What if Paul Krugman were right about trade and wages?

For the sake of the world as a whole, I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net.

That is Paul Krugman, here is more.  I have yet to see the evidence that trade has a significant negative impact on middle class wages, but for sake of argument assume it is true.  However benevolent it may sound, strengthening the social safety net would not be my policy recommendation number one.  After all, if Samuelson-Stolper factor price equalization is the main mechanism at work, wages would have a long way to fall downwards and if anyone in the middle class is to keep working, the safety net must eventually be cut, not increased.  You might think we can fund all these trade-losers by taxing capital but of course the incidence of taxes on capital sometimes falls on labor, not to mention that at some point the Laffer Curve kicks in. 

Is not the appropriate policy recommendation to create a budget surplus, create a U.S.A. Sovereign Wealth Fund, and invest the resulting capital in the corporate winners from this entire process?  In other words, we would be giving the trade-losers a more direct share in capital.  Since output is rising and wages are falling, the return to capital must be rising; let’s make money off of that.

You might not trust the government with such investments but it is awkward for Krugman to push that argument too hard.  Alternatively, you might think that share prices already have capitalized these gains, but that is hard to square with the view that Krugman is reporting a new result about trade.  Share prices are driven by liquidity to some extent, and if you know something about the returns to labor and capital that the rest of the world does not, there ought to be a way to make money.  Why spend more on consumption (a stronger safety net today) if the rate of return on investment is rising so high and we are going to need even more of a safety net in the future?

The costs of media bias

A majority of Americans view news organizations as politically biased, creating a strong incentive for firms to try to present themselves as impartial. This paper argues that the desire to appear unbiased leads to information loss.  In the formal model, firms withhold information in an effort to appear neutral. It is shown that information loss is exacerbated by competition, policies that regulate content are welfare reducing, and that regulating the size of the market can increase the amount of information revealed. Finally, the introduction of imperfectly informed sources of news, such as blogs, can decrease the incentives for traditional news outlets to provide information, yet they may also enhance welfare when information is being suppressed.

That’s from Jeremy Burke of Duke, who is on the job market this year.  Paul Krugman often makes this complaint, namely that newspapers often prefer a "He said, he said" story over simply telling the truth.  One message of this paper is that the problem isn’t so easy to stop.  Newspapers aren’t just being lax, rather they are maximizing their profits and reputation.  The discussion of blogs starts on p.22 of the paper; it is basically pro-blog but the ability of the blogosphere to speak truth can substitute for the requirement that newspapers do so, rather than forcing newspapers into truth.

Speak English, lower taxes

Megan McArdle writes:

It is hard for high levels of taxation to survive a right of exit;
Europe has mostly been protected (so far) by its many languages, which
make it harder to move. But as the EU increases labor mobility, expect
to hear more about harmful tax competition.

The story is about skilled Danes leaving the country so as to avoid higher taxes.  The last time I was in Denmark I was struck how many service workers could not speak Danish (will a Spaniard or Hungarian really learn that language?) and in the workplace communicated in English.  Greater policy competition is one of the most important results of so many Europeans speaking good English.  High taxes and differential incomes, in turn, increase the incentive for people to learn good English, thereby creating a self-reinforcing dynamic.  I’ve long thought that Europe will become more like the United States than vice versa, most of all through mobility and diversity, but I don’t think that is a very popular view.

Why is New Zealand poorer than Australia?

Via Craig Newmark, here is one short article. the conclusion:

"Prosperity does not come by accident,” Mr Rennie said.  "Australia has a stronger political consensus around policies for growth, which contributes to investor confidence.”

Sorry but I can’t buy it.  Throughout the 1990s New Zealand economic policy probably "led" Australian policy, yet Australia has gained on New Zealand since that time.  I’ll instead cite booming resource prices (there is more gain in selling minerals to China than agricultural products), economies of scale from having a larger country, and most of all the Kiwi brain drain.  In percentage terms, many more of the smartest New Zealanders leave their home country — often for Australia I might add — than vice versa. 

Mexican economies of scope

Traffickers are drawn to musical acts because they provide an easy platform to launder money. There are other easy options, but none is so culturally prestigious. It is the glamour of the music scene that makes it irresistible to narcotraffickers, said Rolando Coro, a well-known disc jockey at Radio Tremendous in Morelia.

"They show up at the dances, these drug traffickers, and order the expensive whiskey, not just a glass, but the whole bottle," Coro said. "They have pretty women following them around. It’s fun for them."

Bands that make deals with drug traffickers get a crucial leg up on the competition. Tzin Tzun, the promoter, can spot them with ease.

Here is the full story, with further information about the recent killings of Mexico’s most popular musicians.  I wondered about this:

"Bands start to get popular and sometimes they want to keep more of the money," Tzin Tzun said.

Department of Human Rationality

According to the San Francisco Chronicle, police found a shoe and blood in an area between the gate and the edge of the animal’s 25- to 30-foot-wide moat, raising the possibility that one of the victims dangled a leg or other body part over the edge of the moat…

One zoo official insisted the tiger did not get out through an open door and must have climbed or leaped out. But Jack Hanna, former director of the Columbus Zoo, said such a leap would be an unbelievable feat and ”virtually impossible.”

Instead, he speculated that visitors could have been fooling around and might have taunted the animal and perhaps even helped it get out by, say, putting a board in the moat.

Ron Magill, a spokesman at the Miami Metro Zoo, said it was unlikely a zoo tiger could make such a leap, even with a running start.

The story is here.  And I agree with what Robin Hanson is probably thinking: it was signaling behavior.  Maybe from the tiger too.

Update: Here is one story, here is more, some of you rail in the comments but the initial interpretation is looking correct.  Note also that the tiger, after killing the first boy, went 300 yards to track down the other two boys and not anyone else.

Subprime fact of the day

Even with about a tenth of all subprime mortgages now in foreclosure, only a
small share of all American families — about 0.3 percent — own a home in
foreclosure…

Here is the link, from Mark Thoma.  This is one big reason why I’m not yet convinced by the economic pessimists.  The article also notes how many estimates of the S&L crisis of the 1980s were exaggerated, and suggests the same tendency may be happening today.

Addendum: This piece is a good statement of the case for pessimism.

The latest evidence on racial discrimination and wages

I haven’t read through this closely, but it seems to be a very important paper:

…we show that, relative to white wages, black wages: (a) vary negatively
with a measure of the prejudice of the "marginal" white in a state; (b)
vary negatively with the prejudice in the lower tail of the prejudice
distribution, but are unaffected by the prejudice of the most
prejudiced persons in a state; and (c) vary negatively with the
fraction of a state that is black. We show that these results are
robust to a variety of extensions, including directly controlling for
racial skill quality differences and instrumental variables estimates.
We present some initial evidence to show that racial wage gaps are
larger the more racially integrated is a state’s workforce, also as
Becker’s model predicts.

Here is the paperThis version is $5 cheaper.

What have we learned about economic growth

Not as much as you think.  Here is Charles Kenny’s closer:

In short, the last six years has not changed the basic conclusion that the growth literature has taught us much less about how to get rich than it has about who is already rich.  There is nothing particularly new in recent growth theory, but perhaps that is no surprise because there is remarkably little new in growth, either – the rich today are by and large those who were rich yesterday. That there might not be a holy grail of growth policy, however, is no reason for people of economic faith to stop looking, so no doubt the next six years will see another 13,000 articles on the subject to review.

Five books from Germany

Jeff, a Facebook friend, wrote on my Wall:

Which five German books should I read, before I return to Amerika [my translation]?

He seems to read German.  I will recommend: Goethe’s Faust, Rilke’s Duino Elegies or Sonnets to Orpheus, Thomas Mann’s Buddenbrooks, Franz Kafka short stories (don’t forget "Ein Landarzt,"), and Hermann Hesse’s Glass Bead Game.  Non-fiction does seem to count for the query, although it would not crack my list of top five.  Schopenhauer tempts as well.  Do you have better ideas for him?

The tastiest sentence I read today

The trigger for the large, calorie-hungry brains of ours is cooking,
argues Richard W. Wrangham, the Ruth B. Moore Professor of Biological
Anthropology at Harvard University’s Peabody Museum of Archaeology and
Ethnology.

Here is another bit:

…it turns out that there are no records of people having a large amount of their food come from raw food.

Here is much more, interesting throughout.  Thanks to Yan Li for the pointer.

Ron Paul as President

Bryan Caplan defends the prospect of a Ron Paul presidency.  Here is Megan McArdle.  Here’s yet another perspective.  Here is Ezra Klein.  Here is Paul himself.

The Ron Paul phenomenon reminds me of the old America First movement, with Misesian 100 percent reserve banking theory on top.  He is making (one version of) libertarianism much more popular by allying it with nationalist and also states’ rights memes.  That includes his stances on immigration, NAFTA, China, devolution of powers, and "The Constitution."  Even when the policy recommendations stay libertarian, I fear that the wrong emotions will have the staying power.  Evaluating a politician is not just about policy positions; for instance personally I am skeptical of most forms of gun control but I worry when a candidate so emphasizes a pro-gun stance.

Many libertarians see the Paul candidacy as their chance to have an impact and they may well be right.  There is also no one else for them to support.  But, raw milk or not, I am not myself tempted to take a stance this year in favor of any of the candidates, Paul included.  Liberty is lacking in the United States but I’d like to see it more closely bundled with reasonableness, moderation, and yes pragmatism; I
am looking to advance on all fronts at the same time.  Call me fussy if you wish.

I fear that Ron Paul is so taken with his own ideas that he is unable to see how or when his views might ever be wrong; it is in that sense I consider him insufficiently intellectual.  (Admittedly all the other candidates are too open to whatever is politically popular at the moment.)  Openness also means ability to improvise, which is a critical leadership quality; many of the challenges of the presidency are the surprises, 9/11 being one example of many.

The America Firsters, by the way, were right about many things, but
they were very wrong about a few very big things, such as World War II
and the civil rights movement.  They also suffered a virtually total
eclipse for decades.  I don’t see nationalist and states’ rights memes as a path toward a future with more human liberty.

Ron Paul is changing the ideological landscape of American politics and the fabric of modern classical liberalism.  No matter what your point of view, I recommend that you take the Ron Paul phenomenon very seriously indeed.

Addendum: Here are good remarks from Arnold Kling and Steve Horwitz.