Category: trade

Econ 101: Tony Judt on Trade

I just finished listening to the Audible version of Thinking the Twentieth Century, a discussion between Tony Judt and Timothy Snyder, recorded just before Judt died in 2010. Judt was a British-American historian, essayist and university professor who specialized in European history. Snyder is an American author and historian specializing in the history of  Central and Eastern Europe and the Holocaust.

I found Judt to be a very insightful in his area of political and social history expertise but generally off base on economic issues, which is not his field. I fear that his misunderstanding of trade is widely shared so I will set out some important basics as a contribution to better public understanding. “Science” doesn’t dictate policy, but a correct understanding of the economics of trade is essential if one’s value preferences are to lead to policies that produce your desired result.

Judt describes the increase in American wages for manufacturing workers along with their health and pension benefits over the past several decades leading manufacturing firms to outsource their production to the cheaper labor in (for example) China and thus hollowing out American manufacturing.  Almost everything about this description is wrong.

For starters manufacturing output in the U.S. is at an all-time high (prior to Covid shutdowns). Off shorting some of it has not hollowed out U.S. manufacturing.  Because manufacturing output has grown more slowly than the economy overall (the upper line below), its share of GDP has fallen (the lower line). Moreover, because of increased labor productivity in manufacturing, fewer workers are needed to produce this increased output (second chart) thus freeing labor to work in other areas and increasing our overall standard of living.

U.S. manufacturing output

Billions of US $ and Percent of GDP

Data Source: World Bank
MLA Citation: <a href=’https://www.macrotrends.net/countries/USA/united-states/manufacturing-output’>U.S. Manufacturing Output 1997-2021</a>. http://www.macrotrends.net. Retrieved 2021-08-16.

But let’s take a closer look at Judt’s statement. If the U.S. shifts some manufacturing offshore, it must pay for it. Instead of paying American workers it must pay Chinese workers, and firms and shipping companies. Fundamentally, a country’s imports must be paid for by its exports (or by capital inflows from the exporting country). Let’s look carefully at each possibility. To simplify, let’s initially assume that there are no capital flows (cross border investments from one country in another) so that trade in goods and services must balance (i.e., pay for each other).

For starters whether labor is cheaper in China than in the U.S. cannot be determined without considering the exchange rate of the dollar for the Chinese Yuan. If exchange rates (not mentioned by Judt) are flexible (determined freely in the market) the fact of an increase in U.S. imports from China (i.e., the offshoring of U.S. manufacturing to China) will depreciate the dollar/Yuan exchange rate. As U.S. manufacturers sell dollars to buy Yuan with which to pay for the goods they now want to buy from China, Yuan will become more expensive (a depreciation of the exchange value of the dollar). The dollar’s depreciation will have two effects. It increases the cost of Chinese labor to U.S. companies and thus will reduce the cost advantage of Chinese labor and reduce the demand for it by U.S. firms. And it will lower the cost of U.S. exports thus making them more attractive in China. While the adjustments will take time, the dollar depreciation will continue until American exports increase and its imports from China moderate until trade balances–our increased exports pay for our increased imports.

If the exchange rates are fixed, as they were in gold standard days, the adjustment in the real effective exchange rate needed to balance trade takes a different form.  The initial increase in the demand for Chinese products (outsourcing to Chinese workers) are paid for with dollars. But to preserve the fixed exchange rate, the PBRC (Chinese central bank) must buy these dollars with newly created Chinese currency. This increase in the Chinese money supply will lift prices in China making Chinese exports more expensive in the U.S. and U.S. goods cheaper in China. In short, the real exchange rate adjustment needed to balance imports and exports in this case results from a higher inflation rate in China than in the U.S. while in the first case of flexible exchange rates it results from adjustments in the nominal exchanges rates themselves.

A third possibility is for China to take the extra dollars being spent in China and invest them in the U.S. (or elsewhere) This is the capital flow case in which trade itself does not balance.  This was the policy followed by China in the 2000s through 2014. The PBRC would buy the dollars being spent for outsourced Chinese labor (U.S. manufacturers payments to Chinese workers rather than to American ones for the goods they needed) and would invest them in the U.S. If the increase in the Chinese money supply resulting from those dollar purchases was more than was consistent with stable prices in China, the excess money would be sterilized–so called sterilized foreign exchange intervention (the PBRC would create Yuan to buy dollars and would repurchase some of those Yuan back with domestic Chinese securities owned by the PBRC).

To some extent this foreign exchange market intervention by the PBRC was the result of its desire to build up its FX reserves (a kind of insurance policy for exchange rate shocks). However, much of it was to prevent an appreciation of the Yuan that would reduce its exports (it was following an export led development strategy). This policy was much criticized abroad as currency manipulation and ended in 2013-4.  Thus, China has financed a significant part of the U.S. governments fiscal debt. https://nationalinterest.org/feature/who-pays-uncle-sams-deficits-26417

Thus, when someone says that something is cheaper to make in China, remember that it must also be that from China’s perspective, something must be cheaper to make in the U.S. in order to pay for what China sends to us. Both sides benefit and the world grows richer.

Facebook and Immigration

December 3rs’s WSJ started an article on immigration as follows:

“The Trump administration has sued Facebook Inc., accusing the social-media company of illegally reserving high-paying jobs for immigrant workers it was sponsoring for permanent residence, rather than searching adequately for available U.S. workers who could fill the positions.

The lawsuit reflects a continuing Trump administration push to crack down on alleged displacement of American workers.”  “Trump administration claims Facebook improperly reserved jobs for H1-b workers”

Immigration policy is a complex issue with many aspects. The economic aspects, however, should be straight forward and simple. https://wcoats.blog/2018/03/03/econ-101-trade-in-very-simple-terms/  https://wcoats.blog/2018/03/24/econ-101-trade-deficits-another-bite/  https://wcoats.blog/2018/09/28/trade-protection-and-corruption/ A free market in goods and labor increases productivity and output making the world wealthier. The cost for this extraordinary benefit is that some firms may go out of business and some workers may lose their existing jobs when someone else does better what the firm or worker were doing. They will need to move on to other activities or jobs.  It is wise and appropriate social policy to help those displaced by competition find alternative uses of their resources and skills.

It might seem rather harmless to protect existing firms and jobs from competition (aside from its afront to our individual freedom) but overtime the cost in reduced income growth will become greater and greater. What if such policies had been imposed a hundred years ago? Where would we be now?

If there are American workers who can perform the same job for the same wage Facebook needs, it has every financial incentive to hire them over sponsoring foreign workers. They don’t need laws to push them to do so. The good old profit incentive works just fine. It is fortunate that the exercise of our individual freedom to invent, invest, and work where we please also produces the most efficient (i.e. productive, thus profitable) use of our talents and resources. Talk about win-win. Those displaced when I come up with a better idea (i.e., something the rest of you like better) should be discouraged from stopping such progress with an effective economic safety net. “Replacing Social Security with a Universal Basic Income”

The Rule of Law: China and the U.S.

The rule of law has been an essential and critical foundation of successful free market economies. It provides the certainty of property rights and contracts needed for entrepreneurs to risk their capital in business undertakings. But as our business and other activities cross borders, whose laws apply?

“Among the earliest examples of legal codes concerning maritime affairs is the Byzantine Lex Rhodia, promulgated between 600 and 800 C.E. to govern trade and navigation in the Mediterranean.” https://en.wikipedia.org/wiki/Law_of_the_sea  Leaping forward, international air travel, satellite communications, spectrum allocation for radio, TV, internet, and other telephonic transmission would be impossible without firm agreements among countries–the international rule of law.

Laws facilitate commerce–buying and selling–by establishing rules for doing so (e.g. contract enforcement rules) that are stable and applicable to all. They lower the costs and reduce the risks of trading. The United States Constitution recognizes the importance of this in the commerce clause of Article I Section 8, which is used to prevent individual states from taxing or otherwise interfering with interstate commerce. Achieving the same law-based freedom to trade across national borders is more difficult, requiring the negotiation of agreements and treaties that establish common rules between sovereign nations.

The World Trade Organization (WTO) develops and enforces the rule of law in the area of cross border trade. The difficulty of achieving global agreement on the rules of various aspects of trade is reflected in the fact that no new agreements have been reached since the establishment of the WTO (taking over the General Agreement of Trade and Tariffs) on January 1, 1995. “The WTO agreements cover goods, services and intellectual property. They spell out the principles of liberalization, and the permitted exceptions. They include individual countries’ commitments to lower customs tariffs and other trade barriers, and to open and keep open services markets. They set procedures for settling disputes.” the WTO – what is it?

China was admitted to the WTO as a developing country on December 11, 2001. Chinese officials immediately expressed the desire to understand and conform to the international rules required by the WTO and requested technical assistant from the IMF for doing so. In July of 2002, the IMF sent me to Beijing to review their needs with them.  They were particularly keen to have an American banking supervisor to advise them. I had a perfect candidate who was just finishing a two-year posting to Hong Kong. Everyone I spoke to in Beijing, as well as my Chinese colleagues at the IMF, stated that virtually all Chinese officials agreed on where China wanted to go–full liberalization according to WTO rules. They only differed with regard to how fast they thought they should move to get there.

Our condition was that our resident banking supervision advisor had to have his office located with the other Chinese banking supervisors and that he would have an open door. This was enthusiastically accepted by the Deputy Governor who apparently had not informed the Governor of these details. Unfortunately, when the Governor was presented the contract of his signature, he killed the arrangement. I was, however, able to enjoy wonderful tours of the Great Wall, the Forbidden City, and dine on the best Peking Duck I have ever had.  

An economically rising China is lifting millions of people out of poverty. We rightly welcome its newly productive economy contributing to increasing world output and living standards. The challenge is to square China’s authoritarian political regime with an international free market trading system. The vehicle has been the WTO and other international rule setting bodies that exist to harmonize diverse economies in the direction of freer and more open trade. The rules were being set by the dominant, largely free market economies that China wanted to join.

Beyond an American led WTO itself, the multilateral trade agreement that established the highest standards yet for tariff reduction and the incorporation of more modern trade issues such as non-trade barriers, services, protection of intellectual property, minimum labor standards, and dispute resolution (the rule of law cannot meaningfully exist without credible dispute resolution procedures) was the Trans-Pacific Partnership (TPP) negotiated between 2006 and 2015. The TPP agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United States was announced on October 5, 2015.

Three days later, on October 8, I spoke in New York City at a seminar hosted by the Chinese Chamber of Commerce of New York on the internationalization of China’s currency, the renminbi. All of the talk by the Chinese attending was about the TPP. Why was China excluded? Could they join? My reply was that China would be very welcomed to join when they were able to meet the treaty’s conditions. TPP was another powerful magnet pulling China into the liberal international trading order.  

A recent report from the Peterson Institute of International Economics (June 23, 2020) stated that: “The Trans-Pacific Partnership (TPP) was designed in 2016 to be almost China-proof, with stringent obligations requiring transparency and trade liberalization. As former US Trade Representative Michael Froman put it, Chinese participation would be welcomed only when China could meet TPP’s terms, which it was far from doing. The United States was not keeping China out; China was just not ready to come in.” “China and Trans Pacific Partnership-in or out”

Broadly speaking, the aim of the WTO is to increasingly move its member countries toward the freest trade possible with fair competition (a level playing field), thus promoting a more productive allocation of economic resources and lifting global incomes.  The organization is not without its problems. But rather than working to strengthen the WTO, President Trump turned to negotiating bilateral trade agreements and raising rather than lowering import tariffs. Clearly bilateral agreements are easier to conclude than are global or broad multilateral agreements. Trump focused on China and its large bilateral trade surplus with the U.S. out of the mistaken belief that its surplus (our deficit) was harmful to the U.S. and that reducing it would increase American jobs. “Who pays Uncle Sam’s deficits”

In one of his most short-sighted actions from a sadly long list, President Trump withdrew the U.S. from the TPP on January 23, 2017. In addition to tweaking a few existing trade agreements, such as the North American Free Trade Agreement (NAFTA) by incorporated many of the newer provisions of the TPP and the United States-Japan Trade Agreement and the United States-Japan Digital Trade Agreement, and imposing protective tariffs on solar panels, washing machines, steel and aluminum imports in the name of national security and “America First,” the Trump administration has focused its trade war bilaterally on China (with occasional pot shots at our friends in Europe and elsewhere).  “Trade Office fact-sheets and-annual-report”   A Brookings Institution study assessed the result of all of this for the American economy and workers as follows: “American firms and consumers paid the vast majority of the cost of Trump’s tariffs. While tariffs benefited some workers in import-competing industries, they hurt workers in sectors that rely on imported inputs and those in exporting industries facing retaliation from trade partners. Trump’s tariffs did not help the U.S. negotiate better trade agreements or significantly improve national security.”  “Did-Trump’s-tariffs-benefit-American-workers-and-national-security”

The remaining eleven countries that had signed the TPP agreed in January 2018 on a revised treaty they renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership” (CPTPP).  CPTPP is substantially the same as TPP, but omits 20 provisions that had been of particular interest to the U.S. These provisions can be relatively easily restored should the U.S. choose to rejoin. “Trade and Globalization”

With the increasing power of Xi Jinping, China’s President and the General Secretary/Chairman of the Central Committee of the Chinese Communist Party (now for life), China has played an increasingly active role in the IMF, WB, WTO and other international bodies. In addition, it has launched several regional organizations that it leads (the Asian Infrastructure Investment Bank, the New Development Bank–BRICS, and the Belt and Road Initiative) “The Asian Infrastructure Investment Bank and the SDR”  Xi Jinping claimed that the AIIB would adhere to the highest international standards. But as President Trump and others have noted, there are a number of important areas in which China does not abide by the WTO rules. The policy question is what should be done about it.

The Cato Institution began a recent review of China’s trade practices as follows: “There is a growing bipartisan sentiment in Washington that Chinese trade practices are a problem, since these practices are unfair to American companies in a number of ways. But there is disagreement about the appropriate response. Can multilateral institutions be of use here? Or is unilateralism the only way?” Their conclusion is that the WTO and other multilateral institutions would be the most effective way of continuing to pull China into compliance with the international rule-based system. “Disciplining China’s trade practices at the WTO-how -WTO complaints can help”

President Trump has unilaterally gone the other way. He has blocked Huawei, the world’s leading seller of 5G technology and smartphones, from U.S. 5G mobile phone systems and urged our European allies to do the same because of Huawei’s links with the Chinese government. He is attempting to block the sales of U.S. and other non-Chinese manufacturers of the semiconductor chips used in Huawei and other Chinese products to China.  “A-brewing-US-China-tech-cold-war-rattles-the-semiconductor-industry”  He is trying to ban TikTok, WeChat and other popular Chinese products from U.S. markets and raising tariffs on an increasing number of Chinese products imported into the U.S. Some of these measures might be justified on national security grounds but some seem more protectionist of U.S. companies that are not otherwise competitive.

We are basically forcing China to build its own alternative rules and approach to trade. It is even offering its own global tracking system in place of the GPS system the U.S. has given the world and they seem well along in dividing the World Wide Web and other Internet protocols into two worlds. https://www.voanews.com/east-asia-pacific/voa-news-china/chinas-rival-gps-navigation-carries-big-risks

A November 20, 2020 article by William Pesek highlights what Trump’s misguided trade war with China is producing: “On his presidential watch, Donald Trump did manage to make one thing great: economic cooperation within North Asia.

So chaotic and pernicious was the outgoing US president’s pivot away from Asia that China, Japan and South Korea are dropping the hatchet and joining hands. The unlikely union was formalized on November 15 with the signing of the 15-nation Regional Comprehensive Economic Partnership, or RCEP, free trade agreement.”  “US sidelined as China Korea and Japan unite”  The RCEP is a lighter more limited trade agreement than was the TPP (now the CPTPP) but it is led by China rather than the U.S.  Rather than converging to WTO standards it creates an alternative. 

“President Xi Jinping’s Friday [Nov 20, 2020] announcement of China’s intent to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), a high-standard mega regional trade pact, has been seen as a bold move to reassure the world of the country’s continuing commitment to reform and opening-up.” “News analysis: an uphill task for China to negotiate CPTPP accession agreement”  While Xi Jinping’s strategy for China’s ascension is to take over the leadership in forging the rules for the international order more to the liking of his regime, China’s younger and upcoming managerial and entrepreneurial class, many of whom studied in the U.S. and Europe, have seen and liked the freer and more open capitalist societies. Their patriotism and commitment to a rising China is informed by the knowledge that freer and more open economies thrive more than centrally controlled ones.  We should not overlook their potential for returning China to a path of liberalization and integration with the liberal international order enjoyed by the rest of us.

Xi Jinping and his government’s goal is to retain power by delivering rapid economic growth, which allows and requires a vibrant private sector, while overseeing tight political control. One example is provided by its Social Credit System.  “China’s social credit system-mark of progress or threat to privacy?”  This requires a different set of rules for cross border trade than set out by the WTO. But many of China’s world traveling citizens see China’s successful rise in more closely embracing free market capitalism. We should incentivize the later view.

President Trump’s trade policies have damaged the world’s rule-based trading system and hurt the American economy while turning China in a different direction. President elect Biden has indicated his interest in rejoining the TPP. He should give it and the rebuilding of the WTO and other multilateral bodies high priority.

Saving the American Dream

The American Dream is under attack.

“The American Dream is the belief that anyone, regardless of where they were born or what class they were born into, can attain their own version of success in a society where upward mobility is possible for everyone. The American Dream is achieved through sacrifice, risk-taking, and hard work….” “The American Dream is to succeed by work, rather than by birth”. The Dream has attracted the world’s best and brightest to our shores making America the world’s leading economic powerhouse and enabling us to live freely as we each determine what we are willing to work for, for ourselves and our families.

Historically, individuals have been limited in what they could achieve by where they were born in society, by their parent’s position in life, and by who they knew. Companies of individuals were limited by the restrictions placed on them by their governments, often by the protections from competition government granted their friends (crony capitalism). Such traditional societies limited the freedom and ambitions of its citizens and limited the productivity of its human and physical resources. In short, traditional societies were keep poorer than they would have been if their citizens had been freer to innovate and compete.

The American Dream is now under attack by Donald Trump’s trade protectionism, crony capitalist government favoritism, immigration walls, and weakening of the international rule of law that has extended the benefits of specialization and trade globally. It is also being attacked by Alexandria Ocasio-Cortez’s (LOC’s) vision of state leadership and control of production and a new generation of idealistic, but uninformed, voters who mean well but have missed the lessons of socialism’s failures. If we are to save the conditions in the United States in which the American Dream still lives, we must better understand what has led so many Americans to vote against it.

I am sure that the answers to that question are many and complex, but broadly speaking two stand out in my mind, both of which point to the measures needed to restore support for the dream.

The first is to better educate the public, especially its younger members, about the conditions that allow and encourage a productive, innovative economy. This includes understanding the proper role of government in protecting private property, enforcing contracts, maintaining public safety (the rule of law) and in providing the public infrastructure that facilitates private activities and commerce (the commons of public goods). It includes the lessons of why all socialist economies have failed as a result of the corrupting incentives of state direction of economic activity rather than the competitive search by profit seeking private enterprises for better ways to serve the public.

The second answer concerns the adequacy and efficiency of our social safety net. The American Dream concerns individuals who take responsibility for their own well-being. While on average this has opened the way for most to prosper to the extent of their talents and energy, some will, often through no fault of their own, fail and fall off the tightrope. Society has an interest (even beyond the obvious humanitarian one) in softening the fall. It has an interest in an effective social safety net. 

Some–those who have not understood the lessons of socialism’s failures–have looked to trade and immigration restriction to prevent them from losing their jobs. They object to the economic benefits of free trade when it means that they must look for a new job (however, most manufacturing job losses in the U.S. have resulted from technical progress and the resulting increase in productivity rather than from cross border trade). “Econ-101-trade-in-very-simple-terms”  “Trade-protection-and-corruption” Those with such views have supported Trump’s anti free market policies. They have been attracted by Trump’s “I win you lose, us vs them” rhetoric.

AOC and her friends point to the widening income inequality–the dramatic increase in the incomes of the wealthiest and the stagnation of the incomes of the middle class in recent years–and demand income redistribution. But she fails to understand that it has been the growth of government’s role in the economy and the incentives in big government toward corruption and crony capitalism (protectionism for the wealthy) that have reduced competition and protected the position and markets of the biggest companies with friends in government. Socialism would make those incentives even stronger.

America’s dynamism and success reflects the creative destruction of risk-taking entrepreneurs and their hard-working employees.  https://economics.mit.edu/files/1785  However, the workers whose jobs are displaced by new products and new technologies may need help in finding and retraining for new jobs. They may need financial assistance in between (unemployment insurance). If nothing else, this may be the cost of their support for such a dynamic system.  Our social safety net sometimes provides poor incentives and sometimes has holes. It is time to seriously consider replacing it with a less intrusive and more comprehensive Universal Basic Income.  “Our-social-safety-net”  “Replacing-Social-Security-with-a-Universal-Basic-Income”

The American Dream–the foundation of our freedom and affluence–is under attack from the left and the right. We should fight to preserve (or restore) it.

Supply Chains

When politicians and pundit refer to trade or supply chains, they invariable mean cross border trade or supply chains.  This is a mistake. President Trump recently provided a particularly nonsensical example:

“In Washington, President Trump lambasted corporate America for “these stupid supply chains” and said the pandemic had proven him right on the need to bring factories home.

“We have a supply chain where they’re made in all different parts of the world. And one little piece of the world goes bad and the whole thing is messed up,” he told Fox Business in May. “I said we shouldn’t have supply chains. We should have them all in the United States.” “Coronavirus-globalization-manufacturing”

Trade occurs whenever you sell your labor or whatever you produce and buy what you need from others. Trade starts at your doorstep and without it you would starve to death. Supply chains exist whenever you purchase inputs to whatever you (or the firm you work for) are making from someone else rather than making every component yourself. If you are a carpenter, you buy your tools from someone else.

You might think that you should confine trade and/or associated supply chains to your family or your village for some reason, but you would give up the efficiencies of greater specialization when trading more widely (maybe even across national borders). And such restrictions would lower–potentially significantly lower–your income and standard of living as well as the incomes of your trading partners.

This does not mean that there are no risks in relying on others to produce some of what you want. If there is only one source of what you buy, you risk going without if that source stops producing. But that is rarely the case. I briefly thought it might be for toilet paper in March when the supermarket t-paper shelves were empty for a few weeks. But I bought some on line from China and it was delivered to my door.

Manufacturers whose supply chains have only one source are taking a risk for whatever efficiency they enjoy. Having multiple suppliers or supply options is a form of insurance and is generally wise.  But it makes little sense for a Southern California manufacturer who buys some of its inputs from across the border in Mexico to be forced to shift its supply chain to Pennsylvania in order to have it “in the United States.” Transportation costs would be higher and with greater risk of weather or other transportation disruption. On the other hand, relying on the much closer source across a national border has the risk of an unpredictable President imposing a tax (tariff) on imports from Mexico. Our wise constitution prevents him from doing so on interstate commerce.  

The uncertainty of today’s world is causing firms to reevaluate the risks of long supply chains. That is prudent, but insisting that everything be produced and purchased within the United States is nonsensical and harmful for everyone involved.

Econ 101: covid-19 resource priorities

U.S. cases of covid-19 (those testing positive for the virus that causes it) continue their exponential growth exceeding 333,000 on April 5 with over 9,500 associated deaths. In a few days some hospitals will run out of the protective equipment and ventilators needed by their staff and patients.  How should the existing stock of these items be allocated to the most urgent and/or “worthy” uses and how should the inadequate supply be most effectively augmented?  Should a central authority (the “government”) choose who gets them or should the highest bidder in the market?  Should new supplies be demanded by the government employing the Defense Production Act of 1950, or should producers respond to the profits of higher prices? Should we follow the socialist or the capitalist approach?

In normal times (which these are not) the demand for hospital supplies is met by a competitive market of producers in response to prices offered by hospitals. In a well-functioning economy these prices reflect the cost of producing them and a modest profit sufficient to attract the desired supply. In this way scarce resources (the supply of any resource, starting with labor time, is limited) are allocated to their most valued uses as measured by what people are willing to pay for them. Because of the rapid and dramatic increase in the need for face masks (N95), and other protective gear needed by doctors and nurses the current supply does not satisfy the demand. This includes both emergency stocks and the flow of newly produced supplies.  Unbelievably some hospitals are preventing doctors from wearing appropriate protective gear at the detriment of their own safety and the future supply of doctors. “Doctors-say-hospitals-are-stopping-them-from-wearing-masks”  In Italy the shortage of ventilators is already causing doctors to deny them to those most likely to die in order to make them available to those more likely to live with their assistance (triage).

How should this inadequate stock of equipment be allocated among those demanding it, all of whom cannot be satisfied?  The two broad classes of approaches to allocating the existing supply until it can be increased are for a government body to determine who needs it most according to some politically accepted criteria or for market suppliers to allocate it to the highest bidders. Many books have been written to document why market allocation (capitalism) has dramatically outperformed government allocation (socialism) thus lifting most of the world’s population out of dire poverty (over 90% by 2009). But what about the emergency situation we are now in with the exponential spread of a new virus that is about ten times as deadly as the annual flu?

“The governors of New York, Texas, Illinois and other states have said they are competing with the federal government and other states in a mad scramble for lifesaving supplies such as surgical masks, N95 respirators, isolation gowns and ventilators that are widely drained or out of stock.” .” “Gouged-prices-middlemen-medical-supply-chaos-why-governors-are-so-upset-with-trump”

The oversight of healthcare delivery in the U.S. resides in the states and municipalities rather than the Federal government. However, the Federal government does support medical research and provides health guidance to the states.  Of the approximately 5,100 hospitals in the United States the Federal government owns about 200, primarily for its military and veterans. It also maintains its own emergency stockpile of medical equipment for its hospitals and to backstop shortages in state and private hospitals. In principle the Federal government could set standards for which of these non-Federal hospitals would benefit most from being allocated ventilators and other equipment from the Federal stockpile if their own supplies become inadequate. It might even dictate how private market supply would be allocated in the event of shortages.

Government allocation carries a larger risk of political and personal corruption factors influencing resource allocation than does market allocation. While the private market is not without corrupt players, the bottom line of needing to attract and satisfy customers who have other options in order to make a profit to stay in business disciplines private suppliers and tends to weed out crooks. A company’s reputation for honesty and product quality is a critical part of its staying in business. Poorly performing companies go out of business, while poorly performing and/or corrupt governments rarely do. New York governor Andrew Cuomo’s request to President Trump for help with its shortage of ventilators and other medical supplies met with pandemic expert Jared Kushner’s rebuttal that the governor was over estimating New York’s needs and that more ventilators should be allocated elsewhere.  Nothing political here. Move along.

Another and potentially more damaging potential of government allocation concerns the U.S. government’s “competition” with other countries for the scare supplies. “The White House late Thursday ordered Minnesota mask manufacturer 3M to prioritize U.S. orders over foreign demand, using its authority under the Defense Production Act, or DPA, to try to ease critical shortages of N95 masks at U.S. hospitals.

“The Trump administration has asked 3M to stop exporting the masks to Canada and Latin America, and to import more from 3M’s factories in China, the company said Friday…. At the same time, officials in Berlin criticized the United States on Friday over what they said was the diversion of 200,000 masks that were en route from China…. These are things that Americans rely on,” Trudeau said, “and it would be a mistake to create blockages or reduce the amount of back-and-forth trade of essential goods and services, including medical goods, across our border.” “White-House-scrambles-scoop-up-medical-supplies-angering-canada-germany”

“Canadian Prime Minister Justin Trudeau said his government has been ‘forcefully’ reminding American counterparts that trade ‘goes both ways across the border.’  Thousands of nurses in Windsor, Ontario, he noted, travel to Detroit each day to work in hospitals there. Several of them have since tested positive for covid-19.” These steps are incredibly short-sighted as is Trump’s trade policy in general. As the biggest and strongest country in the word, the U.S. should be engaging with the rest of the world to lead a cooperative approach to fighting covid-19 rather than throwing its weight around because, at the moment, it still can. These are the sorts of behavior that can lead to war.

Following quickly on the heels of allocating the existing stockpile of equipment, is the closely related question of how to increase and allocate the supply going forward as quickly as possible.  Market allocation of the existing stock prioritizes those willing to pay the most as an indication of the intensity of their need (or who has more money to spend, but the wealthy always have a greater impact on allocation whether through government or the market). Established firms aim to maximize their profit over time and will take into account their long run relationship with regular customers when agreeing on prices for the existing supply. This limits so called “price gouging”, but the prospect of higher prices accelerates the market’s supply response. Many governors instead “pleaded for the White House to invoke the Defense Production Act, the legislation that would compel American companies to make critical supplies.” “Gouged-prices-middlemen-medical-supply-chaos-why-governors-are-so-upset-with-trump”

While history clearly demonstrates that market allocation is superior to government command of the economy, it struggles in current emergency circumstances even if or when government interference is removed (such as the government’s interference with market development and supply of covid-19 test kits).  Knowledge is essential for good decision making.  A virtue of market allocation is that knowledge that is impossible  to properly centralize in socialist economies can be exploited in decentralized individual decision making in response to market generated prices that match supply with demand (See F. A. Hayek’s “The_Fatal_Conceit”).  Markets rely on trust that is built in various ways from experience. The Internet reports reviews of products by users. Uber drivers are rated by riders. Company reputations are carefully built and protected.

In the current sudden surge in demand for certain medical supplies the system is overloaded, and hospitals search beyond their usual suppliers. New marketers emerge to help hospitals find new suppliers. The reliability and quality of the supplied products lack market experience and feedback.  Governments can play a supportive role by requiring transparency about product contents and/or performance but can also get in the way if regulations are more costly than their benefits.  “’The dynamic of the market is very weird at this point,’ said Andrew Stroup, a co-founder of Project N95, a nonprofit clearinghouse working to connect hospitals with suppliers. The group has received more than 2,000 requests from health-care institutions searching for more than 110 million pieces of personal protective equipment.”   “Gouged-prices-middlemen-medical-supply-chaos-why-governors-are-so-upset-with-trump”

In the imperfect world we all live in we would do best to maximize the role of private entrepreneurs and firms to develop and supply the best possible products, limiting the government’s role to protecting private property and contract enforcement, and establishing standards that help promote consumer confidence and trust in suppliers. Private, profit motivated producers maximize their profits by best surviving and satisfying the desires of their customers.

Covid-19: What should Uncle Sam do?

On February 29 the first person in the United States died from Covid-19, the disease caused by SARS-CoV-2, the so-called novel coronavirus first observed in Wuhan, China.  On March 12, three more people succumbed from this disease bringing the total to 41. Ten days later on March 22, 117 died bringing the total to 419 as the exponential growth of Covid-19 deaths continues. Globally 15,420 had died by midday March 23 and deaths are rising fast.

How and where will this end?  Shutting the economy down and keeping everyone isolated in place until the virus “dies” for lack of new victims would ultimately kill everyone from starvation (if not boredom).  This pandemic will only end (stabilize with the status of the flu, which currently kills about 34,000 per year in the U.S.) when an effective vaccine is developed and administered to almost everyone. This will take one year to eighteen months if it is discovered today, and that is if we are lucky that the safety and effectiveness trials go according to plan. Without a vaccine, the pandemic will “end” when most of us have acquired immunity to it as a result of having and surviving (as almost everyone will) covid-19 –acquiring so called herd immunity.  This assumes that having and surviving the disease will immunize us. This is generally the case with viruses but has not yet been established for SARS-CoV-2.

Our hospitals and medical services could not handle the patient load if every one contracted this disease over too short a period, so it is important to slow down the pace of infection–so called flattening the curve (which could spike quickly as you see from the opening paragraph). The ideal strategy is to allow the infection of those with low risk of serious illness or death to speed up herd immunity with minimum demand on our limited health facilities, while protecting and treating the most vulnerable. The young and healthy are least vulnerable and the old and health-impaired are the most vulnerable.  We should reopen schools and restaurants after Easter and gradually restart our cultural entertainment lives adhering to higher standards of hygiene and public interaction. This would be ideal both with regard to speeding up herd immunity and with regard to minimizing that damage to the economy.

What should government do?

I am from the government and I am here to help (it is risky to attempt humor in these times, but what the hell). “Treasury Secretary Steven Mnuchin warned GOP senators that the unemployment rate could spike to nearly 20 percent if they fail to act dramatically…. The United States is expected to lose 4.6 million travel-related jobs this year as the coronavirus outbreak levies an $809 billion blow to the economy, according to a projection released yesterday by the U.S. Travel Association…. Research from Imperial College London, endorsed by the U.K. government, suggests that 2.2 million would die in the United States and 510,000 would die in Britain if nothing is done by governments and individuals to stop the pandemic.” “six-chilling-estimates-underscore-danger-of-coronavirus-to-public-health-and-the-economy”

“Infectious disease experts do not yet know exactly how contagious or deadly the novel coronavirus is. But compared to SARS and MERS, SARS-CoV-2 [as the novel coronavirus is now labeled] has spread strikingly fast: While the MERS outbreak took about two and a half years to infect 1,000 people, and SARS took roughly four months, the novel coronavirus reached that figure in just 48 days.”  “Mapping the Novel Coronavirus Outbreak”

The U.S. does not have the medical equipment or hospital beds that will be needed for those anticipated to need ICU facilities.  And as poorly equipped medical staff fall ill from their exposure to the Coronavirus, we will run out of enough doctors and nurses to care for them forcing us to default to the unpleasant realities of medical triage where doctors begin to assess and choose those that have a higher probability of survival and to leave the weakest to fend for themselves. This has already started in Italy.

So, what should the government do? Its response might be considered under three categories:  a) Stop or slow the spread of covid-19; b) Help state and local health service providers care for those needing it; and c) minimize the damage to the economy (i.e. to those whose income is affected by the disease or the measures taken to slow the spread of the disease).

As with all good policies, as the government determines its immediate approaches to the crisis, it should keep one eye on the longer run implications of the policies adopted. It should balance the most effective immediate actions with the minimization of what economists call moral hazard in the future.  The simplest and best-known example of moral hazard results from the now hopefully banished practice of governments bailing out banks when they fail as a way of protecting depositors. This one way bet for the banks–they profit when they win their bets and the government bails them out when they lose them–encouraged banks to take on excessive risks. In the U.S. we have replace bank bail outs with deposit insurance and efficient bank resolution (bankruptcy) procedures. “Key Issues in Failed Bank Resolution”

If economists do nothing else, we pay very close attention to incentives, particularly those created by government rules and regulations (including taxes and subsidies).  Government financial assistance must also be carefully designed to be temporary, recognizing the danger that expansions of government into the economy in emergencies have the bad habit of becoming permanent.

From these general considerations our response should be guided by these principles: Measures should be effective with the least cost. They should be narrowly targeted. They should be temporary. The cost of financial assistance should be shared by all involved–no bailouts.

Flatten the curve 

The government’s first priorities must be to slow the spread of covid-19 while supporting the medical needs of those contracting it.  Limiting the number of infected will limit the resulting deaths (guesstimated to be around 1% of those infected by this virus). Slowing the rate at which people are infected–flattening the curve–will reduce the peak demand for hospital beds and related services until a vaccine is found (once one or several candidates are discovered today, it will take 12 to 18 months of tests to establish its safety and effectiveness and manufacture enough to start administering it).

Despite clear warnings that the novel coronavirus posed serious threats to the U.S. for which we were not prepared, President Trump failed to act until very recently, calling the scare a Democratic plot as recently as February 28. “Trump-says-the-coronavirus-is-the-democrats-new-hoax”  “U.S. intelligence agencies were issuing ominous, classified warnings in January and February about the global danger posed by the coronavirus while President Trump and lawmakers played down the threat and failed to take action that might have slowed the spread of the pathogen, according to U.S. officials familiar with spy agency reporting.” “US-intelligence-reports-from-january-and-february-warned-about-a-likely-pandemic”

Countries that acted quickly to identify and isolate those infected by the virus have generally succeeding in slowing its spread without shutting their economies down.  South Korea, Singapore, and Taiwan have tested widely and quarantined those testing positive, many of whom were asymptomatic. Their economies have not been shut down. Restaurants and bars remain open as do schools in Singapore and Taiwan.  New cases in S Korea have fallen to very low levels two weeks ago and active cases have been declining since March 11 as more people recover than acquire the disease. On March 22 only two people died from the disease.  Cases and deaths have remained low in Japan, Singapore and Taiwan. The following describes the lesson’s from Singapore’s success: plan ahead, respond quickly, test a lot, quarantine the sick, communicate honestly with the public, live normally:  “Why-Singapore’s-coronavirus-response-worked–and-what-we-can-all-learn”

As a result of the U.S. failing to act earlier, the potential for this approach has been reduced in the U.S.  Nonetheless, the government should urgently remove its barriers to testing, increase the supply of tests, and pay most of the cost of testing. In order to discourage frivolous testing those being tested should pay a small amount of the cost (e.g. ten dollars per test).  Even today (March 21) very few Americans are tested despite frantic catch up efforts by the U.S. government.  “A-government-monopoly-led-to-botched-covid-19-test-kits-but-private-labs-are-now-saving-the-day” Positive test results (“cases”) in the U.S. are rising rapidly (983 new cases on March 16 jumped to 9,339 on March 22, for a total of 33,546). However, as so little testing has been possible, there is no way we can know whether this dramatic increase reflects increases in infection or only the increase in the identification of existing infections. “Peggy Noonan gets tested–finally”

As a result, the government has urged people to stay home, and most entertainment centers (theaters, cinemas, restaurants, gyms, and bars) have closed, and a few state governors are mandating it.  Many international flights have been cancelled.  Aside from grocery stores and pharmacies, most shops and malls have closed. A controversy is raging over whether closing schools does more harm than good. Among the arguments against it is that because serious illness and death among the young is rare but they can spread the disease (to their families at home and others), attempting to block their infection interferes with herd immunization (protection from infection as the result of a large proportion of the population becoming immune as the result of recovery from infection).

The economic impact of those drastic measures will be explored below, but the government must now urgently prepare for the surge of covid-19 patients promising to overwhelm our brave medical health care workers, medical supplies and hospital beds even with these draconian measures. Priorities must be given to properly equipping medical service providers and training their replacements as they fall ill. Hospital beds and respirators and other equipment needed for the more seriously ill must be urgently produced, in part by turning out and away, less seriously ill patients and those with non-emergency, elective treatments. We can delay the investigation into why these steps where not taken two months ago when the need was identified.

Care for the sick

The government should support the market’s natural incentives to develop better treatments and ultimately a vaccine (i.e. profit). This raises challenging policy issues. Protecting the patent rights of firms developing treatments protects the profit incentive for them to do so. However, the sharing of research findings, thus threatening such patents, can greatly accelerate the discovery of helpful medicines or procedures. Hopefully rights can be established and protected that both encourage drug development and cooperative information sharing.

The failure of the U.S. government to provide for or allow significant testing for covid-19 is a scandal. The government should get out of the way. “Coronavirus-and-big-government” Its claim last week and the week before that testing was opening up is sadly not true.  By March 19th the U.S. with a population of 327 million had only tested 103,945 people (0.03%).  S. Korea with a population of 51.5 mil. had tested 316,664 by March 20th (0.6%) and Germany with a population of 82.9 mil. had tested 167,000 by March 15th (0.2%)  “Covid-19-why-arent-we-prepared”

President Trump’s trade war has damaged world’s ability to fight covid-19 in general but more specifically his tariffs on medical supplies are contributing to their shortage in the U.S.  “The US-China trade war has forced US buyers to reduce purchases of medical supplies from China and seek alternative sources. US imports of Chinese medical products covered by the Trump administration’s 25 percent tariffs dropped by 16 percent in 2019 compared with two years earlier.”  “Tariffs-disrupted-medical-supplies-critical-us-coronavirus-fight”

Save the economy

Having missed the opportunity to flatten the curve via testing and targeted quarantines, the U.S. has taken much more drastic steps to restrict public interactions, shutting down the entertainment, educational, and transportation sectors of the economy. These should result in temporary interruptions of the supply of these services that will bounce back when the restrictions are lifted. Some output will be lost forever (lost classroom time, and restaurant meals) but others can be recouped or at least restored to original levels (rates). Clothing and other retail items not purchased during the shut down can be purchased later.

What the economy will look like afterward (hopefully only a few months) will depend on several factors. The first is the extent to which our public behavior is altered permanently. Home movies might permanently replace some part of our usual attendance to the cinema. Teleconferencing might permanently reduce meeting travel or accelerate the existing trend in that direction, etc.

The policies being debated in congress at this moment for protecting individuals and firms from the financial cost of the temporary shutdown can profoundly affect the future composition and condition of the economy. Every big firm out there is working on how they can tap some of the taxpayer’s money that government will be giving out. Those pushing government interventions into new areas on a permanent basis will exploit the occasion to slip in their favorite policies. Unfortunately, once the government moves into an area– it rarely withdraws. Almost 19 years later, the horrible Patriot Act, adopted when a scared public was willing to trade off liberty for security, is still largely with us.

Our public interest would be served by incentives that lead those who might be sick with covid-19 to stay home rather than risk infecting others, and by policies that enable viable firms that lost customers and individuals who stayed home to bridge their financial gap until returning to normal. Affected firms and individuals will continue to have expenses (food, rent, mortgages, etc.) but no incomes. They should be provided with the funds to meet these expenses in order to return to life/work when the lights go back on. The sharing of the cost of those funds must be considered politically fair and must incentivize the desired behavior. Everyone must have some skin in the game (a share of the cost). Adopting measure that fill those criteria will not be easy.

The government (taxpayers) should cover much of the cost of the covid-19 related medical services and hospital costs, including very widespread testing. Medical service providers should be tested daily (e.g., several doctors have died from covid-19 in Italy). Anyone staying at home and testing positive should receive sick leave paid for by the government.

Assistance to companies and the self-employed should be as targeted as possible on those forced to reduce or stop operations as a result of covid-19. Where possible, assistance should take the form of loans to companies that continue to pay wages to their employees even if not working. Restrictions should be placed on how such loans are used (no stock buy backs, or salary increases during the life of the loans). Bank and lending regulators should allow and in fact encourage temporary loan forbearance by the lenders on temporary arrears from otherwise viable firms. “Bailout-stimulus-rescue-check” One small businessman convincingly argued that wage subsidies that keep working on the payroll are better than generous unemployment insurance, which makes it easier for firms to lay off their workers. “Dear-congress-i’m-a-small-business-owner-heres-what-my-business-needs-to-survive”

What about the big companies, such as Boeing, the airlines, the Hotel Chains, and Cruise ship operators? Yes, they should be included in the loan forbearance and incentive loan programs, but they should receive no special consideration beyond that. If government (partially) guaranteed loans through banks to pay wages and other fixed expenses for a few months are not enough to finance a firm’s expenses without income for a few months it is probably not viable in the long run anyway and should be resolved through bankruptcy as were GM and Chrysler in earlier financial crises. This would wipe out the stakes of owners while preserving the ability of the firm to return to profitable operation with new owners. “Bailing-out-well-if-bail-out-we-must”

Monetary policy

The American economy (and elsewhere) is suffering in the first instance a supply shock (sick people unable to work and produce). This fall in income from supply disruptions also reduces demand. Cutting the Fed’s already low interest rate target to almost zero is a mistake. No one will undertake new or expanded investments because of it, and its impact on reducing the return on pensions and other savings will, if anything, reduce spending. The last decade of very low interest rate policy targets has already contributed to excessive corporate debt and inflated stock prices (recently deflated back to normal).

Injecting liquidity via new lending facilities and international swap lines, as the Fed is now undertaking, is the correct response. If lenders allow their borrowers to delay repayments for a few months, they need to replace that missing income somehow (rather than calling in nonperforming loans and bankrupting the borrower). The Federal reserve should substitute for that income by lending to banks freely against the good collateral of government debt or government guaranteed debt.

“The vital need of everyone in the economy, from the corner drugstore to the local transit authority to the mightiest multinational, is liquidity: credit to meet payroll and other key obligations so as to remain solvent until the end of what we all must hope is a finite crisis.”  “Here’s-an-economic-aid-plan-better-than-mitch-McConnell’s”

Macroeconomic policy

As noted above, the government’s help should be narrowly targeted to the direct victims of covid-19.  A general fiscal or monetary stimulus is not needed or desirable.  Nonetheless, it will add to the federal debt that is already bloated by years of annual deficits at the peak of a business cycle when a surprise is customary and appropriate.

“The United States is not confronted with a financial crisis and a follow-on crisis of demand, as in 2008 or 1929. Rather, previously robust consumption and production are being deliberately halted to save lives. Thus, traditional tools of monetary and fiscal stimulus, such as zero interest rates and direct cash aid to households, are unlikely to prove decisive. You can’t shop, or invest in new construction, while on lockdown.”  “Here’s-an-economic-aid-plan-better-than-mitch-McConnell’s”

This is a dangerous period both for our personal health and for the health of the economy. Affected firms should be helped in order for them to continue paying their employees and to remain solvent until they can return to production. But the United States has failed to prepare properly and is handling the fight against covid-19 poorly. We need to reopen our schools and restaurants and return to normal at a reasonable pace while allowing herd immunity to develop at a faster pace while supporting the most rapid development of a vaccine possible. Don’t fight this wildfire with our eyes shut while enhancing the dangers of future fires from ill-advised measures undertaken in this emergency environment.

Stay strong everyone. We will all get through this.

Is Huawei a Security Risk?

This question is quite beyond my technical competence to answer.  Even the experts disagree amongst themselves.  President Trump thinks it is too risky to use Huawei equipment and insists that Britain and our other allies not use Huawei equipment for building out their 5G telephone infrastructures. British Prime Minister Boris Johnson thinks its OK (plus it is available and cheaper than its potential future competitors) for many but not all uses.  President Trump, who likes to think he is protecting American jobs even though our economy is fully employed, was so angry at Johnson’s unwillingness to bow to his demands that he hung up on Johnson in their most recent phone conversation.  Johnson promptly cancelled his planned trip to the White House. Ukraine President, Volodymyr Zelensky, must be shaking his head in disbelief.

Trump has reason to be suspicious of foreign produced equipment following the recent disclosure that a CIA owned Swiss company, Crypto AG, sold encryption devises to 120 countries that enabled the U.S. and Germany to “easily break the codes that countries used to send encrypted messages.”  This went on for over 40 years allowing us to spy on our friends and foes alike. “National-security/cia-crypto-encryption-machines-espionage”

But these days security is much more sophisticated and wouldn’t allow such hardware to slip through undetected. On the other hand, the spying technology is more sophisticated too. Britain and other European countries are avoiding Huawei equipment for sensitive applications and using it for the rest. My point is not to join the debate over whether and where to use Huawei equipment but rather to argue that the more promising approach to convincing our friends of potential dangers (the more Adult approach, if I may) is to present our evidence and endeavor to convince them of our views. Trump’s approach, as in so many other areas, is to threaten and bully. “The-basis-of-American-world-leadership”

It is not easy to determine when trade restrictions reflect genuine security concerns and when they are just another manifestation of Trump’s protectionist, central planning direction of our resources.  He has imposed and threatened to impose tariffs with abandon, inflicting harm on our own economy as well as the tariffs’ targets. “Trumps-recent-trade-moves-show-adversarial-approach-has-only-just-begun”  “The United States has also threatened duties of up to 100% on French goods, from champagne to handbags, because of a digital services tax that Washington says harms U.S. tech companies.”  “Trump-threatens-big-tariffs-on-car-imports-from-EU”  This use of tariffs has nothing to do with trade and violates WTO rules, which Trump seems to pay little attention to in any event.

While this type of bully approach might work sometimes, it is unsustainable in the long run.  Needless to say, world confidence in the U.S. to do the right thing has plummeted. While for now other countries bow to and follow orders from the U.S., not out of respect but out of fear of retaliation, they follow a strategic waiting game. They know that Trump will not always be in power. And after he is gone, the U.S. will no longer have allies but adversaries ready to bare their claws for revenge.  https://www”9-charts-on-how-the-world-sees-Trump”

 

 

 

Protecting Jobs

Protecting jobs sounds like a good thing to do (if you don’t think very carefully about what it means). Free markets protect jobs that are performing desired tasks better than someone else can. President Trump’s protection of steel workers’ jobs by imposing tariffs on competing sources of steel (mainly Canada) is protecting a relatively inefficient industry and thus “protecting” a lower standard of living for our country at large. “Protectionism” protects us from innovation and exciting technical changes that we eagerly embrace when offered in the market.

This week’s Economist magazine has an interesting article on the latest economic disruption (known to economists as “creative destruction”).  “Today the latest bonanza is in full swing, but instead of steel and sand it involves scripts, sounds, screens and celebrities.” https://www.economist.com/leaders/2019/11/14/who-will-win-the-media-wars

Movies (cinema or film for the more sophisticated) were only available in movie theaters when I was a kid more than half a century ago and yes they were already talkies (don’t be a smart ass). Then there was TV and we could watch movies there if we could stay up late enough. Cable TV packages greatly broadened the choice of channels.  Then video players and cassettes meant that we could choose what movies we wanted to watch and when.  We used to get CDs from Netflix in the mail.  I think I still have an unreturned diskette somewhere.  Maybe I will frame it so that my grandchildren can marvel at such historic relics.  In 1985 Blockbuster Video opened and we could skip the mail and browse thousands of films for rent.  They filed for bankruptcy in 2010 and the last two stores (in Alaska) closed last year.

“This week Disney launched a streaming service which offers “Star Wars” and other hits from its vast catalogue for $6.99 a month, less than the cost of a DVD. As the business model pioneered by Netflix is copied by dozens of rivals, over 700m subscribers are now streaming video across the planet. Roughly as much cash—over $100bn this year—is being invested in content as it is in America’s oil industry…. This binge is the culmination of 20 years of creative destruction (see Briefing). New technologies and ideas have shaken up music, gaming and now television.” The Economist

We can look at these amazing technical and business innovations in several ways:  1. A lot of jobs were destroyed as newer technologies replaced older ones and the jobs associated with them.  2. Fortunately no one succeeded in “protecting” them and we, the consumers–the targets of greedy profit seeking capitalists, enjoyed the greater benefit of more entertainment, more conveniently delivered and costing less.  3. New jobs were created to provide these new services.

“Disruption has created an economic windfall. Consider consumers, first. They have more to choose from at lower prices and can pick from a variety of streaming services that cost less than $15 each compared with $80 or more for a cable bundle. Last year 496 new shows were made, double the number in 2010. Quality has also risen, judged by the crop of Oscar and Emmy nominations for streamed shows and by the rising diversity of storytelling. Workers have done reasonably. The number of entertainment, media, arts and sports jobs in America has risen by 8% since 2008 and wages are up by a fifth. Investors, meanwhile, no longer enjoy abnormally fat profits, but those who backed the right firms have done well. A dollar invested in Viacom shares a decade ago is worth 95 cents today. For Netflix the figure is $37.” The Economist

Such dramatic disruptions can be painful for some–those whose jobs were lost or whose investments lost value. We need to adopt policies that minimize that pain. But thank God we didn’t try to protect those jobs and share values and the older ways they reflected.

Where does the desire to explore come from?

Long ago I had the pleasure of introducing a young friend to types of food he hadn’t tasted before.  He was quite comfortable with his American style hot dog and hamburger meals and wasn’t certain he wanted to try new and strange dishes.  People differ in this regard.  Some are eager to try new cuisine, see new places, and encounter new people and cultures. Some are not.  And some are even rather intimidated and reluctant to leave their familiar comfort zone. There is a lot to be said for the predictability of the familiar, perhaps similar to well-worn shoes.

After some gentle persuasion, my friend agreed to sample a few dishes.  I reassured him that nothing would be forced on him and that he might even discover some exciting new tastes.  If he found that he didn’t like a dish he would not have to finish it.  But he would never know what he might be missing if he didn’t explore a bit.  Once he started, however, it was hard to stop him.  He was pleasantly surprised at how interesting and tasty some dishes were.  He was particularly reluctant to try foie gras knowing it was goose liver, though he fell in love with it by the second bite.

As I noted earlier, people differ in their tastes for adventure.  We might just leave it at that but for two reasons.  The first is that being rich is more interesting and exciting than being poor.  I am speaking here of experience rather than money.  Seeing and engaging new and different places, meeting new and different people of different cultures, listening to new and different music can make life richer.  The core of a liberal arts education (as opposed to acquiring professional skills) is the introduction to and broadening of our understanding and appreciation of ours and other cultures. It makes our lives richer.

The second is that openness to change is a necessary aspect of economic progress.  Technical progress disrupts the established order but increases our productivity and standards of living.  Global trade not only significantly increases our material standard of living but confronts us with other people and cultures as well.  Both–technical progress and global trade often impose changes on us (such as the job skills demanded in the market) that we might otherwise not choose or want.  If people can choose to live where their opportunities are greatest and if firms are able to employ people with the skills that best fit the firms needs, economies will be more efficient and will raise the standard of living for everyone.  By allowing the disruption of innovation and trade we will have the opportunity to, or be forced to, confront and deal with strangers more often.

This can have a negative side for those who do not easily embrace adventure—those who prefer the familiar (hot dogs and hamburgers). If new neighbors come from different backgrounds and cultures, adventure lovers can enjoy the excitement of learning more about other places and people.  But those uncomfortable with strangers can be – well – uncomfortable.  Economic advances can also have negative impacts on those whose skills are no longer needed and we would be wise to develop and support government measures to soften and facilitate the needed adjustments.

A predisposition to seek and embrace adventures or to shun them is given to us by nature. However, civilization and its advance builds on nurturing more social skills and openness. Failure to teach/convince our fellow citizens of the rewards of adventure (or merely accepting and adjusting to change) can lead to disastrous results.  In extreme cases unease can turn to fear/hate as in the recent white nationalist terrorist attack in El Paso by Patrick Crusius.  As-his-environment-changed-suspect-in-el-paso-shooting-learned-to-hate.  The nature of public debate on race relations, religious freedom, globalization, etc., and the words of role models can have a profound impact on how those confronting change formulate their views on these subjects.

The world is a better, richer place when all of its people respect one another and live peaceably together. We and our education systems (school, churches, clubs, jobs) should do our best to encourage those reluctant to welcome strangers of the positive experiences it can open to them.  By learning to understand different ways of thinking and doing, we not only enrich our lives but can strengthen our own ways of doing things (our own cultures). Such interactions can show us what we like and value about our own ways and what we might adjust in light of the interesting practices of others. This is what the American melting pot is all about. It has produced a vibrant, dynamic and economically flourishing country. However, it is more friendly to the adventuresome types than to those resistant to change. We would do ourselves and our country a favor to kindly encourage those “left behind” to open up more to the wonders of our changing world.  With regard to a difference subject of misinformation Anne Applebaum explores multiple approaches to this task: Italians-decided-to-fight-a-conspiracy-theory-heres-what-happened-next?