American Gerontocracy

Generational Warfare In Our Time

Better Economic Growth under the Democrats?

This recent blog post describes a chart from lifted from an upcoming book by Princeton political scientist (note — not economist) Larry Bartels. It purports to show that American economic performance under Democratic administrations has been superior to performance under Republicans, across all income categories.

Apparently, this chart has a lot of liberals very excited. Too bad that it is complete nonsense.

The chart is a gross oversimplification of how economic policy actually impacts economic performance. The root of its problem lies in the inane assumption that the effect of policy on economic growth manifests itself with a one year lag. In other words, the chart gives a political party credit for economic performance starting the year following it takes over the Presidency.

Let’s explore this assumption. A president comes into power. By the time his first budget goes into effect, it is already October of that year. Does anyone really think that that initial budget has any signifiant impact on economic performance of the following year? And that only the budget is responsible for that economic performance?

Just to show the arbitrary nature (and impact) of the one year lag assumption, I ran growth numbers for a two year lag based on Bureau of Economic Analysis data, from 1945 to 2007. In that time period, average economic growth (for all income categories, to keep it simple) resulting under Democratic adminstrations was 2.02%. From Republican administrations, 2.08%.

The other major assumption that the study ignores is that it is Congress, not the Presidency, that holds the power of the budget. Asking who controlled Congress and what those policies were has just as much (or more) bearing on economic outcomes as who was in the White House. Similarly, the Fed controls monetary policy, which potentially has a greater economic impact that fiscal policy. Who has appointed the Federal Reserve Chairman and its Board of Governors? Are they employing a conservative or liberal ideological approach to monetary policy?

Additionally, Bartels’ “analysis” just completely ignores history, again by making foolish assumptions about the data lag. For example, it’s pretty widely accepted that the economic downturn and stagflation of the early 1970s was proximately caused by the financial demands of the Great Society and the Vietnam War, coupled with exogenous shocks to oil prices. Both the Great Society and America’s deep involvement in Vietnam came courtesy of LBJ. So you can’tgive Nixon credit for bad economic performanceon his watch — the causes of rampant inflation and low growth at the time weren’t his fault.

In the final analysis, the success of economic policy of respective Democratic and Republican administrations must be evaluated based on their long term impact. This is very difficult to measure because there are so many dfferent factors at work — fiscla policy, monetary policy, technological innovation and impact on productivity, population and demographic change, commodities avilability, trade, etc.

Behind this complexity, however, the fact remains that basic economics tells us smaller government, lower taxes, and less wealth redistribution results in a larger pie for everyone. Nothing in the Bartels’ “analysis” as should cause a rational observer to doubt that simple fact. If there’s any doubt of this, compare the long term growth rates of the US versus Europe. Freer markets, smaller government, and lower taxes inevitably produce higher growth, lower unemployment, and lower inflation in the long run. If there’s any doubt, here’s a link to a recent speech from the President of the European Central Bank, Jean-Claude Trichet:

“Since 1996, the annual growth rate for the euro area has averaged 2.1% per year compared to 3.3% in the US.”

The speech goes on to propose structural reforms in Europe to increase competition and promote innovation (including tax reform and labor market reform) — the fundamentals of conservative economic doctrine.

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April 5, 2008 Posted by | Taxes, Trade | Leave a comment

Why Protectionism is Bad for Generations XYZ

The rhetoric is compelling. America is losing tens of thousands, hundreds of thousands of manufacturing jobs to competition overseas. The bleeding must be stopped. We must raise barriers to trade and protect these American jobs before we export them all.

Suffice to say, it is a fundamental principle of basic economics that freer trade always results in a superior economic outcome for both trading parties. In the long run, free trade always generates a larger pie – even if it causes some economic disruption along the way. This is the general concept of Pareto efficiency.

Without getting into too much detail on the economics behind this subject now (we’ll circle back to it later), the general impact of free trade will be to move our economy towards a scenario where:

  1. The jobs we lose will be the lowest value to the economy, in areas where we have the least amount of competitive advantage.
  2. The jobs our economy we gain will be in areas where we have the greatest comparative advantage. The value of these jobs will outweight the value of the jobs lost.

So what types of jobs will we gain and which will we lose? And how does that impact Generations XYZ? (Just a side note here – in the interest of efficiency, I will henceforth refer to America’s future generations – in my opinion our politically disenfranchised generations – as Generations XYZ, encompassing Generations X and Y, plus the newest post-Y generation, the children of the 21st century.)

As it turns out, the jobs we lose are the old economy manufacturing jobs. These are the jobs which are characterized by a rigid, hierarchical structure (typically union jobs) where tenure is more important than talent and hard work. The exact types of jobs that Generations XYZ are competitively disadvantaged.

Now which jobs do we gain? New economy jobs. Jobs that require flexible labor, creative talent, and new economy skills – service orientation, technology skills, etc.

Here’s an interesting article looking at how economic evolution has transformed the economy of my adopted state of Pennsylvania, starting with a bit of a history lesson:

“To keep out foreign competition [in the early 1970s], the United Steelworkers union and the big steel companies joined forces in a no-strike pact known as the Experimental Negotiating Agreement, which tried to protect the industry’s high wages and benefits by blocking foreign competition.

This campaign for protectionism failed and employment in the American steel industry fell from 521,000 in 1974 to 151,000 in 2000. The global shakeout was even more severe, with bigger percentage drops in steel employment, in Germany, France and Britain. It was a savage process in which more than 30 U.S. steel companies went bankrupt and a great industrial union was decimated. Working in Pittsburgh in the late-1970s, I heard people talk as if any hope of future prosperity would disappear once the mills and blast furnaces closed.

But if ever there were a case that documents what the economist Joseph Schumpeter described as “creative destruction,” it’s what happened in Pennsylvania. Steel and other manufacturing industries were indeed shattered by competition from the globalized economy that was just emerging. But new industries that nobody could then have imagined took their place, and they provided new jobs, year after year.

Employment in Pennsylvania reached an all-time high in January 2008, and then fell slightly in February. People here fear that a steep recession may be coming. But as of February, the last month for which statistics are available, unemployment in Pennsylvania was just 4.9 percent. Since January 2003, the state has added a total of 178,000 new jobs, according to the state government.

Where are all these new jobs coming from? The answer is that as the old rust-belt manufacturing industries sank, Pennsylvania became a platform for innovators in technology, finance and the health industry. What saved the state, above all, was its concentration of great universities, which provided the human capital for growth….

The new jobs will come in areas such as professional and technical services (up 17 percent by 2014), computer systems design (up 30 percent), wireless telephone (up 30 percent) and data processing (up 32 percent). This transformation is evident in Pennsylvania data recording gains in wages and salaries from 2003 to 2005. Pay rose 20 percent for information technology managers, 35 percent for biotech engineers, 24 percent for computer researchers.”

Once again, we find the Democratic Party on the wrong side of this issue, supporting protectionist policies that favor older generations at the expense of Generations XYZ. Ultimately, protectionism is a dangerous rearguard action that fights economic inevitability. Better to engage in free trade, grow the economic pie larger for everyone, and accelerate economic transition to jobs where America has maximum competitive advantage – new economy, high tech, powered by Generations XYZ.

March 30, 2008 Posted by | Trade | 2 Comments