Autarky in the U.S.??

Brad DeLong’s website is one of my regular visits and has been for about as long as I’ve been reading blogs. He’s a damn smart liberal economist (yes, Dorothy, they do exist) and knows one of my old professors from there, Steve Cohen, pretty well to boot.

So when I read this, I put it aside for a bit to see if it made any more sense.

Just came back to it, and it doesn’t. This raises three possibilities:

# I’m not salvageable when it comes to economics and shouldn’t read or discuss it any more;
# Brad wasn’t paying attention and phoned this post in;
# There’s something subtle I didn’t understand that someone may be able to explain to me.In the hopes that it’s #3, let me wade in. Brad says, in response to Dan Gilmour’s post on ‘outsourcing our future‘:

First of all, the number of jobs in the United States is not set by what happens on the sea lanes–on what exports and imports the container ships carry from port to port. The number of jobs is set in the Eccles Building, by the Federal Reserve, which tries to hit the sweet spot: high enough demand to produce effective full employment, without so much demand that vacancies become so abundant as to lead inflation to run away. Sometimes the Federal Reserve does a good job and is lucky, and we have full employment with price stability. Other times the Federal Reserve is unskillful or unlucky, and we have accelerating inflation or high unemployment. It is certainly true that what happens in international trade affects employment in America. But the Federal Reserve can and does offset and neutralize impacts of trade that push employment away from where the Federal Reserve thinks the sweet spot of full employment is.

To which my response is sha-WHAT?? Last time I checked, we weren’t an autarky. The world economy is, as I visualize it (and yes, I do spend all too much time visualizing trade flows when I ought to be thinking about, say, Uma Thurman…) a complicated network, with a linked series of subnetworks each of which has some measure of control over itself – but that is firmly bound within the larger. If the Fed can unilaterally set monetary policy and interest rates, with no regard to world markets, there are a whole lot of people working on international currency trading floors who have been faking it for a long time.

I simply can’t imagine any condition under which this is correct; my plea here is for someone to either confirm my impression or correct me, if possible.

He then goes on to discuss international trade:

So what, then, is the impact on the American economy when Singapore educates its people to become competent network developers, or India educates its people to become competent help-center technicians? It’s not that jobs leak away. Remember: trade balances. Indians want rupees, not dollars: they will only sell us as much as we can pay for in rupees, and the only way we get rupees is by selling things to Indians. Either way (if the Federal Reserve does its job) Americans’ demand for imports made in other countries is recycled into foreign demand that employs Americans in industries that export goods, export services, make producers equipment, or build structures. This is a consequence of Say’s law–an economic principle which is usually true, sometimes false, but which it is the Federal Reserve’s business to make as true as possible as much of the time as possible. This means that nightmare scenarios–3.3 million high-tech jobs moving overseas–are beyond the bounds of short-run probability. The current account plus the capital account must balance: if the work that used to be done here by 3.3 million people is to be done there, that means that our export industries here must employ an extra 3.3 million people as well.

I can’t think of the appropriate Snoop Dogg response except to say one simple word here: “eurodollar”.

As I recall, they’ve found a couple hundreds of millions in U.S. cash in Iraq recently…what was Saddam doing with that, if what he really wanted was dinars?

This is a kind of important issue, because in my mind, the ‘global averaging’ taking place in the economy and the consequences on jobs is one of the most pressing issues that faces us today; lots of the other issues fall out from causes rooted in this one.

I’m not advocating a return to Smoot-Hawley; in fact I’m not far enough through this issue to begin to know which path makes sense, except that any path we take must somehow deal with the issue, rather than ignore it.

And DeLong’s post somehow seems to ignore it.

So help and clarification from all quarters welcome.

12 thoughts on “Autarky in the U.S.??”

  1. I’ve skimmed through the source article, so I may have missed something and I’m no economist, but….

    It seems an underlying assumption is that the US economy will create jobs in other industries that still have a comparative advantage. Which I believe will happen. Given this, the Fed can throttle the number of jobs available using monetary policy, lower interest rates = more, higher rates = less.

    This is a crude tool, but it does affect US employment, since it effects US interest rates. It’s not perfect, since there’s no guarantee where capital will actually be invested. The ‘evil’ capitalist could just as easily invest in China or India. So, you’re right. In a purely global economy where every worker can be interchnaged, the Fed will have a harder time controlling for employment rates. But, no matter how managers would like it to be so, it’s never going to be 100% true, so the Fed will always be able to influence US employment rates. If for no other reason than that Johnny on the spot has an inherent advantage over Abu and Li in the domestic market, just think of plumbing and electricians as obvious examples. This is true to varying degress for every job.

    His argument still seems kinda weak right now, since interest rates are at already at historic lows, so there’s not much more goose left for the Fed to throw into the pump. The fiscal side isn’t much better when you consider the deficits we’re already running. This pretty much leaves the US economy to restructure witout much goverment interference. All the better!

  2. Basically what he said, as I try to remember my econ classes from a long time ago. The assumption is that economies generally run close to full employment. The terms of trade don’t affect the level of employment in the long term; they affect the composition of employment (e.g., how many people work in the textile industry as opposed to the number of people in retail).

    What affects the level of employment are the fiscal, monetary and regulatory polcies of that economy (note that these policies may also affect the composition of employment: for example, more people work in textiles in the US than would otherwise, because of import constraints on textile products). And, in general, all things being equal, more trade with the outside world benefits the nation, as the composition of employment (here and abroad) tends to move towards comparative advantages.

    Bhagwati’s Protectionism is a pretty decent lay discussion of trade theory. If I recall, it covers these issues pretty well, though it’s been a while since I’ve read it. Bhagwati was one of my professors a long time ago.

    One thing to consider is how economies develop over time. Plenty of horse-drawn carriage drivers were put out of work with the advent of the automobile. These jobs were lost permanently. However, all the people working in the horse-drawn carriage industry found jobs elsewhere over time. Similar statements can be made about industries that were not made obsolete. The textile industry, for example, was a major industrial job creator — the engine of the early industrial revolution, in fact — but relatively few people work in textiles in the US now. These jobs were exported, because Chinese textile factories have a comparative advantage over American ones. The people who would have worked in textiles in past decades now do something else.

  3. >>If the Fed can unilaterally set monetary policy and interest rates, with no regard to world markets…<< Yep. The Fed can and does. What the Fed’s monetary policy is has powerful effects on the value of the dollar, but the Fed spends 98% of its time thinking what interest rate is appropriate for the domestic economy and 2% of the time thinking about what effects its interest rate policy has on exchange rates. The Fed thinks that if people outside the U.S. are unhappy with the value of the dollar, they need to change their monetary policies to deal with it… Brad DeLong

  4. Brad, you’ve actually worked there as I recall, so I’m now trying to assemble what you’ve just said and what I’ve read in other works and in the common business journals, which suggest that Fed policy is pretty constrained by foreign markets, and that the implications for the value of the dollar weigh heavily on those decisions.

    I’ve taken the common wisdom to be that the rise of high-liquid international financial markets acts as a powerful restraint on central banks; if that’s not true, I (and a bunch of others) have a lot of rethinking to do…


  5. Uh. Wrong premise, wrong conclusion.

    Currently the Fed does not do it’s business based on a Kenysian (jobs) model. It bases it’s policy on keeping the economy functioning (printing dollars in time of panics or Y2K hysteria fer instance) while keeping monetary growth such that it just matches economic growth (with a slight bias toward monetary excess) keeping prices stable or rising slightly.

    You guys need to go back and read your Milton Friedman and the Nobel economists from all years following Miltie’s.

    Once you have a stable currency the only thing affecting jobs and growth rates is – ta da – taxes. Lowering taxes raises growth rates. Lowering taxes on capital is especially productive in creating jobs in a capital intense economy.

    Say any of you guys hear of the Bush economic plan?

    Now the one fly in the ointment is Congressional spending. Two ways to fix it. Keep spending constant until the economy catches up. Or Cut spending.


    I must say that from the list of items you presented as possible ways of interpreting your professor I was instantly clued that you had not been taught modern economics. Not your fault. Evidently your professor doesn’t know any.

    It is a shame.

    The only comparative advantage America has (in the aggregate) is our ability to learn and do new stuff faster than any place else on earth. If we want to maintain our advantage we must do our best to reduce friction in our economy. The loss of control will more than be made up for by the speed of our advance.

    The rise of Hong Kong needs to be studied in every economics departments everywhere. Israel is another good example. Even Taiwan. The most valuable resource in the world today is not oil. It is brains.

  6. Joe Lieberman seems to understand capitalist economics pretty well (for a politician any way).

    Perhaps a look at what he has to say might ease you into the right frame of thought from a liberal perspective.

    He gets the war too.

    And he has got civil liberties down. I especially like that in comparison to Bush.

    He is the only Democrat who could challenge Bush. A national unity Democrat.

    I’d vote for him in an instant. Although an untested commodity he seems like he could handle the job as well as Bush.

  7. M. Simon:
    Are you saying that the Fed doesn’t consider the unemployment rate when setting monetary policy? Or that interest rates have no effect on the unemployment rate?

    Seems like I remember all the talk in the late 90’s about full employment causing inflation.

  8. As knowledge-work jobs become easier to move overseas, it’s important to understand how our comparative advantage will shift. Most economists seem to have no clue about this, mouthing platitudes like “computer chips not potato chips”–completely ignoring the fact that the U.S. has no lock on chip designers or other technical talent–and “more training”–again, ignoring the fact that university education is not accessible only to Americans.

    It seems possible that *comparative* advantage may shift back somewhat toward manufacturing, since the costs of transoceanic shipment for physical goods are greater, in many cases, than the cost of transoceanic shipment for bits.

    I also agree with M Simon that “]tThe only comparative advantage America has (in the aggregate) is our ability to learn and do new stuff faster than any place else on earth.” It’s critically important not to squander this advantage (which could easily be done, for example, by an out-of-control tort system.)

  9. Lurker,

    I am saying the Fed doesn’t consider unemployment when setting monitary policy.

    It hasn’t since Paul Volker was Fed Chairman – about 20 years or so ago. You been sleeping?

    The talk about full employment causing inflation was not monitarist talk. That is Keynesian talk. For the monitarist the only cause of inflation is the money supply. Since the Fed has been controlled by the Friedman followers (monitarists) inflation has been reduced to under 3% a year.

    So it would appear from the results that they are correct.

  10. M. Simon,

    So, from a monitarist perspective NOTHING can cause
    inflation but the money supply? Does this include everything, including external factors? If this is really true then I can’t be a monitarist. The Arab oil imbargo seemed to cause a bunch of inflation and had nothing to do with the money supply. Likewise, it seems that any necessary commodity (like labor) that went scarce, would tend to increase inflation.

    I thought one of the main functions of the Fed was to jigger with the money supply to counteract these other issues that can stimulate or depress inflation. It seems like what you are saying is that nothing matters WRT inflation EXCEPT monitary policy.

    Am I misunderstnading something?

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