower-wage jobs that involve manual dexterity or personal communication. Many of the low-skilled jobs that Americans often avoid have been taken by recent immigrants.
Even so, something like UBI may be needed in the future as technological advance continues its drive to automate physical functions and thereby eliminate job opportunities for all but the best educated and trained. Perhaps a limited basic income (LBI) program could be designed to exclude distributions to any with taxable income (earned plus capital) in excess of a specified amount (twice that amount for married couples filing jointly). Since the least educated and trained include those toward the lower end of the income and wealth distributions, a UBI or LBI may be promoted as the poverty relief vehicle of the future.
Economic Growth
Economists make the case that the most effective poverty-alleviating vehicle over the past couple of centuries has been economic growth, and that market economies are more favorable to growth than are authoritarian economies. A modern economist is led to the suspicion that the suffering of the poor may be less amenable to relief by sharing the existing wealth than by a process of economic development that increases the society's stock of capital (which is part of its physical wealth). The poor are helped via increasing employment and income generation. They are also helped by a growing volume of lower-priced consumables that are more affordable to the poor.
Although economic growth has been the principal alleviator of global poverty during the past couple of centuries, economic growth might serve as a vehicle for diminishing income distribution inequality if some way can be found to suppress the capture of monopoly incomes and to cause entrepreneurial profits to be shared more evenly with the working class.
However, growth also may be a culprit in worsening the distribution of income due to the fact that entrepreneurial success in the private sector is rewarded by profit which propels successful entrepreneurs into the upper-income echelons. More steeply progressive taxation would curb the accumulation of wealth from entrepreneurial success, but capture of a too-great portion of entrepreneurial profit by progressive taxation may also "kill the goose that laid the golden egg." And it is not clear how the fruits of entrepreneurial success captured by progressive taxation can help the lower-half of the income distribution without redistribution.
Until the nineteenth century, most people could only hope to sustain well-being at the level experienced by their parents. Few expected well-being improvement from generation to generation, and most hoped only to avoid famine, war, disease, and other causes of decreasing well-being. Economic growth, in the sense of improvement in the lives and well-beings of populations, was not an active phenomenon, and did not even begin to be expected until at least the nineteenth century. But here in the twenty-first century we have become so spoiled to on-going improvement in the well-being of populations almost everywhere in the world that people become anxious if they don't get an adequate boost of well-being right on time every year.
Since the turn of the nineteenth century, economic growth has become the principal alleviator of poverty, far outpacing both voluntary redistribution (giving between individuals and groups) and involuntary redistribution via progressive taxation and government safety net programs. But global growth has slowed in the wake of the 2008 Great Recession and governmental efforts to revive growth processes have had minimal effects. The very low rates of growth of the U.S. economy recently demonstrate this point.
Growth vs. Redistribution
Bad government forestalls growth and poverty relief. Poverty relief is a long-term process; crisis relief is a short term palliative. Economic growth may be the best prescription for alleviating poverty, but it won't guarantee a more equitable distribution of income.
Economists have reservations about redistribution of wealth as a mode of poverty relief because of the potential for impairing incentives to work and to engage in entrepreneurial ventures. Economic growth in the last half century has been a more potent reliever of poverty than has wealth redistribution over the past twenty centuries.
So how can public policy be configured to promote poverty-relieving economic growth? Here are six public policies that can promote growth and enhance welfare at the lower ends of the income and wealth distributions:
1) Implement and subsidize education and training programs that accommodate technological advance.
2) Encourage and subsidize on-going research to develop climatically sustainable products that are consumed by the mass of the population.
3) Seriously implement and enforce laws that foster competitive market conditions.
4) Stabilize macroeconomic policy by making the timing and magnitude of government spending, taxing, and monetary policy decisions predictable.
5) Foster comparative advantage specialization by resisting the temptation to engage in "industrial policy," i.e., governmental efforts to "pick winners" by subsidizing or directing industrial and commercial activity and employment.
6) Favor open-economy global trading relationships that can provide lower-priced goods and services to consumers toward the lower end of the income distribution.
Revolution
Productivity, the ratio of output to inputs, has been the key to human welfare and economic growth through the ages. From ancient times through the eighteenth century, humans used age-old and proven techniques with little variation or improvement. In consequence, productivity and human welfare remained approximately constant, regional populations grew only slowly except for emigration and immigration, and economic growth was an unidentified and largely unknown phenomenon.
The nineteenth century brought a veritable revolution in productivity with what became known as The Industrial Revolution. With the invention of machines that augmented or replaced animal power, human productivity began to increase, i.e., outputs increased relative to inputs. Along with it, wages increased, populations began to grow at faster rates, and economic growth became a recognizable phenomenon.
Measurement
The productivity of any resource, human or physical, can be measured as the ratio of a produced amount ("output") to the quantity of the resource used in producing the output. The marginal productivity of any resource is the ratio of an increase of output to the increase of a single unit of the resource in producing the output, all other inputs unchanged. A nation's overall ("total factor") productivity increases when technological change enables getting more output from all of the resources employed in producing the output. The productivity of a single resource may increase when better or more of complementary resources are employed along with it, or when less of it is used in conjunction with complementary resource inputs.
For example, labor productivity increases when labor is provided with more and better (i.e., more "efficient") tools and equipment (physical capital) or land. Labor productivity thus increases with technological advance and capital investment. If labor productivity increases fast enough, it may accommodate wage increases without diminishing the profitability of the production process. And rising wages can accommodate population growth.
Labor productivity may decrease when too much labor attempts to use existing capital equipment, or when capital equipment depreciates, i.e., wears out and is not replaced. Population growth, by increasing the labor force relative to the stocks of capital and land, may decrease general labor productivity. Labor productivity need not diminish due to net immigration (i.e., immigration greater than emigration) if it is accompanied by sufficient net capital investment (gross investment less depreciation) that increases the capital stock apace with the rate of immigration.
By the same token, the productivity of a nation's capital stock may increase with investment in more efficient equipment and advancing technology, or by using more labor in conjunction with existing equipment. Population (and its labor force) growing faster than the capital stock may increase the productivity of capital even as it decreases the productivity of labor. The productivity of capital decreases with depreciation, and when more equipment than needed is available to an existing labor force.
Comparative Advantage
Comparative advantages are usually perceived to be attributable to differences of resource endowments among nations. But it is clear that differences in productivity and the rates at which productivity advances may provide bases of comparative advantages among nations. Nations that engage in more research and development (R&D) which is installed with new capital investment may acquire and sustain comparative advantages in producing goods using the advancing technology relative to other nations that put less emphasis on capital investment that implements advancing technology. Slowing rates of R&D and capital investment may result in loss of comparative advantages.
Advancement
Productivity in the U.S. economy recently has been advancing slowly, restrained by weak business investment in new equipment and software. The slowing productivity advance has constrained the economy's ability to grow fast enough to generate higher incomes without stoking inflation. Wage growth, which is enabled by increasing labor productivity, thus has stagnated.
A slowing rate of advance of labor productivity may be attributable to: 1) continuing depreciation of the equipment that workers use without replacement; or 2) employing more workers to use the existing equipment. Both phenomena appear to have been occurring recently in the U.S. economy: managements have been reluctant to replace depreciating equipment until demand increases with faster economic growth, and employment has been increasing with immigration and as more people enter (or return) to the labor force.
The natural adjustment processes in a market economy lead production decision makers continually to adjust the combinations of the factors of production employed until the marginal product (output per additional unit of the resource input) per dollar's worth of each is just equal to the marginal productivity per dollar's worth of every other resource employed.
For example, if technological advance enables one of the resources to produce more output per unit of the resource, managers can be expected to increase the quantity of that resource employed. Doing so will increase the marginal productivity of the complementary resources, but decrease the marginal productivity of the more productive resource (per the law of diminishing returns). And this adjustment process will continue until again the marginal productivities per dollar's worth of each resource is equal to that of every other resource employed in the production process.
Resource Cost
If a resource becomes (or makes itself) more costly per unit employed, managers will have incentive to use less of that resource. Doing so will decrease the marginal productivity of complementary resources, but increase the marginal productivity of the more costly resource (due to the law of diminishing returns, but in reverse).
Recent (mid-2019) fast-food worker demands to increase the minimum wage from $7.25 per hour to $15.00 per hour would provide an example of this phenomenon. And a 50,000 worker strike at General Motors for higher pay would be another example. Labor making itself more costly will decrease its productivity per dollar's worth and motivate managers to invest in labor-saving capital equipment.
Wage growth in the U.S. economy has been stagnant recently because the supply of labor has been increasing faster (with continuing population growth, immigration, and the return of "discouraged workers" to the labor force) than the demand for labor has been increasing. The demand for labor has been depressed by the slow growth of the economy. But the economy won't be able to grow faster without faster productivity increases, a so-called "catch-22." And increasing labor productivity is dependent upon additional capital investment which also is depressed by slow economic growth prospects -- a double catch-22.
A 2019 study by researchers at MIT (described by Edd Gent on the SingularityHub website, https://singularityhub.com/2019/09/16/mit-future-of-work-report-we-shouldnt-worry-about-quantity-of-jobs-but-quality/) notes that while companies stress that advancing technology augments human labor across the board, the greater benefit is to higher-skilled occupations. The application of new technologies to lower-skilled occupations is automation to save labor costs. Advancing technology that improves productivity of higher-skilled occupations while automating lower-skilled jobs tends to worsen the already-skewed income distribution.
Policies
Why has productivity advance recently been so slow? Three reasons: uncertainty about the political scene that dampens new investment, onerous governmental regulation of business, and corporate income and capital gains tax rates that exceed rates in many other countries. The steps that must be taken to alleviate the problem of slow productivity advance and restrained wage increase require actions to settle the political environment, eliminate the most onerous and costly regulation of the business sector, lower U.S. corporate income and capital gains tax rates to globally-competitive levels, and increase government spending to support scientific research and development of new technologies. Once these matters are confronted, productivity advance again may accelerate.
The provincial interests of government officials in international commerce necessitate qualifications to the comparative advantage principle. The government may attempt to protect an old domestic industry in order to preserve a comparative advantage that is fleeing to foreign regions. The government may attempt to neutralize another region's comparative advantage, or it may take "compensatory" action to offset some policy being implemented by the government of another region. In any of these cases of protection, the effect will be to diminish any potential for gain by comparative advantage specialization.
Governments sometimes attempt to contravene the comparative advantages of their regions by creating artificial advantages for their domestic producers or neutralizing the comparative advantages of their trading partners. They do this by implementing protectionist measures that offset the comparative advantages of their trading partners. Protectionism becomes manifest in the enactment of tariffs on imports, subsidies for domestic producers, and so-called "non-tariff barriers" (NTBs, e.g., quotas on imports, health and safety restrictions on imports, import packaging and labeling requirements, discriminatory performance standards for imports, etc.) that are intended to curb imports or raise their delivered prices.
Protectionist policies may expand or preserve employment and enterprise opportunities for the region's own workers and businesses, but they diminish freedom of enterprise and employment opportunities within the trading partners, and they almost certainly diminish the welfare of the region's consumers. Labor unions are almost universally in favor of "leveling the playing field" (i.e., neutralizing the foreigners' comparative advantages) by implementing protectionist policies.
Government may attempt to neutralize another region's comparative advantage by imposing an import tariff that is intended to eliminate a foreign cost advantage. The government may impose an import quota as a means of limiting the damage resulting from importation of an item that can be produced at lower cost elsewhere. Or the government may take "compensatory" action in any of these areas to offset some policy being implemented by the government of another region. In any of these cases of protection, the effect will be to diminish any potential for gain by comparative advantage specialization.
Protectionist policies implemented by the government of a country also limit the consumer sovereignty of its own people by narrowing their range of consumer choice (including making religious and charitable contributions), but at the same time they increase the range of consumer choice for people of its trading partners. When a government implements protectionist policies, it risks eliciting rising protectionist pressures in its trading partners. Rising protectionism is dangerous because it tends to induce reciprocal protectionist responses by trading partners. The US Smoot-Hawley Tariff Act of 1930 did just this, and it spawned global protectionism that aggravated the Great Depression.
Government may attempt to protect an old domestic industry in order to preserve a comparative advantage that is fleeing to foreign regions. An example is the cotton textile industry as it moves from the South of the United States to East and South Asia. Such protection may take the forms of subsidies to the domestic industry or quotas or tariffs imposed on imported merchandise. Or the government may promote the development of what is believed to be a latent comparative advantage of the region by subsidizing a so-called "infant industry." A recent example of this may be the developing electronics industries in India and Singapore.
Actions by governments are potential sources of threats as well as opportunities. If domestic producers can enlist the authority of government to protect them by imposing tariffs or quotas, this constitutes an opportunity for domestic producers to sustain or expand production and employment (in spite of a lack of comparative advantage), but it is a threat both to foreign exporters and to domestic importers. By the same token, actions by foreign governments to protect their industries will constitute threats to domestic firms that may have real competitive advantages. As already noted, protection also tends to distort the world-wide allocation of resources and diminish the potential for gains from trade.
Governmentally imposed quotas implemented by import or export licensing also constitute a source of threat for domestic firms. Import licensing is more commonly used as a means of protecting domestic producers, but governments of resource-rich regions (particularly petroleum exporting countries) may use export licensing as a means of capturing income from the foreign sale of the resource. The source of the threat is that uncertainty arises as to which firms can acquire licenses to import or export what quantities of goods. Production and shipping schedules may be significantly disrupted, and earnings from sales of imported materials or goods for export may be jeopardized.
Given the deleterious effects of government efforts to contravene comparative advantages with protectionist policies, most economists (other than those who are on the payrolls of government agencies and labor unions) come down on the side of free trade and advocate trade liberalization, i.e., the elimination of tariffs, subsidies, and other NTB constraints on trade.
Opening to Trade
If an economy has been closed to international commerce, opening it to trade will make foreign-made products available to domestic consumers. Assuming that no trade barriers are imposed, the foreign supply of the product will add to the domestic supply so that the total supply available for domestic consumption will increase. As the total supply increases relative to domestic market demand, the domestic market price will fall.
At the lower domestic market price of the product, domestic production will decline in response to a decrease of demand as foreign imports capture a share of the market. At the lower market price, domestic producers' sales revenues could increase if domestic demand for the product is sufficiently inelastic with respect to price. But if domestic demand for the product is elastic with respect to price (perhaps more likely), domestic producers' sales revenues will decrease. At the lower market price, the total quantity transacted in the domestic market will increase even though domestic production decreases. Domestic producers of the traded product will be unhappy if their sales volumes and revenues decrease consequent upon opening trade. But domestic consumers will be pleased that they can now purchase a larger quantity of the product at a lower market price.
As trading relationships become more open and free, the specialization of production toward each nation's real comparative advantages occurs. Comparative advantage specialization may be obstructed if investment is devoted to industries for which trading partners do not have comparative advantages. Jobs will be threatened and businesses in non-comparative advantage industries will suffer declining sales and profits attributable to the ensuing process of comparative advantage specialization. Those who feel threatened can be expected to appeal to their congressional or parliamentary representatives to provide protection for the domestic industry in the form of tariffs or non-tariff barriers to trade.
Protection
A tariff is a tax on an imported good that is paid, not by the exporter, but by the consumers in the nation whose government imposes the tariff. The effect of the imposition of a tariff by the government is to raise the price of the imported product to domestic consumers, which, if the domestic demand for the import is sufficiently elastic with respect to price, will reduce the volume of the import, thereby providing a modicum of protection to the domestic industry. With the tariff in place, domestic producers will be able to sell their product at the higher imported price, although a smaller quantity. The increased price of the import has the effect of worsening the nation's terms of trade; since the foreign-made product now costs more to domestic consumers, each unit of a domestically produced export can buy only a smaller quantity of the import. However, if the domestic demand for the import is sufficiently inelastic, the tariff may not greatly decrease the amount of the product imported.
Once a tariff is imposed, the domestic market price of the product rises. Domestic producers are all too happy to accept the higher price although it may still not be as high as the pre-trade domestic price. Domestic production increases. At the higher market price, domestic consumption falls and the quantity of the product imported decreases. These effects will be relatively small if the world supply is fairly inelastic with respect to price, but the effects will become larger if world supply increases and becomes more elastic.
Welfare
The effect of the worsening terms of trade consequent upon the imposition of a tariff is to diminish the potential for gains from trade for both partners. The tariff imposing nation will not specialize its production as much as prior to imposition of the tariff, and it will not be able to achieve as high a level of welfare. The tariff-imposing nation will also export less, and its trading partners will suffer lower levels of welfare than possible under conditions of free trade. It is even possible that the tariff imposed will be so high as to choke off all international trade in the item, thereby limiting the welfare levels of the trading partners to those of the pre-trade situation.
As the production process matures, foreign producers will be able to ramp up production. This will enable the world supply of the product to increase and become more elastic with respect to price. The opening of trade reduces producer revenue, but it enables consumers to enjoy additional welfare.
Domestic producers can be expected to appeal for protection, but domestic consumers should resist any such protection measures on grounds that they will pay a higher price for the product, less of it will be available in the market, and their welfare will diminish. Unfortunately, consumers typically are less well organized than producers who lobby for protection. The government could impose a tariff of any magnitude ranging from nearly zero to the full amount of the difference between the pre-trade domestic and foreign product prices. A tariff equal to the full difference would provide maximum protection to domestic producers by choking off all imports of the product.
At the higher domestic price of the product after imposition of the tariff, domestic producers may want to increase output, but domestic consumption of the product is likely to fall as import volume shrinks. The government captures the tariff revenue. If demand for the product is sufficiently inelastic with respect to price, domestic producer revenue may increase. Unfortunately, there is a net loss of consumer welfare, a so-called "deadweight loss" to society since it is not captured by domestic producers, domestic consumers, or the government in the form of tariff revenue.
Any tax that hits lower-income tax payers harder than more affluent tax payers is regressive. A tariff on consumer goods that bulk large in the budgets of lower-income consumers is a regressive tax that may render the distribution of income more unequal than it otherwise would be.
While domestic producers can be expected to push for a maximum tariff on competing imports, and domestic consumers will hope for a low or zero tariff on goods that they consume, the government must decide whether the tariff should serve domestic producers, domestic consumers, or its own revenue needs. A major source of revenue to the U.S. government prior to the twentieth century was from tariffs on imported merchandise. If the government's objective in imposing the tariff is to raise revenue, it may specify the one that maximizes tariff revenue, irrespective of producer and consumer preferences. A government may impose import tariffs in an effort to control the nation's trade deficit.
Trade Deficit
Imposing a tariff on imported goods to decrease a trade deficit may be an inappropriate policy for any nation that is suffering either a saving deficit (i.e., saving less than net private domestic investment) or a government budget deficit (i.e., tax revenues insufficient to finance expenditures). If the nation suffers both deficits simultaneously (as does the U.S. early in the 21st century), a trade deficit in the Current Account of its Balance of Payments (the same as a surplus in its Capital Account) is the only way that the nation can finance both the saving and the budget deficits. If the government imposes tariffs to diminish its trade deficit while it suffers both saving and budget deficits, its currency is likely to depreciate on foreign exchange markets.
Trade, both interregional and international, is the vehicle for sharing the benefits of specialization by comparative advantages. When trade is free, the welfare of the trading partners can increase as their populations are able to consume products and services produced or provided under least-opportunity-cost conditions. But when trade is obstructed, the potential welfare benefits of comparative advantage specialization are lost. The deliberate imposition of trade obstructions diminishes the welfares of trading partners; the "liberalization" of trade by removing obstructions can be counted on to enhance the welfares of trading partners.
There are of course natural obstructions to trade, the most obvious being imperfect information about available alternatives and the costs of transportation of product among markets. These natural obstructions are gradually diminished and may ultimately be eliminated by technological advances that facilitate information dissemination and reduce transportation costs. As more and better information becomes available and shipping costs are decreased, ever more of the welfare benefits of specialization by comparative advantages may be shared among trading partners.
Corporate entities may obstruct trade with anti-competitive tactics and by gaining and enforcing patents and copyrights. Corporate interests may facilitate trade by international licensing of patents and outsourcing components or off-shoring production of goods and services for import. But most non-natural obstructions to free trade are imposed by governments for political purposes, and the political obstructions inevitably diminish the potential welfare gains of comparative advantage specialization.
Perhaps the most insidious form of trade obstruction comes about when one or more trading partners launches a trade war. The launch of a trade war typically occurs when, for whatever reason, one trading partner imposes or increases tariffs on imports or imposes non-tariff barriers (NTBs) to imports. Such acts inevitably elicit reciprocity from other trading partners who may match or over-top the obstruction implemented by the first trading partner. As subsequent rounds of reciprocal tariff or NTB escalation ensue, welfare benefits of comparative advantage specialization dissipate until trade is choked off and welfare benefits are eliminated.
During a trade war, producers of exportable goods suffer declining profits and may fail. Employees of those producers may lose jobs or find their hours cut back. Consumers of imported goods and services must pay higher prices that cover the tariffs or shift purchases to higher-priced domestically produced items if they even are available. In any case, it is the domestic producers, their employees, and consumers who bear the burden of a tariff, not the government or producers in the trading partner nations.
A trade war may slow the trading partners' rates of economic growth when domestic producers export less and hire fewer employees. Slower growth will follow upon rising unemployment and decreasing national income which constrains consumption spending. A trade war may even precipitate or aggravate depression in any of the trading partners' economies, as in fact occurred on global scale during the 1930s decade following the passage of the Smoot-Hawley Tariff Act of 1930 by the U.S. Congress. Political isolation and economic autarky could be end results of a seemingly never-ending trade war.
The question for any government contemplating launching a trade war is whether the political gains of trade obstruction outweigh the welfare loss to the residents of the nation. This benefit-cost comparison may not even be undertaken. But if it is undertaken it may be a very difficult comparison since it is virtually impossible to value such gains and losses on the basis of any common denominator of value.
Officials charged with trade policy are likely to overvalue the potential gains to the political administration or its political party and to undervalue (or be blind to) the likely welfare loss to the larger population of producers, employees, and consumers. The only "winners" in a trade war are the instigators whose political goals are met by imposing or raising tariffs or NTBs. All other parties, domestically and internationally, are innocent bystanders who stand to suffer losses.
Any economy will experience some "normal" amount of unemployment by people who are in the labor force but are between jobs or who are just entering the labor force and have not yet landed first jobs. But excessive ("super-normal") unemployment represents an opportunity loss of goods and services that could have been produced and consumed if the unemployed workers had been working and earning incomes. Also, long-term unemployment in a labor-abundant nation may impair its comparative advantages that are based in labor-intensive production and possibly shift labor-intensive comparative advantages to other labor-abundant nations suffering lower rates of unemployment.
An authoritarian polity (socialism, fascism) may control and suppress unemployment by application of the police power of the state to assign workers to occupations, and otherwise to punish any of working age who are caught deliberately unemployed. This is not intended to be an advocacy for shifting from democracy and market capitalism to an authoritarian polity and economy.
But excessive unemployment is one of the so-called "twin evils" of market capitalism (the other being inflation). The "Great Depression" of the 1930s decade saw unemployment in many of the Western market economies approach a quarter of their respective labor forces. Rising unemployment during an economic downturn can become a serious political problem. One of the worst things that a government can suffer is that too many unemployed people hang around street corners, carping about the government's inability to solve the unemployment problem, and fomenting revolution.
In the early post-World War II period, the governments of the U.S. and the U.K. were the first in the world to legislate responsibility of the government for achieving and maintaining high enough rates of employment, and implicitly low-enough rates of unemployment. Natural recovery forces accompanied by Keynesian-inspired government policy were gradually reducing unemployment during the second half of the 1930s decade when fortunately (or not) World War II ensued to mop up all remaining unemployment and further pull into the labor force people (students and women) who prior to the war were in school or who did not work outside of the home. Macroeconomic policy during the post-WWII era has alternated between dampening inflation and reducing excessive unemployment. Occasionally, during periods of "stagflation," government has found itself addressing both simultaneously.
Unemployment increases in particular locales for three principal reasons: cyclical downswings that reduce the demand for the goods and services produced by labor, technological advances that have the effect of "saving labor," and the outsourcing of product and offshoring of production to lower-cost locales. Local labor interests vigorously oppose both outsourcing and offshoring with commensurate loss of employment in local industries. An economic argument is that the jobs lost from local non-comparative-advantaged industries releases labor to be retrained and reemployed in comparative-advantaged industries at higher wage rates.
All three of these forces were at work during the "Great Recession" of 2008-2010. By mid-2010 unemployment had become principal object of the Obama administration economic policy and the premier issue in the 2010 mid-term Congressional election races. Although the industrial, commercial, and financial sectors of the US economy were showing signs of recovery, the US unemployment rate remained stubbornly above the 9.5 percent level of the labor force. Productivity had continued to increase over the course of the recession as businesses released labor and the retained employees carried out essential production activity.
By mid-2010 businesses were producing and selling more output and beginning to invest in new capital, but of the labor-saving types. Economists were forecasting a slow and painful recovery with respect to unemployment that might last several more years. Indeed, recovery from the Great Recession took the better part of the next decade as unemployment rates gradually fell toward 3 percent of the labor force by 2016. The policy debate focused upon whether to implement another round of stimulus spending or leave in place tax cuts that had been enacted during the previous administration.
The 2010 unemployment conundrum begs a critical question about how in the twenty-first century American society should provide the food, fiber, and shelter essentials to sustain the lives of its population. If life is to be sustained by working to earn enough income to buy the essentials, then what is the responsibility of government to ensure enough employment? Does this responsibility extend to providing government employment if there is insufficient employment in the private sector? If the link between eating and working is to be broken, then what are to be the mechanisms that motivate production and work, and that handle the distribution of output to the society?
It is not at all certain that in the future with on-going technological advances and continuing automation, enough jobs can be provided by the economy or the government to ensure adequate earned incomes. In the future it may be necessary to rethink the working-income-eating nexus, with a shift from thinking about minimum-wage adequacy to thinking about minimum-income adequacy that is not based on working.
The idea of a universal basic income (UBI) has been proposed to counter the negative income effect of job loss due to automation, alleviate poverty, and reduce inequality in the distribution of income. But if a government can specify some arbitrary basic income for universal distribution (say, $1000 per month to every resident of the nation), a larger basic distribution always would be better and always will be sought (like demands for an ever-higher minimum wage). Such demands likely would increase budget requirements well beyond the current safety net cost. And the richer the UBI distributions, the greater the incentive to take the distributions and not work at all.
A 2019 study by researchers at MIT (described by Edd Gent on the SingularityHub website, https://singularityhub.com/2019/09/16/mit-future-of-work-report-we-shouldnt-worry-about-quantity-of-jobs-but-quality/) suggests that it is not the number of jobs that are at risk from automation, but rather the quality of the jobs. The automation process has hollowed-out the U.S. workforce, increasing the number of high- and low-skilled jobs at the cost of mid-skilled jobs. This phenomenon has worsened inequality in the U.S. as many routine mid-skilled assembly-line type jobs and administrative-support occupations have been replaced by machines. Disemployed mid-skilled workers often have had to take lower-wage jobs that involve manual dexterity or personal communication. Many of the low-skilled jobs that Americans often avoid have been taken by recent immigrants.
Even so, something like UBI may be needed in the future as technological advance continues its drive to automate physical functions and thereby eliminate job opportunities for all but the best educated and trained. Perhaps a limited basic income (LBI) program could be designed to exclude distributions to any with taxable income (earned plus capital) in excess of a specified amount (twice that amount for married couples filing jointly). Since the least educated and trained include those toward the lower end of the income and wealth distributions, a UBI or LBI may be promoted as the unemployment relief vehicle of the future.
Inequality in the U.S. income distribution emerged as a prominent issue in the 2016 presidential election campaign, and it remains a prominent issue in the 2020 Democratic presidential campaigns. In a democratic society that values "rule of law," citizens are declared to be equal under the law, but they are in fact not born equal. Inherited abilities, diverse educational opportunities, and entrepreneurial orientations are principal causes of inequality. Of these, only educational opportunity can be addressed by public policy. Educational opportunities can be provided, but we can't make people avail themselves of them (like we can take a horse to water but we can't make it drink). And, there are myriad other possible causes of unequal distribution that are even less amenable to public policy treatment.
More jobs ("brought back to America" from overseas) might serve to occupy low-skilled members of society with inadequate education, and thereby to alleviate poverty at the lower end of the income distribution spectrum. But more low-skilled jobs won't help if there is little willingness to work and to accept those jobs, and their availability certainly won't help if the social safety net or prospects from criminal activity provide enough income to enable them to "get by" without working. Better (higher wage) jobs require education and skills and would deliver higher incomes to relieve inequality, but to get those jobs people have to be willing to devote (invest in) the time, energy, and effort to acquire the needed education and training. Public policy might be addressed to conditioning future generations to this necessity, but it is less likely to help adults of ages beyond the early thirties who are engaged in occupations and perceive themselves to have life-time rights to the jobs that they currently occupy.
Reward for successful entrepreneurship will make the income distribution more unequal. Curbing such reward with more steeply progressive income taxation may discourage some entrepreneurial activity, and with it growth potential. Even if it were possible to make incomes perfectly equal one time, they wouldn't stay that way because of differences in entrepreneurial perceptions and willingness to assume risk. And, drive, determination, and "sticktivity" differ among people.
Poverty, income distribution, and job loss due to automation are likely to be difficult economic challenges facing the U.S. during the twenty-first century.* Charles Murray, writing in The Wall Street Journal, September 3, 2016, has proposed a universal basic income (UBI) to eliminate poverty, to counter the negative income effect of job loss due to automation, and implicitly to reduce inequality in the distribution of income. Murray says that the system that he proposes will work only if it replaces all other transfer payments and the bureaucracies that administer them. He describes his version as follows:
Would a guaranteed universal basic income be workable? Murray estimates that the system he proposes would cost about $200 billion less than the current U.S. safety net. It is not clear how retirement income from savings would be treated. Would "earned income" exclude annual retirement income distributions? Even if retirement income distributions are treated as "disposable income" under the Murray plan, the annual UBI distribution of $10,000 likely would be less than the amounts of many retirees' Social Security distributions, thereby impoverishing those retirees who rely on Social Security to supplement distributions from their accumulated savings. Also, if UBI is to replace Medicare which many retirees designate as their primary health care insurance, the retirees' supplemental health insurance policies will have to be reconfigured as their primary health insurance policies with consequent increases of premiums that may not be covered by the $3000 that would be allowed for health insurance. These objections to Murray's proposal can be dealt with by enriching the UBI distribution amounts, but such enrichment might increase budget requirements beyond the current safety net cost.
This last concern poses the biggest potential problem with the UBI proposal. It should be no surprise that the public debt of a society that prefers democratic polity becomes a serious political issue. The prospect was noted nearly two centuries ago by a Frenchman visiting in America. In 1835, after traveling for two years in the United States, Alexis de Tocqueville wrote De la Démocratie en Amerique (Democracy in America). In his chapter on “Government of the Democracy of the United States,” Tocqueville noted that when universal suffrage provided legislative empowerment to the poor and propertyless, society would soon discover that it could vote itself benefits quite apart from any ability of government to finance the provision of them. If some benefits are good, then more (and ever more) benefits must be better. Voila! The basis for out-of-control public debt in American democratic polity was noted as early as 1835 by a French visitor to the United States. The wonder is that it took nearly two more centuries for the problem to materialize.
If government can select some arbitrary basic income for universal distribution, a larger basic distribution always would be better and always will be sought (like demands for an ever-higher minimum wage). Such demands likely would increase budget requirements well beyond the current safety net cost. And the richer the UBI distributions, the greater the incentive to take the distributions and not work at all.
A 2019 study by researchers at MIT (described by Edd Gent on the SingularityHub website, https://singularityhub.com/2019/09/16/mit-future-of-work-report-we-shouldnt-worry-about-quantity-of-jobs-but-quality/) suggests that it is not the number of jobs that are at risk from automation, but rather the quality of the jobs. The automation process has hollowed-out the U.S. workforce, increasing the number of high- and low-skilled jobs at the cost of mid-skilled jobs. This phenomenon has worsened inequality in the U.S. as many routine mid-skilled assembly-line type jobs and administrative-support occupations have been replaced by machines. Disemployed mid-skilled workers often have had to take lower-wage jobs that involve manual dexterity or personal communication. Many of the low-skilled jobs that Americans often avoid have been taken by recent immigrants.
Even so, something like UBI may be needed in the future as technological advance continues its drive to automate physical functions and thereby eliminate job opportunities for all but the best educated and trained. Andrew Yang, a 2020 U.S. presidential candidate, has advocated a UBI of $1000 per month for every American resident to address both the current income inequality issue and the forthcoming automation unemployment problem.
Perhaps a limited basic income (LBI) program could be designed to exclude distributions to any with taxable income (earned plus capital) in excess of a specified amount (twice that amount for married couples filing jointly). Since the least educated and trained include those toward the lower end of the income and wealth distributions, a UBI or LBI may be the best, and possibly only feasible, vehicle for addressing distributional inequality, poverty, and job loss due to automation in the twenty-first century.
George Will, writing in The Washington Post, October 6, 2016, in citing Nicholas Eberstadt's monograph, "Men Without Work: America's Invisible Crisis," says,
(https://www.washingtonpost.com/opinions/americas-quiet-catastrophe-millions-of-idle-men/2016/10/05/cd01b750-8a57-11e6-bff0-d53f592f176e_story.html?utm_term=.9dcd94f58222)
This statistic betrays three phenomena: 1) a nation affluent enough to afford to have 32 percent of its adult male population voluntarily not working and being supported by other members of society; 2) the likelihood that on-going automation has eliminated some of the jobs in which these adult males might have worked; and 3) an unemployment rate (nominally 3 percent at mid-2019) that is lower than it would be if the voluntarily non-working adult males were in the labor force, either holding jobs or looking for jobs. However, official income and labor force statistics miss the fact that some of the "non-working" adult males are capturing unearned income from criminal activity or earning income in not-illegal "underground" economic activity (i.e., productive activity that is compensated in cash so that it is not taxed, and hence is not measured in either employment or earned-income statistics).
In the first chapter of his book The Affluent Society (1958), John Kenneth Galbraith notes that although nearly all people through the ages have been poor, great wealth has been enjoyed only during the last couple of centuries in the small corner of the world populated by Europeans and North Americans. He paints a picture of the poverty experienced by humanity through the ages:
The ideas by which the people of this favored part of the world interpret their existence, and in measure guide their behavior, were not forged in a world of wealth. These ideas were the product of a world in which poverty had always been man's normal lot, and any other state was in degree unimaginable. This poverty was not the elegant torture of the spirit which comes from contemplating another man's more spacious possessions. It was the unedifying mortification of the flesh--from hunger, sickness, and cold. Those who might be freed temporarily from such burden could not know when it would strike again, for at best hunger yielded only perilously to privation. It is improbable that the poverty of the masses of the people was made greatly more bearable by the fact that a very few--those upon whose movements nearly all recorded history centers--were very rich.
Writing in The Washington Post, columnist Fareed Zakaria describes the improvement in the well-being of the world's masses by the early 21st century:
In almost all pre-20th century societies, healthcare was a personal and household responsibility. It had rarely (never before?) been asserted or guaranteed by anyone (person or government), i.e., it had not been "socialized." Some 2020 Democratic presidential candidates are asserting that healthcare is an American "right" rather than a privilege. A society must be sufficiently affluent to even contemplate universal healthcare as a human right for its population. It wouldn't have been possible (or even imaginable) prior to the late 20th century in America, and it can't be a serious consideration today for most of the low-income (third-world) countries of Africa, Latin America, and Asia. In a sense, it is a luxury enabled by affluence to even contemplate universal healthcare for a population.
A society's right to universal healthcare might be asserted as a moral imperative, much in the way that the United Nations has issued its "Universal Declaration of Human Rights" (https://www.un.org/en/universal-declaration-human-rights/). But simply asserting a right does not make it effective. The enunciation of a "right" to anything presupposes that some one or some organization is prepared to guarantee the right and assume the cost of enforcing the guarantee. The assertion of a right to healthcare for all American residents (including undocumented immigrants?) is based upon the premise that the U.S. government would be the guarantor, and it implies that the U.S. financial "well" is infinitely deep. This means that U.S. taxpayers would become the ultimate guarantors and inevitably must pay the bill, no matter how high it becomes. But why limit the right only to American residents? Why not assert a global right to adequate healthcare that the U.S. government must guarantee and American tax payers must pay for?
"Medicare For Anyone" who wants it has been proposed as an alternative to a Progressive advocacy of "Medicare For All." (https://www.washingtonpost.com/opinions/2019/07/23/medicare-all-faces-its-moment-truth/?utm_term=.1f3b2352c740) Medicare for anyone who wants it would be a "public option," i.e., a government agency that provides healthcare insurance in competition with private healthcare insurance providers. A public option may seem to be an attractive centrist alternative between the present Affordable Care Act (ACA) system and a far-left Medicare For All proposal.
A public option that entails lower healthcare insurance premiums than private insurance premiums is likely to induce insurees to shift from private insurance to the public option, in the long run ending up with a "single payer" insurance system. This may be the intent of those who advocate a public option. Writing in The Washington Post, columnists Chelsea Janes and Michael Scherer say that
. . . .
Many Democrats argue that if Americans are given the choice of a public, government-run health option like Medicare, they will eventually see it as preferable to the private system and will migrate there on their own. That would create a government-run system without coercing people to join it, they say. (https://beta.washingtonpost.com/politics/democrats-back-off-once-fervent-embrace-of-medicare-for-all/2019/08/19/13c76ffe-c28b-11e9-b5e4-54aa56d5b7ce_story.html)
But a government-run single-payer insurance system that lacks competitive pressures likely would be subject to bureaucratic inefficiencies and political machinations. It would also be unlikely to initiate or accommodate innovation.
Any insurance program is a vehicle for managing and sharing the risks of suffering unexpected expenses. Insurance as a means of "socializing" risks was an innovation that emerged in the 19th century. The alternative to sharing risk by buying insurance is to be self-insured, i.e., to be prepared to bear the full burden of unexpected expenses. Prior to the 19th century, most risks (healthcare and other) were individually borne, i.e., there was little possibility of socializing risk. In mid-20th century, Florida law required the purchase of automobile liability insurance policies unless one could demonstrate financial ability to absorb liability expense of at least $50,000, i.e., to be self-insured. Today, every U.S. state government and governments of most other countries require the purchase of automobile liability insurance as a condition for licensing the use of automobiles on public roadways.
In the 20th century, healthcare insurance became a popular option for those who could afford the premiums, but healthcare self-insurance remained a possibility and was the norm for lower-income persons and households who gambled that they would not incur traumatic medical expenses. Healthcare of the "indigent" was implicitly socialized as doctors and hospitals absorbed the expense of treating the indigent and shifted it by charging higher prices and rates to paying clients and their insurance policies. The intent of the 21st century ACA program in the U.S. was to mandate (i.e., to force) every U.S. resident to purchase healthcare insurance, else pay an income tax penalty.
A Medicare for All program would socialize healthcare directly by establishing the automatic coverage of every person while paying for the program in the U.S. government's general budget. It would thereby avoid the appearance of forcing compliance with a law requiring the purchase of healthcare insurance. The force dimension of the healthcare socialization process would thus lie in the requirement to pay income taxes by the segment of society with incomes high enough not to be exempt from paying income taxes. (More than 44% of American residents paid no income taxes in 2018, https://www.marketwatch.com/story/81-million-americans-wont-pay-any-federal-income-taxes-this-year-heres-why-2018-04-16.)
Medicare For All may eliminate private insurance policies (and some insurance companies), but it would not eliminate private insurance for those who wish to purchase "supplemental insurance" policies unless the government also prohibits the private purchase of supplemental insurance. (Could/would the U.S. government do that?) Supplemental insurance policies would be paid for by those with incomes high enough to afford them, and thus would create an elite tier of health care that doctors and hospitals would prefer. Unless mandated by law to treat all comers, some doctors and hospitals might decline clients with only Medicare For All coverage, i.e., restrict clientele to those who have purchased supplemental insurance policies in addition to Medicare For All coverage.
Economists are fond of asserting that there is no such thing as a free lunch, but they acknowledge that indivdual members of society can have free lunches if others (friends or the larger society) pay for the lunch. Medicare For All would foster the delusion that individuals may enjoy free healthcare even though the larger society must pay for it. Economists also find that people tend to consume more of anything when its price is reduced. Medicare For All would make healthcare appear to be not just cheaper, but actually free to the individual. Nominally "free" healthcare inevitably would result in increased consumption of healthcare services, thereby increasing the cost to society.
Medicare For All may reduce administrative overhead costs and enable negotiation down of prescription prices, but there is no guarantee that either or both will reduce healthcare costs by enough to cover increased consumption of healthcare services, coverage of additional persons who are not now insured, and any expanded benefits (e.g., vision, hearing).
A government agency negotiating healthcare and drug prices amounts to price fixing, which is designated by the Federal Trade Commission Act of 1914 as an "unfair trade practice" for private sector competitors. Prices set (or negotiated or fixed) by government agencies often result in surpluses (prices set too high for equilibrium) or shortages (prices set too low). A government agency negotiating healthcare service and drug prices down under a Medicare For All system likely would lead to shortages of drugs and increased wait times for services.
If reduced administrative overhead and negotiated lower prescription prices fail to cover increased healthcare expenses (how likely is this?), Medicare For All would require increasing taxes or increasing public debt to cover those not presently insured and any expanded benefits (e.g., vision, hearing).
While Medicare For All would eliminate private insurance premiums (except for options to purchase "supplemental insurance" policies), there is no guarantee that the resulting decrease of household expenses would be sufficient to cover an increase of income taxes to cover a Medicare For All program. If insurance premium reductions are insufficient to cover the increase of personal income taxes, Medicare For All will have an impoverishing effect on received income (after-tax income) and dissipate recent wage gains. This might militate against a Democrat being elected in 2020.
If any part of the increased cost of Medicare For All is paid by increasing public debt, that part of the cost of healthcare for each generation is simply shifted to future generations, ad infinitum. Financing increased healthcare expense by incurring bigger annual budget deficits requires issuing ever more government bonds. But the global appetite for U.S. government bonds is not likely to be infinite. And a vulnerability is that certain authoritarian governments that hold huge quantities of U.S. government bonds (e.g., China, Saudi Arabia) could at any time decide "to dump" their holdings on the global bond markets.
Increasing the supply of U.S. government bonds relative to demand for them on global bond markets would cause U.S. government bond prices to fall and yield rates on them to rise relative to bond prices and yield rates on bonds issued by other governments. This would cause ever-increasing interest expense in the government's budget that would either push out other categories of government spending (e.g., military, infrastructure, climate control) or increase annual deficits even further.
Faced with ever increasing healthcare costs, a failure of the U.S. Congress to approve an increase of the debt limit might cause the U.S. government to default on bond interest payments and principal redemptions. In this event, dollar exchange rate would plummet on foreign exchange markets and the U.S. government's debt ratings would crash. If this were to happen, foreigners would become more resistant to buying U.S. government bonds, and thus less willing to help Americans to finance their increasing debt attributable to ever-increasing healthcare costs.
Medicare For All would lack competitive pressures and thus would diminish the government administrative agency's motivation to innovate or to cover recent medical technology advances. A Medicare For All bureaucracy that barely covers expenses or operates at a loss would have no "retained earnings" cushion to devote to research and innovation. (https://www.washingtonpost.com/opinions/medicare-for-all-is-political-suicide-for-democrats/2019/06/06/8c41f14c-87d1-11e9-a491-25df61c78dc4_story.html?utm_term=.8f9e365f862e).
Pharmaceutical providers are indeed profit-driven (as are all private-sector businesses except the intentional "not-for-profits"), and they assert that substantial profits are necessary to finance research and innovation. If Medicare For All succeeds in negotiating drug prices down too far, private sector pharmaceutical profits will decline and reduce "retained earnings" that can finance research and innovation.
The fact that American drug prices typically are higher than prices of the same or comparable drugs in other countries may indicate that American drug consumers are subsidizing drug research and development that benefits drug consumers in other countries who import American drugs or who make drugs locally under license by American drug producers. This may be justifiable as "humanitarian work" on behalf of lower-income (third-world) countries, but not so much for high-income countries in North America (Canada) and Europe where drug prices often are lower than in the U.S. It may also indicate that foreign drug producers have emulated (reverse-engineered) or pirated drug formulas that American drug producers have paid to research and develop.
Whether pharmaceutical profits are excessive is a personal and social perception that can be assessed by observing pharmaceutical salaries, dividend distributions, and how their share prices are changing on stock markets compared to salaries, dividends, and share prices in other industries. An alternative to the perception of "excessive profits" captured by private-sector U.S. drug manufacturers is for the government to nationalize them, i.e., to bring ownership and management of them into the public sector. In theory nationalization could reduce prices to eliminate profits, but it would also eliminate the retention of earnings to finance research and innovation. Historical experience with nationalization of private enterprises has not be encouraging with respect to managerial efficiency or to innovation.
As national healthcare systems in other countries have shown, universal healthcare often leads to longer wait times for appointments and elective surgeries. This may induce sufficiently-affluent citizens to seek healthcare services abroad (medical tourism) where they may pay to have them sooner and at lower costs, and thereby to create an elite tier of healthcare. (https://www.nytimes.com/2019/08/09/business/medical-tourism-mexico.html?em_pos=small&ref=headline&nl_art=4&te=1&nl=upshot&emc=edit_up_20190815?campaign_id=29&instance_id=11659&segment_id=16188&user_id=86b0d837dd357b2a6e0e749321f6ed7f®i_id=74240569emc=edit_up_20190815)
Medicare For All is a far-left proposal with which a majority of Democrats may not be comfortable. I suspect that if a Medicare For All proposal becomes a centerpiece of the Democrat's 2020 platform, it may well serve to re-elect Trump. A more "centrist" alternative than either Medicare For All or a public option may enhance the electability of a Democratic candidate. A more palatable approach might be to advocate incrementally improving the existing ACA healthcare system by plugging coverage gaps and expanding benefits while giving sufficient attention to financing increasing healthcare expenses.
Comments
Post a Comment