Even Smart People Get It Wrong Sometimes

by

Economist Art Laffer:

“China is a huge plus to the U.S. because without China there is no Walmart, and without Walmart there is no middle class or lower class prosperity in America.”

Actually, the US was known for broad-based prosperity long before either Walmart or China was a significant factor.  It was really only in the 1980s that Walmart’s expansion really took off…and it was then by no means as China-dependent as it has more recently become.  Indeed, starting in 1984 and extending at least through the early 1990s, Walmart was a strong supporter of the Crafted with Pride in the USA campaign, which was launched by textile entrepreneur Roger Milliken, among others.

China’s presence in the global marketplace was greatly expanded by the Permanent Normal Trade Relations bill, which was signed by President Clinton in October 2000, as well as by China’s own economic-liberalization policies.  (Some data on the growth of Chinese exports over time, here)

Real mean US household income, which is effectively a measure of price levels as well as wages/salaries, grew from $71773 in 1985 to $93887 in 2000.  Fifteen years later, in 2015, it had risen to only $95887.  (2017 dollars)

Real median household income   grew from $51455 in 1985 to $59938 in fifteen years later, in 2000. In 2015, this indicator had actually declined to $58476.  (It grew to $61372 by 2017)

There are a lot of factors that affect an economy, of course, and it would be unfair to conclude that the slowdown in American household income growth was caused by the vast expansion of trade with China.  Maybe it would have been even worse without Chinese imports and exports?

National Review writer Robet VerBruggen cites “research” suggesting that “consumers save hundreds of billions of dollars per year thanks to expanded trade with China, and six-figure sums for every manufacturing job lost.  (Tucker) Carlson may be right that cheap junk from China doesn’t make us happy in any fundamental way, but it would put serious strains on family budgets if all that junk got expensive again.”

Maybe. But I doubt if the strains would really be all that serious over time. If manufacturers did not have vast reservoirs of low-wage labor available for production of a particular product, then the incentives to improve productivity when making that product with high-wage labor would be greatly increased. Capital investment that makes no sense when you are paying workers $1.50/hour may make great sense when you have to pay $15/hour.  Furthermore, product designs themselves can often be changed in minor ways to make them more manufacturable; again, this would help reduce the cost impact of domestic or other high-wage-country manufacturing.

I doubt if the strains on family budgets resulting from such changes in production-labor costs would have anywhere near the impact that has resulted from dysfunctional public schools (resulting in a need to pay for private schooling or move to a pricier neighborhood), unreasonable constraints on home-building, and out-of-control administrative and facilities spending by universities, coupled with irresponsible marketing of degree programs and student loans by same.

One thing that has definitely been beneficial about China’s export trade is the drastic reduction in poverty in that country; this reduction is indeed something that we should all celebrate.  I suspect, however, that given economic liberalization, China could probably be doing just as well or almost as well with an economic approach that is not so extreme in its trade orientation but more focused on satisfying domestic demand…and this would probably be much more sustainable for them in the long run.

Also, here are some additional links on US wage trends for anyone who’s interested:

 

Average hourly earnings of production/nonsupervisory employees shows a somewhat different pattern from the household date:  rapid increase in the mid/late 1960, up to a peak of about $22 in the 1970s, then decline to a low in 1995, with some recovery by 2000 and reaching $21.51…ie, back up to the 1970 level…by 2015.

This chart shows a longer history of mean real hourly wages, from 1948 to 2013, and also some productivity data.  It jumps out that the period of great increase was from the late 1940s to the early 1970s; the changes since then are minor fluctuations by comparison, although pattern is again somewhat different from the household data.

More wage history data and analysis  here

29 thoughts on “Even Smart People Get It Wrong Sometimes”

  1. Karl Rove’s biography of William McKinley <made a fair argument that tariffs did add to prosperity, although that was a time when manufacturing was just getting rolling.

    We need a fair analysis of the cost of tariffs versus the wages of semi-0skilled workers. I don't think recent such analyses can be trusted.

    There is too much money sloshing around that is not making anything,.

  2. History of tariffs in the US

    Tariffs were the main source of Federal Government revenue from 1790 to 1914. I don’t think this is well-understood, a lot of people seem to think that they are something being emphasized for the first time by Donald Trump.

    Ace got into a related dispute on and with Twitter:

    “(A journalist) suggested that tariffs were something new for Republicans, rather than one of the main planks of the “American System,” which has been around since…oh…men like Henry Clay and John C. Calhoun and John Quincy Adams supported it! I’m no journalist, but that makes it 200+ years old.

    What did I say? I suggested that she was too dumb to #LearnToCode….”

    Which got him suspended from Twitter.

  3. Thank God, I never got interested in Twitter inspite of Hugh Hewitt telling everyone they had to get on board the new media.

    Tariffs were the principal sources of federal revenue until the 16th Amendment.

    Smoot and Hawley were wrong to try to use them punitively in the late 1920s. Hoover was opposed and was correct but he signed it anyway,

    It damaged the countries trying to recover from WWI but it did NOT cause the Depression here, That was Roosevelt and the “Brain Trust,.”

  4. Tariffs are a tool in conducting international trade policy. Since the end of WWII, the USA has given away the store to promote trade. Times change and so too trade policy.

  5. Household stats are tricky because the nature of a household has really changed in the last few decades as families have completely imploded for lower classes, and the problem has begun to seriously spread to the middle class as well.

    re: China, the people there are all slaves, and the government numbers are completely made up.

  6. This chart shows a longer history of mean real hourly wages, from 1948 to 2013, and also some productivity data. It jumps out that the period of great increase was from the late 1940s to the early 1970s.

    Having a monopoly in manufactured goods due to the rest of the world’s manufacturing infrastructure flattened by bombs will do that. And it took 25 years for Japan and Germany to bounce back. I remember the first guy in my Midwest neighborhood to buy a new Japanese car, a ’71 Corona I think. At the time the quality of Japanese manufactured products was still suspect, as China’s are today. He was taking a risk not plunking his money down on a Vega or Pinto or Gremlin. (VW wasn’t an option due to their crappy heaters.)

  7. “Having a monopoly in manufactured goods due to the rest of the world’s manufacturing infrastructure flattened by bombs will do that.”

    If the argument that Trade is the absolute essence of middle-class prosperity, then it would have had the opposite effect, given that there wasn’t then much of had anyone to trade with.

  8. I think an argument can be made that financial services has taken over as a wealth machine but it does not include much of the working population. Those who save and invest in the stock market hitch a ride but that does not include most wage earners.

    The guy who created a lot of wealth for the middle class was the founder of Vanguard, who just died.

    I was slow to see this because I knew too many stock brokers who I considered fools. Index funds came along late for my working life.

  9. “If manufacturers did not have vast reservoirs of low-wage labor available for production of a particular product, then the incentives to improve productivity when making that product with high-wage labor would be greatly increased.”

    This is exactly right, and everyone knew it once. Jonathan RT Hughes’s American Economic History textbook, which everyone should read, makes clear that the entire history of America has been shaped by labor scarcity, leading to high wages and productive investment in labor saving machinery.

  10. “… the period of great increase was from the late 1940s to the early 1970s; the changes since then are minor fluctuations by comparison …”

    Many factors are at work in an economy, so we should be careful about ascribing too much to any one factor. But if we think about what happened in the 1970s, something jumps out: the Environmental Protection Agency was created, and Congress (arguably unconstitutionally) delegated much of its power to it and a growing number of other unelected bureaucracies to make regulations. The exponential growth in regulations (and the parallel exponential growth in the complexity of the tax code) effectively destroyed much of US industry.

    The evidence for the destructive effect of bureaucratic over-regulation can be seen in the automobile industry — where the US imports products from HIGH-WAGE countries like Germany and Japan. We see brain-dead Leftists proudly saying that US emissions of CO2 have declined — without realizing all that has happened is the industry & the jobs & the tax revenue have gone elsewhere; the planet has seen no reduction in CO2 emissions, and the American worker has paid the price.

    Of course, other factors have been important too. The decline of the educational system is having long-term impacts, along with the Gramscian Long March of the Extreme Leftists through the institutions.

    “And it took 25 years for Japan and Germany to bounce back.

    It is worth considering why defeated (bombed out & occupied) Japan & Germany bounced back after WWII, whereas victorious (but also bomb-damaged) England went into terminal decline. There are many factors at work in the success of an economy — the overhead burden of excessive regulation and Ruling Class pride deserves serious thought.

  11. “It is worth considering why defeated (bombed out & occupied) Japan & Germany bounced back after WWII, whereas victorious (but also bomb-damaged) England went into terminal decline.” After WWI England insisted in returning the pound to its prewar valuation, a matter of pride and stupidity. It became uncompetitive in world trade and with help from the all powerful trade unions and their demands to maintain high wages, English manufacturing collapsed along with a million jobs. This tragedy was repeated after WWII, finishing off what was left of the manufacturing base and all those jobs. Congratulations trade unions and the British elites for allowing this to happen.

  12. Lexington Green….”Jonathan RT Hughes’s American Economic History textbook, which everyone should read, makes clear that the entire history of America has been shaped by labor scarcity, leading to high wages and productive investment in labor saving machinery.”

    There is a study of the relative adoption of the Spinning Jenny in Britain, France, and India: the author concludes that the rates were pretty much determined by two factors: wage rates, and interest rates.

    Previously, I’ve proposed a thought experiment: If Henry Ford had been able to “offshore” (ok, “offriver”) the Model T production to Mexico, while paying very low wages, would he have introduced the assembly line and other labor-saving technologies?

    One would have to look at the numbers in depth, but there is some configuration of labor and capital costs at which it would have been cheaper to make the car by hand in Mexico by the then-traditional assembly methods than to make it at US wage rates while paying the capital costs of the added productivity equipment.

  15. OUTLOOK FOR U.S. IMPORTS IN 1949 and 1950

    In 1947 the US exported $14.5 billion, imported $9 billion, and virtually all the imports were commodities, things that either didn’t require much capital to produce (agriculture) or used capital that wasn’t destroyed during the War (mining).

    But if we think about what happened in the 1970s, something jumps out: the Environmental Protection Agency was created, and Congress (arguably unconstitutionally) delegated much of its power to it and a growing number of other unelected bureaucracies to make regulations.

    Nixon was the last New Deal president. Those massive new federal agencies are easily the worst part of his legacy.

  16. Capital investment that makes no sense when you are paying workers $1.50/hour may make great sense when you have to pay $15/hour. Furthermore, product designs themselves can often be changed in minor ways to make them more manufacturable; again, this would help reduce the cost impact of domestic or other high-wage-country manufacturing.

    It has been painfully obvious that something will have to change for the proposed Foxconn plant in southern Wisconsin to ever get off the ground. The deal was made when Scott Walker was still governor, but from the start there were a lot of questions about how it was going to proceed.

    They were originally planning to make large LCD TVs, but it turns out that will be more difficult than everyone thought. The production methods that China uses can’t be easily duplicated here.

    It takes a lot of production labor. Wisconsin was going to subsidize roughly 17% of workers salaries, but current comparable salaries in China are 80%-90% less. Foxconn is now planning on hiring mostly engineers instead of production workers. It’s starting to look like they won’t actually be making much there.

    The extra large sheets of glass can’t be shipped over long distances, so Foxconn required Corning to be co-located with them. After all the subsidies and handouts to Foxconn, there wasn’t anything left for Corning. The glass will now have to be shipped from Corning’s Kentucky plant, so now only much smaller displays can be made, if they ever make them at all.

    This all worked in China because the centralized command economy dictates what companies can do and how workers can live. It doesn’t work in Wisconsin because of democracy.

    This has been a real eye-opener. It could mean that for real reshoring to occur, designs won’t just have to change, but entire products will need to change. Consumer mindset will need to change.

    It also brings up interesting chicken and egg questions about new product development and consumer adoption patterns. We’ve heard the stories about Henry Ford and Steve Jobs telling people what they wanted instead of asking them what they wanted. It’s also the case that the capabilities and limits of manufacturing technology and labor were telling Ford and Jobs what they wanted.

    If we hadn’t been so accommodating of China, if we hadn’t sent them so much intellectual property and capital, if instead China emerged from communism like Europe emerged from World War II- would we still have gadgets like iPhones, tablets, giant LCD TVs? Probably not.

  17. Grurray, Foxconn is not Chinese,as in China. It is the largest employer in Taiwan.

    Foxconn Technology Group and better known as Foxconn, is a Taiwanese multinational electronics contract manufacturing company with its headquarters in Tucheng, New Taipei, Taiwan. Today, it is the world’s largest contract electronics manufacturer[3] and the fourth-largest information technology company by revenue.[4] The company is the largest private employer in Taiwan[5] and one of the largest employers worldwide.[6][7] Its founder and chairman is Terry Gou.

    Foxconn manufactures electronic products for major American, Canadian, Chinese, Finnish and Japanese companies.

    It also has 12 factories in China,.

    On May 25, 2016, the BBC reported that Foxconn fired 60,000 employees because it had automated “many of the manufacturing tasks associated with their operations”. The organization later confirmed those claims.

    Wisconsin also just elected a Democrat who ran against the deal. That’s why Japan built so many factories in the South where Democrats are not competitive politically.

  18. Here’s a fairly recent article on the feasibility of making iPhones in the USA:

    https://www.forbes.com/sites/willyshih/2018/10/29/making-iphones-in-the-u-s-would-be-challenging-but-not-impossible/#36c4f66d43a5

    (the author spent 28 years in industry before coming to HBS, including running manufacturing operations, so he has more credibility in my mind than the typical b-school professor)

    “Smartphone assembly is complicated – akin to assembling a watch. While there is automation for placing electronic chips on boards, many small components have to be fitted together by hand, and final assembly is usually manual. It’s exceedingly difficult to automate this, because Apple’s designers pack so much in to that slick, compact product. If it takes four hours of direct labor to assemble a phone (at $2.50 – 3.00 per hour in China including benefits), that might add $10 – 12 to the cost. In the U.S. that would probably cost 7 – 8 times as much, say at least $75.”

    So that is a swing of $65 at the cost level, more than that at the retail price level IF Applie maintained constant percent margins as opposed to constant dollar margins. Making the product a little less “slick and compact” would, I suspect, greatly reduce assembly labor and increase automatibility.

    “The more important feature of Chinese labor is the availability and flexibility to meet surges in demand. It was estimated that Apple sold close to 10 million iPhone XS’s in the first week of their availability. Let’s do some math – if we were to assume eight hour shifts, that would be over 83,000 person days just to supply the first week of sales.”

    But it is not a law of nature that surges in demand have to be met by the supplier without limit. Is it really a national tragedy, or even an Apple tragedy, if people have to wait a few weeks before getting their latest iPhone version?

  19. I’ve made this point many times before.

    We are not an “industrial economy” any longer, we are an IP&Services Economy.

    All future significant wealth will come from the creation of IP&Services, not from Making Things.

    In 1880, 85% of the US labor force grew food. By 1980, it was more like 2% to 5%.
    What happened?
    Mechanization is what happened.

    Thevsame will happen with manufacturing. It will reduce to some2 to 5% of the labor force.

    First it moved overseas, because it cost less to ship than to build a robotic factory. As wages rose, buildibg the fully robotic factory became more practical and economical.

    Added benefit: bootstrap china into the “business era” so it does not need jingoism for its notable supply of excess males to compete for women. China may still get problematic with Jingoism, but it has a clear OPTION.

    ALSO NOTE:
    Stagnant wages ignores the fact that the length of time one needs to work for most Goods and Services has reduced notably.
    In many many ways, you may not be making more, but you’re getting a lot more for the dollar.

  20. I don’t care much about iPhones but we need some capability for manufacturing for national security.

    We will never make 50,000 B 24s a year again but we need to be able to make strategic items to avoid national blackmail.

    China has required US companies, like Boeing, to move manufacturing there so they can steal technology,. Bill Clinton started the industrial espionage with Loral and ICBM guidance systems. NASA can no longer build heavy lefty space vehicles,. They don’t even know how to make a Saturn 5 booster anymore,.

  21. “In 1880, 85% of the US labor force grew food. By 1980, it was more like 2% to 5%. What happened? Mechanization is what happened.”

    That is a good example of how data can be accurate but misleading. Today, it takes only 2% of the work force working directly on the land to grow the food we must have. But the productivity of that 2% depends on those who once would have been farmers now making tractors and fertilizers and pesticides, and drilling for oil to drive the machines, and building refineries to refine diesel for the machines, and mining ore and making steel for the machines. If we did the calculations carefully, how many people today are really working for agriculture — although they many be very far from the farm?

    Services — at least, some services — are an essential part of an economy. But an IP&Services economy is unsustainable — unless it can export enough IP&Services to pay for all the imported physical goods We the People require. A glance at the unsustainable US trade deficit shows that it is simply not possible for a country to survive indefinitely based on IP&Services alone. At some point in the future, China is going to stop sending the US physical goods in exchange for ultimately unredeemable IOUs. Then the US will face the choice of becoming like Venezuela (where Democrat insiders will live large while the rest of us hunt for toilet paper), or rolling up our sleeves and taking the hard path of rebuilding manufacturing capacity as Germany did in the aftermath of WWII.

  22. David Foster wrote: “I recommend Tom Brown’s book, based on his extensive experience as a manager, executive, and director in British industry”

    I concur with that recommendation. Tom Brown’s book would have benefitted from the services of a good editor, but it is still well worth reading. The saddest part is when he describes the “success cases” of UK manufacturing industry — companies like GKN and Weir and Dyson which are quoted on the London stock market but have most of their manufacturing and 90% of their staff overseas; and companies like Nissan and ARM which are subsidiaries of Japanese businesses and whose futures depend on decisions which will be made far from the UK.

    Unfortunately, many of our problems in the US seem to parallel the UK problems which Brown describes. Most of Brown’s proposed solutions rely on UK politicians and the London financial class changing their ways. Things will likely have to get much worse in poor old Blighty before that happens!

  23. Ok, I just bought it. I believe there’s no where to go but up after Brexit. If our problems parallel the UK’s then it is just as likely that their solutions will also.

  24. Watching his interview.

    A few thoughts. I can understand his frustration with the short-sightedness of fund managers and investors. However, I think a good leader can bridge the gap between the long term imperatives of an industrial company dealing with a lot of uncertain variables and the short term imperatives of people putting up their own money, unenthusiastic about the possibilities of losing it. If and when the operations side of businesses regain some leverage in the British culture, there will be more confidence in their abilities. The Tom Browns will have an easier go of it.

    His comments at around the 16 min mark about private equity are completely correct. There hss been a push in the US to keep companies private because of compliance barriers and regulations, but my experience is that it often results in jumping out of the frying pan and into the fire.

    I can’t go along with his thoughts on Brexit. It is certainly true that the British mid sized firms will need to work extra hard to keep their wits about them, but what else is new? The single market has already devastated them, as he explained in the first half of the video. The short-termism of London finance is mostly thanks to the international imbalance. As an expert on German methods he should know that their mittelstand is propped up and coddled by the EU’s artificially low interest rates and trade bloc

    You can apply his argument about small, medium, and large companies survival prospects to the EU as well. The EU’s scorched earth tactics in Brexit negotiations have been conducted with an eye towards defending the questionable profitability of the German middle.

  25. It seems to me that the main long-term problem is that industrialization involved the transition from a nation of small-business owners / contractors (isn’t that what small farmers are/were?) to employees, and later efficiency enhancements made large numbers of employees unnecessary, so what do people do now, AND most importantly, what does this mean for governance? Employees have fundamentally different needs and outlook from employers, as renters have different needs from owners, etc. The former wants more security, the latter more liberty. It is not clear there is a way to get back to where we want to go.

  26. A related matter is that doctors, traditionally small businesspeople, are now about 85% employees, usually of big vertically integrated corporations. These own hospitals and medical groups. The volume of work required is tightly controlled and there is little freedom to go outside the system.

    I get constant mailings about burnout and unhappiness with medical practice, especially primary care.

    This one was in 2016.

    14.4% of physicians state they’re making plans to retire, compared to 13.3% in 2014
    21.4% of physicians report that they’re planning to cut back on hours, as opposed to 18.2% in 2014
    8.8% report plans to “switch to a concierge practice,” versus 6.2% in 2014
    11.5% state they’re planning to work locum tenens jobs in the near future, compared to 9.1% in 2015
    13.5% of surveyed physicians report that they’ll switch to non-clinical employment, while only 10.4% said this in 2014
    9.8% said they’ll switch to part-time work, compared to 6.4% in 2014
    Source: 2016 Survey of America’s Physicians: Practice Patterns & Perspectives, conducted on behalf of The Physicians Foundation by Merritt Hawkins.

    The ones planing to go to a “concierge” (cash) practice are mostly older with no student loans.

    Here is one from 2018.

    But for most primary care physicians the picture isn’t so rosy. An editorial published in the Journal of General Internal Medicine reported burnout rates ranging from 30 to 65 percent across specialties, with the highest rates incurred by physicians at the front line of care, such as emergency medicine and primary care. And a survey of 950 primary care physicians conducted by MDVIP revealed 83 percent of doctors say they wish they had more time with their patients.

    That one is by a big group in Ohio but it is typical.

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