anti-mankiw links - or, the defense of manufactures

The other day Professor Mankiw linked to a piece by Christina Romer in the New York Times on why manufacturing should not be subsidized by government policy.

On one hand we can see why this might be a smart policy: manufacturing is past us, isn't it? The U.S. has increasingly moved into smarter, faster sectors of growth like technology, finance, and higher education. The last thing we would need, argue economists such as Romer and Mankiw, is a return to 60s-era economics.

On the other hand, as Jeff Madrick observes in the NewDeal 2.0 blog, manufacturing is only seen as dead because we don't necessarily know what a smarter, leaner, and more efficient manufacturing sector might look like. What is the contradiction between smart technology and good manufacturing jobs? Once upon a time, there wasn't any such clash. But as competition for cheap labor and a variety of factors overwhelmed businesses in the 1970s, "low road" policies were inevitably taken which compromised quality for productivity and low wages. Finance, Madrick notes, took manufacturing's place as the key driver of growth -- and what has that gotten us in the last 40 years? High inequality and relatively stagnant growth and living standards.

Manufacturing -- potentially with a focus on green technologies at the frontier of certain frontiers of economics growth -- can itself become a hotbed of innovation. As Madrick notes, "Isn’t [manufacturing] where the scientists and engineers are? Don’t we learn and innovate by doing? One commentator recently said that those innovations are exploited by others, so it doesn’t matter. Really? Then maybe we should stop promoting R&D altogether." Research and development is key to a vibrant economy. There is no reason to halt our attempts at strengthening them.

A similar point regarding the potential dynamism and value added of the manufacturing sector can be found in the debate which took place in the Economist last summer between Ha-Joon Chang and Jagdish Bhagwati over this same issue. (Chang won the debate). Chang makes an interesting point in his rebuttal to Bhagwati's scepticism about "manufacturing fetishism" which we will end on, here:

Take the case of the Netherlands. Unbeknown to most people, it is world's third largest agricultural exporter, despite having little land (it has the world's fifth highest population density). This has been possible because the Dutch have "industrialised" agriculture by, for example, deploying hydroponic agriculture (growing plants in water) that uses computer-controlled feeding of high-quality chemicals—something that would not have been possible if the Netherlands did not have some of the world's most advanced chemical and electronics industries. In contrast, despite being the world's second most high-tech exporter (measured by the share of high-tech products in manufactured exports), the Philippines has only $2,000 per person income because it makes those products with other people's technologies.

Overall, we at Anti-Mankiw definitely think that the promotion of manufacturing could be an excellent way to revitalize the economy. How the government (or other branches of the state) does so is a different point -- but let's not relegate such an important source of a country's material wealth to the trashbin too quickly!

keeping your head above water: anti-mankiw links

If someone is being "overpaid" here, it surely isn't workers

There are multiple things wrong with Professor Mankiw's recent post about comparing public and private sector employees by compensation.

First of all, the title of the post, "Are federal government workers overpaid?" is misleading. We usually say that someone is overpaid when they are contributing less than they are being compensated. But the CBO report is examining compensation differentials, which is a different issue. The problem is complicated by the fact that public sector workers are engaged in activities (such as education or security) which have clear positive externalities on society, so it's even more difficult to talk about being over or underpaid. (Are the participants in the securitization of bad loans over or underpaid?) It's clear what Mankiw is actually trying to accomplish in his post, and we at Anti-Mankiw can assure you that it has nothing to do with accurately conveying economic research.

Second of all, the report is only for workers in the federal government. In this excellent report by John Schmitt at the Center for Economic Policy Research it was found that state and local government employees are actually paid less than their private sector counterparts, after controlling for observable characteristics (similar to the methodology in the CBO report).

Finally, if a dynamic analysis were performed (i.e., examining the trend of wages in each sector over the last 30 to 40 years), readers would quickly realize that there are more pressing issues at play here. The most important of which may be the fact that wages for both public and private employees have been stagnating since the 1970s. Sure, public employees may have been paid more (according to the study from which the above graph is pulled, however, even that is a contested issue), but the story is more like: private sector wages are falling behind as public sector wages struggle to keep above water. Comparing with the elite 1% over the same 30, 40 year period, you see the drastic explosion of inequality that is the main subject of public debate today. In short, Mankiw is really doing a disservice to the more pressing macroeconomic issues by choosing to focus on whether one sector is more compensated than the other.

Here is another, similar report on this issue ("Public and Private Sector Workers Are in This Together") which focuses on college graduates: http://vox-nova.com/2011/03/17/public-and-private-sector-workers-are-in-this-together/.

Hardly a rosy picture -- for either public or private sector workers. Someone definitely seems to be overpaid here, but it's not workers!

anti-mankiw links; or, the dangers of technocracy

On his blog and in his New York Times articles, N. Gregory Mankiw has slowly but carefully advanced a position which is critical of fiscal expansion. He has given a variety of reasons for his position. These include: fiscal responsibility provides more certainty for investors in determining the future potential of economic growth; as well as observing that the short-sighted character of most politicians leads them to underestimate how difficult an unbalanced budget can be to get out of in the long run.

In presenting these views to the public (i.e. in terms of his rhetoric), Mankiw has often said that he's demonstrating a centrist view of the issue -- evidenced, for example, by his signature on the Simpson-Bowles plan which garnered the support of people on the left and right. Deficit reduction is just simple economics, according to him, because we need investors to stay confident in the strength of our economy.

But deficit reduction is not that simple and focusing on it during a recession might not be the best option. Indeed, the argument that deficit reduction sustains confidence does not hold up. The correct argument for deficit reduction actually seems to be something a bit different: namely, that it can potentially reign in overzealous spending at a time when the economy can afford to do so. That is the gist behind this report by Arjun Jayadev and Mike Konczal entitled "The Boom, not the Slump". In that article (which was referenced in a blog post by Paul Krugman) they work through a few case studies which analyze the timing of austerity measures vis-a-vis movement in some of the economy's broad indicators to show that the case for austerity is weak. And on the other hand, as the Great Depression and World War II showed us, the standard argument for deficit spending in the case of recession has much stronger empirical support.

Still, even when Mankiw's "confidence fairy" argument falls, can he rely on a sound logical footing for his argument? The Jayadev and Konczal paper suggests at first glance that he can't. That is to say, the "sound" economics of Mankiw is really just ideology dressed up as science. In this interesting Monthly Review piece, Marcello Musto applies that exact idea to Europe. Simply put, technocratic discourse is sometimes laden with violence against anyone willing to speak out against the "science" of economic thinking. The result, at least in Europe, is one of the most acute forms of class warfare.

As Musto himself puts it:

The separation between economics and politics that differentiates capitalism from previous modes of production has reached its highest point.  Economics not only dominates politics, setting its agenda and shaping its decisions, but lies outside its jurisdiction and democratic control -- to the point where a change of government no longer changes the direction of economic and social policy.

Introductory economics should start off with a very simple idea: be immediately distrustful of anyone you see (especially elites) presenting the "consensus" view within the economics profession as the "right" policy platform. And, indeed, this is the type of "apolitical" discourse that can end up being the most lethal kind for workers or other groups with less power in the economy.