Today's Topic: Obama's Projected Economic Plans

At Carpe Diem, a libertarian web site run by a talented economist, Mark Perry of the University of Michigan, prof bug left a fairly lengthy commentary that took issue with the libertarian posters' worries and fears regarding Barack Obama's economic plans . . . to the extent that he touched on them in his recent acceptance speech, plus a few other (fairly non-detailed) speeches in the past.

The Buggy View

Though I agree with Mark Perry that our economy has done much better than most media coverage portrays its recent performance --- a testimony to its remarkable flexibility and efficiency, a result of several decades of desirable change --- I don't share the concerns about Obama's tax and spending plans voiced by him or Thomas Sowell (another very good social scientist like Mark) or the most of the posters in this thread.
And though I don't expect to alter anyone's opinion of those plans, I would like to underscore two or three points that might add some perspective on your concerns.
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1) Obama has assembled an impressive group of economic advisers --- not far-out left-wing zealots, let alone socialists. They include Austin Goolsbee, a professor in the University of Chicago's economics department --- not know for harboring socialists, and three highly respected specialists at the Brookings Institute and Harvard . . . as well as financial wizards like Richard Rubin, Bill Clinton's first Secretary of the Treasury. Greg Mankiw of Harvard, a former Chairman of the Council of Economic Advisers in the first George W. Bush administration, has openly praised these advisers.
Click here:

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2) Mankiw's predecessor as Chairman of the CEA, Glenn Hubbard of Columbia, also openly praised Goolsbee . . . though, alas, a google search didn't bring the link up. I do recall reading it in the last few months.
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3) Alan Blinder, a professor of economics at Columbia --- and a former member of the Federal Reserve (Vice Chairman) --- has openly espoused Obama's plans for infra-structure and other federal spending . . . even as he reminds us, citing a very good book by a Princeton political scientist, that our economy has grown faster under Democratic administrations in the first term than under Republican ones, and for a long time.
Click here for Blinder's views and a summary by a good economist (linked to at the Marginal Revolution by Mark Perry's former Ph.D. superviser, Tyler Cowan . . . a convinced libertarian). Cowan, I should add, frequently cites Mark Thoma, the economist in question.
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Today's Topic 

Once again at Carpe Diem, a good economics web site run by Professor Mark Perry of the University of Michigan, the buggy prof set out a lengthy commentary in reply to one of Perry's posts . . . that commentary continuing the bugged-out take on the new economic populism in American life.  Click here for the buggy view (and that of others). 

It would be useful, maybe indispensable, to have read the previous two buggy posts left here, along with links to the Carpe Diem threads, on this fascinating resurgence of American populism.  Like all its predecessors that stretch back to the Whiskey Rebellion of the 1790s, it is fed by a widespread sense of backlash worry and disquietude, caused by what more and more Americans believe are both economic and political systems out of tune with the needs and concerns of average American workers and --- along with this --- a snowballing sentiment that the two systems are rigged, run mainly by financial manipulators, business cheaters, and callous politicians beholden to powerful special interest groups. 

This growing disenchantment and backlash sense of unfairness are reflected in  numerous opinion surveys.  For a year now, 80% of Americans have repeatedly said that their find our country is on the wrong track.  More recently, this week, a New York Times survey found that 80% of Americans --- a striking correlated percentage! --- believe that our economy is operating very badly or fairly badly.

The Political Uncertainties That Linger Over the Forthcoming November Elections

What remains unclear right now is whether the new populism will lead to the Obama-Biden ticket winning the presidential race. If there is uncertainty here --- captured by public opinion surveys of potential voters that show a neck-and-neck race between that ticket and the Republicans' --- it's largely because there are cross-cutting tendencies among a fairly large sector of the white working class. 

For three decades now, going back to the Reagan era --- and maybe to the "silent majority" of the Nixon period a decade earlier --- white working class voters have voted in large numbers for Republican presidential and Congressional candidates, with five of the last 7 administrations dominated by Republican winners.  And the main reason seems to be socio-cultural populism . . . a powerful backlash mood provoked by their growing sense of disgust with the dominant liberal social and cultural themes that have prevailed within the Democratic Party since 1972. 

No need to elaborate on those themes here.  The big question is --- will growing economic disenchantment among white working and lower-middle class voters pull them in the Obama direction, as Hillary Clinton was able to attract them in the spring during the last phases of the Democratic primary process, or will they remain committed to the Republican ticket as a small majority has done since 1980?

Today's Subject Matter

In some lengthy buggy comments that were linked to yesterday --- those comments originally left at Professor Mark Perry's impressive data-driven economic posts at Carpe Diem --- prof bug analyzed the growing discontent with the direction of our country and above all the swelling worry and anxiousness about the US economy.  Today's buggy comments continue this analysis.  As before, they will be found at Carpe Diem, inspired by another one of Prof Perry's laudably empircal-data, charts, and links.

Click here for this extensive bugged-out update, which includes among other things some specific poll-data about the souring mood of the American public . . . with prof bug seeking to put this surge in disquietude in a probing theoretical and history-based perspective.  Keep in mind, please, that the buggy prof bangs out these long commentaries with bursting speed: no time for revision other than a quick check of the spelling. 

Today's Buggy Topic 

Yesterday, August 24, 2008 --- at his impressive data-driven web-site --- Mark Perry, a libertarian economist at the University of Michigan, set out a series of charts that compared the inequality in medal-winning by countries with the distribution of income in the US.  The two were fairly highly correlated in the percentages . . . the top Olympic-winning countries (as a percentage of all countries participating --- at the 5%. 10%, and 25% of the total) matching more or less with the top of income-earners in the US (as a percentage of all earners as the same levels).  Click here for the Perry charts and comments, along with prof bug's two lengthy replies.

A Buggy Starting Point: Some Problems with the Perry Viewpoint 

There are, of course, some problems with the Prof Perry's comparative analysis, illuminating as it turns out to be. 

   * For one thing, economies in the advanced industrial and post-industrial world have different degrees of inequality, with the English-speaking ones generally experiencing the most, and the Japan, small Scandinavian, German, Dutch, Belgian, and German-speaking countries the least.  There are, of course, trade-offs here.  There always are in economic, social,and political life . . . maybe, come to that, life in general.  In this case, the trade-off has been slower economic growth over the last 20-25 years --- at any rate as a general thing.  Still, some of these more egalitarian countries  --- the small ones anyway --- have managed to reform their business sectors, reduce or alter their unemployment benefits, and increase their growth rates of GDP and productivity in the last four years or so.

    *  For another thing, the comparison Perry uses between Olympic-winning countries and American income-earners by percentage levels --- illuminating and provocative as they are --- misses a major difference: there are only three medals to be won in any Olympic contest, whereas the actual distribution of income across 150 million working Americans is a continuum running from the minimum wage (plus earned income-tax credits) annually to what Warren Buffett and Bill Gates and other multi-billionaires earn at the top.  What follows?"  The US economy performed admirably in the growth rates of GDP and productivity in the 25 years after WWII --- or for that matter between 1870 and 1914 despite the disruptive shift in those days from an agricultural to an industrial-financial economy --- and average real wages continued to rise in both periods at a fairly fast clip.  Yet, since 1975, though the US economy has undergone another dislocating upheaval in its economic structures --- a radical shift from an industrial-urban society to a nimble, post-industrial knowledge-based economy highly suburbanized and globalized, with revolutionary new technologies the major driving force of this radical transformation --- low-skilled labor in the US has seen its wages fall about 15% since 1979, and average male wages have stagnated . . . a growth of 2.0% in the same period.  And these wages are adjusted for inflation. 

The Political Fall-out Consequences

These are what prof bug, a political scientist with a Ph.D. in economics as well, are mainly concerned with. 

These fall-out spillovers from the stagnation in real wages, together with the growing insecurities in average households about health care costs, about energy and food prices --- roughly a quarter of average budgets --- and about jobs, have fed a new populist reaction in American life . . . a recurring culturo-political surge that has marked US history in three or four earlier waves, starting with the Jeffersonian-like protests among poor farmers in the 1790s (the whiskey rebellion) and during era of the Jackson presidency in 1828.  As with later agrarian and eventually industrial populist protest movements, poor farmers rallied to reformers who appealed to their sense of being "cheated"  and "manipulated" --- the two common populist slogans that echo off and on in American life --- by the dominant economic and political elites. 

Jackson, above all, used his presidency to fight what he regarded as the dominant manipulating elites of the day.  

In an up-to-date article in US News and World Report, Jackson's first administration (1829-1833) summarizes his struggles this way, likening them to what is happening in US politics today, especially in the Obama coalition of Democrats:

"From the start of his administration, Jackson fought what he considered a profligate and selfish American aristocracy and worked on behalf of western farmers and eastern laborers. He tried to weed out corruption and incompetence from the civil service. He dismissed many government workers and installed loyalists. A backer said Jackson found "nothing wrong in the rule that to the victors belong the spoils of the enemy." He vetoed the recharter of the Bank of the United States, saying it would have made "the rich richer and the potent more powerful." His extensive use of the veto, in fact, set the precedent of making the chief executive central to the legislative process. Until that time, presidents generally exercised their veto power only when a bill seemed unconstitutional. Jackson broadened the criteria for veto to include bills he disagreed with. Most Americans liked what they saw."

Back to Prof Bug and Prof Perry's Comparisons 

The parallels between these and later populist upsurges in American life --- especially in the late 19th century and down to 1914, when agrarian unrest was fed by the radical restructuring of the US economy from an agricultural small-town economy to a giant urbanized industrial and financial economy; and later in the 1930s efforts by the CIO labor union to organize industrial workers --- and what is going on in the appeals of Obama and Hillary Clinton to large numbers of Americans, not just Democrats, are set out and analyzed by prof bug in response to Mark Perry's stimulating comparisons between Olympic metal winners and the winners of the American competitive economy.

Today's Bugged-Out Subject

It deals with the prof bug's critical views, set out at length in two extended commentaries posted at the Marginal Revolution, on the standard-model free-market analysis that have stressed the benefits of low-skilled immigrant labor in the US economy . . . such economic studies almost always reducing, observe quickly, to one or two narrow points (themselves contestable):

1. Such labor from abroad, legal or illegal, keeps costs down in certain industries like certain kinds of agriculture, hotels and restaurants, construction in some regions of the US, and sweat-shop production. 
2. And, simultaneously, so these narrow cost/benefit studies stress, the large flows of such low-skill immigration since the late 1960s --- more than a million a year on an average since then --- have nothing to do with the sudden, disruptive stagnation and decline of low-skilled native American workers in the same interval.  Since 1979, the average real wage for all American male workers --- not just low-skilled --- has risen 2.0%, no more.  For women, it has about doubled though they still make about 2/3 of male wages, some of which difference is accounted for by more part-time women workers.

One Among Many Worrying Trends

Note something important here.  This discouraging trend in the wages of average labor the last 30-40 years contrasts strikingly with the trends in low-skilled American labor throughout the 19th  century and down to 1914.  Despite the influx of about 40 million poorly educated, low-skilled immigrants from the early 1840s on --- almost all from Ireland and Eastern and Southern Europe --- the wages of American workers of all sorts continued to rise steadily.  By 1914, on the eve of WWI, the US wage level for unskilled labor was about 250% higher than that of the highest wage-labor in Europe, Britain's.  It was the same case in 1939, despite the Great Depression.  And the same until the late 1960s.

Since then, the US economy has undergone a remarkably impressive transformation from a manufacturing-based economy, plus traditional service industries, into a knowledge-based information-rich economy.  In the process, it has rejuvenated itself as it has repeatedly over the last 220 years.  It is now the point-man economy in the world, the only rich industrial country that has fully benefited in productivity advances from the technological revolutions led by the computer, information-and-communications technologies, and of course the Internet. 

A related result: the US lead in per capita income over West Europe and Japan, adjusted for purchasing power across countries, is now about 25-30% higher . . . not a lot different compared to the more prosperous European countries in northern Europe on the eve of WWI, believe it or not.  At over $46,000 per person, the average American is more than twice as high in real dollar terms --- adjusted for inflation --- than it was in the late 1970s, yet average wages  (not just low-skilled wages) have generally stagnated for men.

The Causes? 

 Hardly anything complex in economic, social, or political life is the outcome of a single causal influence.  The stagnation in real wages since the mid- or late-1970s is no different. 

Among the major causes are technological changes that favor high-skilled labor (college-graduates really), growing globalization that reduces the wages of low-skilled workers in standardized import-competing industries, demographic shifts such as the soaring increase in single-parent, mother-headed families in both the Hispanic and African-American communities --- to a noticeably lesser extent, the white communities too --- the influx of women into the job market, but also, it seems to prof bug, the huge influx of low-skilled workers into the US economy from abroad . . . the controversial issue that started the discussion thread at the Marginal Revolution site.

No Matter.

The main point in prof bug's comments left in that thread concerns the lamentable, narrow focus of almost all economic discussions of the wage issue and immigration.  In particular, as you'll see, these tunnel-vision cost/benefit studies ignore the increasingly unfavorable spillovers --- negative externalities in economic jargon --- onto the social and educational systems of our country, as well as matters of personal and family security. 

 As buggy readers might recall, it's the same story of tunnel-vision cost-benefit studies by economists of our dependence --- and that of our EU and Japanese allies --- on international oil markets, dominated by gangster-authoritarian states, many of them domestically unstable.  Economists just aren't trained to consider the foreign policy and security spillovers of such dependence, and the huge military costs entailed by such dependence . . . not to mention how extravagantly high oil prices have fueled the militancy and aggressivity of Russia and Iran as well as the hateful and racist propaganda of Wahhabi profligate zealots in Saudia Arabia.  And relative vs. absolute gains in international exchange?  Forget it must be the motto of economists.  Whoever heard of relative power as a measure of influence in international life?

No Need To Say More

The buggy comments left in that Marginal Revolution thread should be easy to follow, including (as explained in the second of prof bug's posts there) the meaning of the statistical phrase, "the fallacy of partial effects" . . . used in the cost-benefit study touted by Taylor Cowan, the head of that blog, that opened the authors up to prof bug's similar charges that they were as innocent about the social and educational spillovers of low-skilled immigration as their collegues are who write on international exchange when it comes to power-related matters.

Today's Subject 

At Carpe Diem, a new thread was started last week (mid-August) by Prof Mark Perry, its head, on the question of high oil prices and whether such interdependence on the international oil market is desirable or not . . . what with the choices facing us now and in the near future as far as energy sources go.  In particular, Perry started the thread with a quote from T. Boone Pickens --- the Texas oil-billionaire --- who has switched to supporting wind-power as a way to start digging us out from what he regards as a dangerous transfer of huge wealth to foreign states that we import from.

A libertarian, Prof Perry disagreed.  Not a libertarian, prof bug agreed with Pickens, though for other reasons.  In particular, as he argues in his three lengthy commentaries in that thread --- one of which takes issue with Perry's interpretation --- the buggy prof argues that virtually all cost/benefit analyses put out by economists about the international oil market are badly flawed. 

Four Such Flaws Stand Out

1. The international oil market can't be analyzed as a competitive economic market.  Prices globally are set in large part by the OPEC cartel, through its production quotas.  And 60% of our imports, which amount to 10 million barrels a day, come from OPEC sources.
2. Energy markets in the US --- whether based on oil, gasoline, natural gas, nuclear power, hydroelectric, coal, or more recently ethanol --- have all been heavily subsidized, and for decades. The 2005 energy bill passed by the Republican Party and signed by President Bush, for instance, committed $6 billion to the oil and gas industries, $12 billion to the nuclear power industry, and $9 billion to the coal industry, plus other kinds of windfalls, along with big support for ethanol production and wind and solar and electricity . . . a total of $85 billion.   Later, in the spring of 2008, President Bush asked for $18 billion worth of subsidies for the oil and gas industries alone.  And of course gasoline and heating oil are delivered to dealers by trucks that use tax-built freeways, highways, and streets.
3. There are huge costs in military and foreign policy spillovers that follow from the US's growing dependence on foreign oil.  In particular, we have spent trillions of dollars and now thousands of American lives to protect oil-rich countries in the Persian Gulf whose importance have been way inflated because of our growing dependence on imported oil.  Meanwhile, almost all of the EU, Japan, Latin America, and Pacific Asia free-ride on our security efforts in that region.
4. Extravagantly high oil and gas prices have fueled the militancy and aggressivity of Iran and Russia, whose economies would otherwise turn out to be basket-cases, just as those prices did for Saddam Hussein's Iraqi regime until our multilateral intervention there in 2003.  The same is true of the demagogic policies of Hugo Chavez's regime in Venezuela, both inside the country and toward the rest of Latin America.  And the double-dealing Wahhabi zealots who rule Saudi Arabia continue to peddle their outrageous Islamist propaganda world-wide --- which is markedly anti-Christian, anti-Jewish, anti-Hindu, and anti-Buddhist, not to forget misogynist to the core --- all the while relying on American protection against its own and foreign-based terrorists . . . not to forget Shiite Iran, its major rival in spreading Islamist fanaticism abroad.

What to Do

Prof bug argues in the thread that if we take into account all four of these factors --- remember, nearly always ignored in cost/benefit economic analyses and commentaries --- we would do well to adopt a national policy of switching to a basic energy source for all our energy uses: electricity, which has the big advantage of being produced by natural gas, coal (which can be produced cleanly at a cost), hydroelectric, nuclear, and solar and wind.  In a decade or so, we would be able with proper subsidies --- including once electric driven vehicles become mass produced in three years or so --- to both free ourselves from most of our oil imports, while reducing the significance of the Middle East as oil prices plunge.  An added benefit would be more environmentally benign forms of energy usage.

And, as prof bug also argues in one of his three commentaries in that Carpe Diem thread, electricity as one big benefit: electricity, once it's produced, cannot be hiked in price by foreign countries and companies seeking to import it from the United States.  Yes, some of the sources can be imported --- but aside from oil, we have vast coal and natural gas resources, and the same we be true of electricity generated by hydroelectric and nuclear-power production. 

Here is the first of many linked buggy posts to come . . . this one at Carpe Diem, the thread started pm August 14, 2008, by Prof Mark Perry, and on the subject of inflationary pressures in the US economy, as reported by the Consumer Price Index (CPI).  This initiated a lively exchange of views, among them (at length and several times) prof bug's.  And as usual, his buggy stuff ranging widely --- not least, onto the role of volatile energy prices in the CPI (but not core CPI, which the Federal Reserve tracks). 

What it does, the core CPI, is eliminate volatile energy and food prices in order to gauge more accurately the underlying inflationary pressures that might require a rise in interest rates now or in the near future.  And starting from there, prof bug moves on to the various dangers in our being dependent on oil imports (60% of the 10 million barrels daily streaming into the US from OPEC countries) from gangster-authoritarian states like Russia, Iran, the radical Saudi Wahhabi Islamist zealots, and so on . . . the whole of Central Asia, the Caucasus region, and the Middle East full of vulnerable and frequently hostile states.

The New Strategy

Believe it or not, prof bug hasn't fallen off the face of the earth and ended up in some godforsaken limbo in outer space with no means of accessing the Internet, never mind the buggy site.  On the contrary, he's been busy posting at various other web sites . . . all economic ones, and mainly libertarian ones to boot. 

Not that they have always welcomed his non-libertarian take on their posts --- among which disgruntled happened to be one called EconLog, run by two professors of economics at George Mason University.  Nothing wrong with their posts there.  The two profs are pretty bright . . . only, well to put it mildly, they're fairly narrowly specialized and it was easy for the buggy prof to bug them: meaning, more precisely, to show up the limits of their knowledge and theoretical arbiter dicta.   They obviously grew piqued.  Who could blame them?. 

Not that they banned prof bug from their web site directly.  No,no; that would contradict their libertarian values, right?  So they did it indirectly --- by the intermediary of their web manager, a fellow who insisted that prof bug not post any arguments longer than 500 words . . . a limit, alas, that hardly adds up to most of prof bug's wind-up prefatory comments. 

Buggy Purgatory