Comparative Advantage

Here's how comparative advantage works in our economy today!

Reflections in the Fun House Mirror

Max Fraad Wolff is a Doctoral Candidate in Economics at the University of Massachusetts, Amherst.:
One hundred and thirty years ago, after visiting Wonderland, Alice stepped into a mirror and discovered the world of the looking glass. If Alice were born today, she’d only have to peek out the window.- Eduardo Galeano 1998.

While markets manage to be shocked and disappointed by job numbers every month, they are not upset by the downward revision of these numbers. We ignore the estimated 8 million jobs that should have been, but were not, created in this “recovery”- that is if this episode were like the past. Apparently this time it is different for those seeking work. Never you worry; it will be an above average recovery for investors. Clearly the rising duration of long term unemployment - now 5 months - is of no concern. The Fed keeps rates at five-decade lows while proclaiming the strength of the economy. The regulator of financial excess assures us that the nation's $22 trillion debt is not an issue. It turns out that 10% annual debt growth from consumers and 11% annual debt growth for the government is just as unimportant as a weak and falling dollar alongside half trillion dollar current account deficits.

As this little commentary goes to press, the S&P 500 and Dow are at or above their suspiciously lofty 90-day moving averages. From Alice's window, this view is justified by the underlying economy and the fact that double-digit credit creation and debt growth at near zero real interest rate levels is able to generate 4% annual GDP growth. Let's try something novel, strange and rarely called for these days.

Moving away from the window, we see from Census Bureau's Economic Roundup that January 2004 manufactured goods production fell along with construction spending, new home sales, durable manufactured goods, housing starts and retail and food service sales. Labor force participation rates - particularly among the young - keep falling. Median household income fell by $500 from 2001-2002. On the upsides were asset prices, materials prices, energy prices, discouraged workers and the poverty rate. Also on the rise are protectionist stirrings, WTO sanctioned tariffs against the US, resentments about US foreign policy adventures and rage about out-sourcing. In passing one might pause to consider the instability generated by a deeply divided nation heading into a rancorous Presidential Campaign. Obviously, that would be silly. All of the above are either positive or just plain invisible in the fun house mirror.

Lou Dobbs is not the only American deeply concerned by the out-sourcing trend. As higher paying white collar jobs follow their blue collar cousins out of the US, voters are angered. Comparative Advantage trade theory tells us we should be losing low tech labor intensive jobs and gaining high tech and high skilled jobs in our trade with the lower wage developing world. In today's American Wonderland economy, the few jobs created (but still net negative) are low tech, low paying service work. We are losing higher skilled and higher tech employment to lower wage developing India, China and beyond. The two parties are split over which protectionist tact to take. The Bush administration favors protecting American firms with “illegal” export tax credits, Commerce Department assistance, exclusive rebuilding contracts and protectionist restrictions on foreign imports of wood, sugar, steel, textiles and food. The Democratic Party flirts with protecting jobs and barring some forms of profitable employment out-sourcing. Give them some time, the election season is young. ...Link