I learned quite a bit about Apple from the NYTimes article by Duhigg and Bradsher. One particularly striking passage:
In mid-2007, after a month of experimentation, Apple’s engineers finally perfected a method for cutting strengthened glass so it could be used in the iPhone’s screen. The first truckloads of cut glass arrived at Foxconn City in the dead of night, according to the former Apple executive. That’s when managers woke thousands of workers, who crawled into their uniforms — white and black shirts for men, red for women — and quickly lined up to assemble, by hand, the phones. Within three months, Apple had sold one million iPhones. Since then, Foxconn has assembled over 200 million more.
This discussion about the flexibility of Chinese labor highlights that the lack of American competitiveness is not simply due to high wages and living standards in the U.S. It is the entire supply chain that makes production in China so appealing to firms. Americans would protest living in a dorm attached to their factory and being woken up at midnight to start a 12 hour shift. But that is exactly what makes China so enticing for businesses.
Yves Smith fills in much of what the article left out. But here I want to make a connection to economic theory. This article reminded me of my undergraduate macroeconomics course in the Spring of 2008. The economic crisis was just setting in, and one of my classmates asked the professor if the solution was simply to cut wages, so that American firms would be competitive again. The professors answered: “Yes. That’s right.” End of story. The same professor repeated this claim in a panel discussion on the crisis, claiming that decreasing the prices of factors of production will make U.S. firms globally competitive once again. Duhigg and Bradsher demonstrate the danger of assuming away production to a black box “production function.” The production function approach ignores supply chains and institutional arrangements surrounding production, and leads certain economists to make quite silly proclamations. Cutting wages in the U.S. will not make U.S. factories more competitive; China has an entirely different supply chain that simply does not exist in the United States.
One person who does study global supply chains and institutional arrangements is economic sociologist Gary Gereffi (note: again, interesting economics happening outside of economics departments). He also directs the Center for Globalization, Governance and Competitiveness at Duke University, which has mapped Global Value Chains in North Carolina. (The website is quite fascinating to explore.) This approach to studying the global economy looks at the supply chains, and where each stage takes place and how much value is added at each step in the process. This is a type of economic analysis, very different from what academic economists do, that should prove more useful in understanding global competitiveness and production.
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Some of my economics colleagues were certainly unimpressed by the President’s focus on encouraging manufacturing in the United States, and his condemnation of the outsourcing of jobs. Economists tend to have a great deal of faith in market forces, and consider the market price an accurate reflection of “all relevant information.” In economics, aiming for insourcing or encouraging particular sectors of the economy (and not others) is “distortionary” because those policies distort prices and quantities from their market price, which (sometimes!) in theory yields the most efficient price and quantity. Generally, economists have little faith in the government’s ability to “pick the winners.”
However, I found Obama’s focus on manufacturing in America, “an economy to last,” as one of the more promising aspects of the address. As I have written before, we should not ignore the benefits of the manufacturing sector in the economy. A healthy manufacturing sector not only affords well-paying jobs, which fosters a middle class, but also leads to R&D spillovers in related industries that may not even exist yet. Why are Japan and South Korea leading in lithium ion battery technology? Because electronics industries fled to there throughout the 1980s and 90s, and when it became clear that battery development would be the next global challenge, they were already far ahead. The U.S. is trying to catch up, but we are starting for our own goal line.
A great deal of research supports these arguments. One of the classic works on global competitiveness is Alice Amsden’s Asia’s Next Giant, which challenges the conventional wisdom that liberalization and market forces caused South Korea’s economic boom. Amsden attributes Korea’s success to a strong government that supported the manufacturing industry and worked with firms to import key technologies and train workers with relevant skills.
And this brings me to a second key aspect of The President’s address: the relationship between market and government. He is the first president in my lifetime to recognize that it is not about government vs. the market. (Even Bill Clinton favored a small government and lower taxes.) Obama’s speech recognized that the market and the government needed to support each other in order for our economy to succeed. The two are intertwined, and by supporting each other can achieve higher economic outcomes and realize more competitive firms. The debate should not be about whether responsibility lies with the government or the private sector to create jobs; the economy should not be understood as something apart from or in opposition to the economy. Rather, the government can support and even initiate certain desirable industries, so that we may achieve a healthy and resilient economy:
Think about the America within our reach. A country that leads the world in educating its people. An America that attracts a new generation of high-tech manufacturing and high-paying jobs. A future where we’re in control of our own energy, and our security and prosperity aren’t so tied to unstable parts of the world. An economy built to last, where hard work pays off, and responsibility is rewarded.
*Third because the 2009 address shortly after Obama’s inauguration was technically not a state of the union.
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Thomas Frank hits the nail on the head when describing responses to the crisis in his new book, Pity the Billionaire. First, there is the Tea Party response, which views the problem as government intervention, despite strong evidence that deregulation of financial markets and institutions is the greater culprit. Thomas Frank writes that this response was “as extraordinary as if the public had demanded dozens of new nuclear power plants in the days after the Three Mile Island disaster”:
Before the present economic slump, I had never heard of a recession’s victims developing a wholesale taste for neoclassical economics or a spontaneous hostility to the works of Franklin Roosevelt. Before this recession, people who had been cheated by bankers almost never took that occasion to demand that bankers be freed from red tape and the scrutiny of the law. Before 2009, the man in the bread line did not ordinarily weep for the man lounging on his yacht.
This naturally raises the question, what has been the response from the other side? The point that I have made before, and Frank makes in this book, is that the response from the other side has been “nothing”:
On the surface, the Tea Party line and the new revived radicalized conservatism sounds pretty good. They’re asking questions that need to be answered. Why did the regulators fail? I mean, that’s a really good question. Their theory is that, you know, it’s government. Government always fails. Right?
The important thing is what’s the answer coming from the other side? What is, say, the administration of Barack Obama? What’s their answer to the question? You know what it is? Nothing. They don’t ever talk about it.
This is the key point. The Left has not had a response to the crisis. And in my opinion, the key obstacle is that the Left does not have a theory about the crisis. This is the main difficulty that the Occupy Movement faces. And neoclassical economics has not been much use. Neoclassical economics has an obsession with general equilibrium; price changes occur when there is a shock to either demand or supply, but a new equilibrium should quickly take hold. It’s not clear that this story is at all useful: there was no external shock, rather the financial markets proved to be inherently unstable. It’s even hard to see how the concept of equilibrium is useful in our present situation.
Going forward, this is the paramount challenge to liberal economists. We need to build a new theory, one that answers these questions that so many people ask but mainstream economists cannot answer: why did the regulators fail? How can we think of markets as inherently unstable? And, as Thomas Frank warns, we want to make sure that this new theory does not pity the billionaire, as does the Tea Party response.
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It’s hard to list all of the problems with American democracy: negative attack-campaigning, excessive lobbying influence, a lack of transparency, polarized political gridlock, a cable-news media with low journalistic standards, and a lack of civic engagement. But as explained by Lawrence Lessig, this tree of corruption of democracy has a single root: campaign finance. Attempts to reform these other branches will prove either impossible or meaningless as long as the current system of campaign finance is in place. Politicians in Washington spend anywhere from 30-70% of their time raising money. And it is not because they want to; it is out of necessity of the large sums of money required to run a successful political campaign. In order to raise this money, our elected representatives need to spend a great deal of time with donors. And the donors they court are typically not people like you and me. This makeshift system of financing campaigns gives a great deal of Washington access to a very small segment of the population (those with enough wealth to spare on politics).
Yale Law professors Bruce Ackerman and Ian Ayers propose a bold plan to reform the campaign finance system in their book, Voting with Dollars. Their plan includes basically two parts: (1) a system of public financing through vouchers and (2) a method to disburse all additional donations anonymously. The public financing gives every eligible voter a $50 “patriot voucher,” which they can donate towards any campaign of their choice. Donations beyond that would still be allowed, but would go through a fund, and all donations would be disbursed to the candidate in smaller denominations over time, render them untraceable to the candidate.
This reform makes a lot of sense, and I gather there would be widespread support from voters. The book even proposes some legislation. The only obstacle we face is mustering the political will. The major political parties have been unwilling to shake the established financing customs, since it works quite well for both of them. Perhaps a group such as Americans Elect would be able to produce a ticket with reform-minded candidates who would make campaign finance reform a priority. Buddy Roemer often mentions this issue in interviews ( and I could imagine him pairing with someone like Russ Feingold, who has also worked on campaign finance reform). But unfortunately, it is hard to imagine the necessary reform coming from the established parties.
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