Sunday, July 18, 2004

Outsourcing Watch: Why It Affects Us Now

Daniel Drezner cites some economic reading including some disingenuous arguments by one Kling. Dan cites Kling as saying:

Given these statistics, what explains the fact that, adjusted for inflation, the pay of the lowest-wage workers has not increased much over the past thirty years? There are a number of factors involved, but I suspect that the largest component of the explanation is a shift in the composition of the low-wage work force. In the 1970's, many of the people at the bottom of the wage scale were heads of households. Today, many low-wage workers are providing second or third incomes to families.

Yes they're working more manhours to bring in more income, but their expenses are up too! That is people are working more hours because they have to, not necessarily because they want to. In addition, trying to measure improvements of standard of living by selectively focusing in on a few factors that have been improved by globalism - certain cheap consumer goods - ignores the long term economic disenfranchisement.

To emphasize this point Nathan Newman has an eye-popping comment about the quality of the new jobs being created.
Even more startlingly, of the 509,000 in new total nonagricultural employment from February to June , 495,000 or an astonishing 97% of the cumulative increase were part-time jobs-- showing why the average work week has been dropping so dramatically.

This "recovery" is like no other in post-WWII history. Job growth is anemic and the jobs created generally stink. Profits are soaring, wages are stagnant, and benefits are being slashed.

Kevin Drum also weighs in with a devastating critique of those who claim that the wages scale are being moved mostly by market forces instead of social ones.
Is this the free market at work? That's what I'm told. So I have a contest in mind: a prize for the least laughable explanation for why CEO pay has gone up 7x since 1980 based on supply and demand. At a minimum, winning entries should explain the following:
  • Why the supply of CEOs has decreased.

  • Why the demand for CEOs has increased.

  • Why the elasticity of the CEO demand curve is apparently steeper than for any other commodity on the planet.

  • Please keep your entries under 100,000 words, and restrict your econometrics to fields no more complex than differential topology.

    Grand prize to be announced at a future date.

    So like most other current segments of the economy, the labor market is being extremely distorted by non-market forces. It's important to realize that. This is why increasing number and magnitudes of discrepencies are creeping into macroeconomic data. The market-distorting forces are creating a divergence from normal patterns. As Brad points out in citing a former Federal Reserve Governor, if productivity were really as high as claimed then real neutral interest rates should be higher too.
    [M]onetary policy may have been too accomodative [in the 1990s]... we may have allowed a large gap to open up between the funds rate and its neutral value.... [E]conomic theory suggests that the neutral real rate may vary over time. One important determinate is the underlying rate of productivity growth.... Research at the Board suggests that the neutral real rate rises approximately percentage point for percentage point with increases in underlying productivity growth...

    As Spencer, a sometimes commentator here also, points out in a comment to this quote: "If you assume that the underlying productivity trend was 3.0% prior to 1975 and since 1995 and was 2.5% between to calculate the "neutral value" for fed funds by adding productivity and the 12 month change in the PCE deflator you get results very similiar to that from a Taylor rule calculation. The rule now says fed funds should be at 5.5%." Spencer is a self-avowed economic forecaster and one of those that I respect, not because he agrees with me, but because he looks at the data honestly and states where he's coming from. People can selectively pay attention to data that confirms their predetermined conclusion. Looking at the big picture however and it's clear that offshoring has already radically transformed the economy. It's also part of a process where essentially political intervention and not market forces are driving economic changes.


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