Dave Schutz continues the conversation with Mark about what he called declinism in his original post:
Mike kindly put me up on RBC as a guest in February, and Mark, our genial host, called me ‘orthogonal’ in his post of March 1: “But Schutz is simply wrong to treat the question of distribution as orthogonal to the problem of falling living standards. The forces he cites – which all boil down to globalization and the falling cost of making good stuff overseas – are not, by themselves, capable of reducing real GDP per capita in the United States. On the contrary: the cheaper and better stuff we can import, the greater our real income.â€Â Thanks, I think. Orthogonal Declinist, what’s not to like? More: “The threat of globalization is precisely the threat of a greatly worsened distribution of income….But if – and it’s a huge if, in this Age of the Tea Party – the gains from trade are recycled by the tax-and-transfer system and by directly provided government so that they translate into rising standards of living up and down the income distribution, and if the result is more support for vital public-sector investments, then there’s no more contradiction between prosperity for China and India and prosperity for the U.S. than there was between economic growth in the U.S. and economic growth in Europe in the 19th Century.â€
Yes, I said I think our income drops in future due to (1) people (both within and without the US) won’t pay as much for stuff made here - and this is due to falling cost of making good stuff overseas, and (2) higher cost of inputs - because manufacturers and residents in other countries will pay more for inputs than we will, there are new bidders for Zambian copper and we have to pay more, and in addition the cheapest oil has already been pumped, so new oil will cost more to lift. So I’m claiming it’s not just gains from trade, it’s also that some props have been knocked from under our gains from our production - a lot of our apparent prosperity in the last ten-fifteen years has been fake, investment by China and Saudi sovereign wealth funds, and Japanese teacher retirement funds, in mortgages on houses whose value was rising because of speculation rather than because the people buying them could ever reasonably expect to keep up on those mortgages with income from making and selling things. This was going to end in tears, and it has, and this foreign aid from China and Saudi Arabia and Japan has no future. So, no more HELOC money to buy Chevy Suburbans, and it’s not coming back. 
I did pay some attention to distribution, in suggesting that relative incomes have been set, partly by the market directly and partly by negotiation between public employees and government, at levels which gave relatively similar rewards to people with similar talents and training, and that those arrangements are cast into doubt going forward because some sectors/employers are becoming far less rewarding relative to others. And this is merely a restatement of, what will we do for the buggy whip makers?
Mark is quite right that we can and will think whether our current distribution of wealth, gains from trade, etc. should be moved around by tax and transfer, and from and to whom. We are seeing the opening salvoes of this discussion in the struggle over level of compensation and benefits to union workers relative to other workers in the US - Wisconsin this past few weeks, Obama froze Federal civil service wages, California election, these are all facets of the same gem. Volcker gave a speech in which he said we are spending 4 ½ per cent of GDP on the financial sector, that historical levels were about 1 ½ per cent, and we should aim to get back closer to 1 ½ per cent. Mark has views that we should be taxing the rich more intensely, and I think assumes this would be through income tax - I absolutely share the view that we should be taxing more, but am inclined to think VAT and gasoline and close-loopholes-for-ethanol, mortgage tax deduction. I regret that Obama threw in the towel on estate tax, which was a wealth tax, we don’t have enough of those.
But I think no matter our decisions on redistribution, the future will be less abundant than the past. This sharpens my concern for what I will call the ‘useless crap’ lines in our national expenditures. Some have been funded by the tax-and-transfer function of government, some by private individuals who thought they were good investments, and I think we can’t afford all of them any more. There’s going to be ongoing struggle about which (if any) of them we continue to fund. In looking at my list, remember John Wanamaker: “Half my advertising is wasted, I just don’t know which half.”
My useless crap list: the East Saint Louis public schools. The Compton public schools. College educations in majors called “XXXX Studies.â€Â  Employers require college degrees to avoid screening for competence in employment. Giant cars with low gas mileage driven by one person to work. Free travel on roads paid for by general fund taxes (somewhat less: free travel on roads paid by gasoline taxes.) Time spent in traffic jams. Giant houses with low energy efficiency, lived in by small well-to-do families who get huge tax deductions from the mortgage tax exemption. Welfare for folks who could have, would have, done day labor before they were displaced by illegals. Security guards. Year after year energy subsidies for heating poorly insulated homes. Corn ethanol to fuel cars. 4 ½% of our GDP to the financial services industry. High speed trains between LA and SF, Orlando-Tampa or, actually, anywhere but Boswash. Legal notices printed in the newspapers. Discarding Detroit while building Tucson. Miles and miles of useless empty houses in Vegas. Expensive residential jail services, provided to nonviolent offenders, including drug offenders. And by the way, drug laws generally and the consequent destruction of Mexico. Throwing away the human capital we have invested in guys who like to look at photos of naked 13 year olds, but who don’t themselves abuse 13 year olds. Throwing away the human capital of guys who drive drunk. Criminalizing prostitution.
“And this is merely a restatement of, what will we do for the buggy whip makers?”
As has been repeatedly pointed out (see Krugman), THIS IS NOT STRUCTURAL UNEMPLOYMENT, for the most part. Wages are under pressure across the board, save Wall St (which should be counted as government-subsidized).
And by now, the assumption that we’ll just casually alter a f*cked-up pre-tax distribution by a ‘wicked good’ safety net is only made by frauds.
Although I agree with you that we’re headed for declining income, I think your reasons need to be unpacked. Higher price of inputs only matters if we keep using the same proportion of material stuff in our exported goods (and don’t extract anything ourselves), and lower price of competing goods only matters for those goods that are essentially interchangeable with the ones made everywhere else in the world.
But I think what you’ve missed is that the declinist story is one that’s being told specifically to bolster the current trend of distributional changes. The more you can get the vast bulk of people to believe that the whole country is up a creek without a checkbook, the easier it is (under current political rules) for the haves to loot what’s left.
I agree with a lot of the waste, but not the underage porn. The customers directly feed the abusive production. They are in no way innocent (though I agree jail is not necessarily the answer). If 18-year-olds aren’t young enough for you, you have a serious problem. And you can draw a direct line from this stuff to actual crimes, which are themselves *extremely* expensive to society if you count all the costs.
Ditto with learning to get along/cultural studies. It’s very expensive when we *don’t* do that.
Speaking of which, you also forgot all the wars. They are stimulative I suppose, but they seem to me incredibly, tragically wasteful, and mostly avoidable if we didn’t have our heads up our a**e*!
And bad driving which causes accidents. More tickets for people who don’t signal! And tailgaters- don’t get me started… very very expensive.
Dave,
I think our income drops in future due to (1) people (both within and without the US) won’t pay as much for stuff made here – and this is due to falling cost of making good stuff overseas, and (2) higher cost of inputs – because manufacturers and residents in other countries will pay more for inputs than we will, there are new bidders for Zambian copper and we have to pay more, and in addition the cheapest oil has already been pumped, so new oil will cost more to lift.
This looks contradictory to me. Higher input costs, which presumably affect everyone, yet falling cost of making stuff overseas? The only way that can work is if overseas wages drop relative to ours (and transportation costs don’t go up). But why expect real wages overseas to drop? Wages in China have risen, and will rise further, and not just from inflation.
The basic determinant of our real GDP is our productivity. If we do not increase our productive capacity GDP will drop. If we improve it, then GDP will be fine.
Bernard Yomtov: I’m asserting falling relative costs of making things overseas, yes. Not too much wages - I like this story: Cars. Used to be, Detroit was it, or Stuttgart or Wolfsburg. You had parts suppliers, and engineers who knew what they were doing, and phones which worked, and local officials who let you build something, and machine shops which could fix your production equipment. And houses which car executives wanted to live in. None of that stuff existed in Ulsan. Remember the trouble Tito had setting up production for the Yugo, butt of international jokes? Over time, these advantages have eroded, and how! In Ulsan you have parts industries and engineers and phones and a container port. Akron was great for tires, and Yokohama has all available facilities now. So even if people would have worked for nickels in Ulsan in 1962, you couldn’t do it there, so you paid people in Detroit whatever they cost. And now you can do it in Ulsan. And now that you can do it there, it is very hard to keep paying Detroit people more than Ulsan people to do the same job. This is particularly true if the Ulsan guys will both put the seat in and attach the wiring harness, when the Detroit guys have a rule that says the wiring harness guy has to be an electrician, so you have two people doing that job.
There’s something kind of circular, in this reasoning. If average productivity is rising, in Ulsan and Detroit, what’s the justification for paying either the Ulsan guys or the Detroit guys “less”, denominated in units of car? Because that’s the only “less” that ultimately makes sense.
Unless the “relative costs” are ultimately about the distribution of income between social and political classes?
If decline is accelerated by looting . . .?
NCG: I don’t know what you do about underage porn, if you don’t do what we are doing. I’ve seen a plausible surmise that the fact that (1) the number of rapes has dropped hugely in recent years and (2) this happened just as pornographic pictures of adult women became widely available free from the Internet for free, is not inconsistent with: maybe guys who can look at pictures feel less need to force themselves on actual women? Don’t know - and I sure don’t know anything about the motivations and pathologies of men who get off on photos of kids.
What we are doing seems kind of blunt-instrument to me. There’ve been a couple of really wrenching cases in my county - an assistant county treasurer and a guy who was a much-loved soccer coach have both been paraded off to the clink, and both seem to have been blameless in their personal lives except that they liked these pictures. I’m with you on “..customers directly feed the abusive production” and hate to think of more 8-year-olds undergoing this kind of stuff. I would probably start out by thinking - we keep reading that there are hundreds of thousands of these images out there. Maybe the cops could put digital watermarks on them, and these guys could look at the watermarked photos? I don’t know what to do, but I put the line about underage porn consumers in my list of waste because I saw these guys getting their lives ruined.
Let em try, Mr Schutz, to break you argument into components, so I can be sure I’m understanding it correctly. (I tend to agree with it, but want to make sure what I’m understaning is what you are saying.
1) The relative cost of inputs is rising; thus, in units of cars, car makers get fewer cars payment per car produced, and raw material suppliers get more.
2) As electricity/literacy/communications networks become more widespread, having them stops providing significant relative advantage. (Living in Detroit is like owning the really good, reliable well; it’s very valuable until city water is introduced.) So the effect of increasing infrastructure elsewhere in the world is that there aren’t gains from owning infrastructure to be shared with workers; effectively, the amount of capital has decreased.
I’ll add: you don’t need a lot of structural unemployment before adding to your human capital, in a way that may become obsolete, stops being attractive. This effect is another way that the globalization of production reduces the effective capital of American workers.
SamChevre: yes, I have two arguments you are looking at. One applies to the whole world: inputs are getting more expensive - oil is harder to lift, the highest-quality nicest ore was mined years ago. This makes our labor less valuable relative to things, but is no harder on USA people than on anybody else.
Second is, as you suggest, the infrastructure for making complicated things is widespread now. This means that people trained to make complicated things - and their unions - are in a much worse competitive position than they were, if you get a really swell and expensive contract for the UAW in Detroit, Hyundai will turn out nice cars much more cheaply in Ulsan, and buyers all over the world will find Hyundais more attractive relative to Fords.
Doesn’t most of this ignore the realities of diminishing oil supplies? Does everyone agree that global shipping will be uninterrupted due to lack of fuels?
What’s it going to be; war,transport,food,plastics,or electricity?