V I. Introduction
Captured Audio - 1/9/07 9:21:48 PM
V A. Introductory matters:
* 1. We deal with scarcity
* 2. What is a successful society? A great society?
V 3. Let's start with the issue of wealth
* a) The "typical" human's living conditions historically
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* b) The political economy of wealth
Intangible Wealth - WSJ.com9-29-07
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* 4. And the Rule of Law Map
Rule of Law Map
Rule of Law Map

* 5. Wealth is created when we trade if...
* 6. Why does a person sell something? (Why do I sell my labor?)
V B. Globalization - Vernon Smith
* 1. Globalization is not new.
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* 2. We live in two overlapping worlds of trade - personal and impersonal
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V C. Globalization Has Come In Waves
V 1. Wave 1
Wave 1
: 1870-1914
* a) Decreases in trade barriers
V b) New technologies
* (1) Transport costs - steamships & railroads
* (2) Large scale production techniques
* c) Exports as share of GDP increased (4to 8%) and income growth per capita (0.5 to 1.3%/yr)
* d) Ended with WWI, Great Depression (high tariff barriers) and WWII
V 2. Wave 2
Wave 1
: 1945 - 1980
* a) Trade liberalization after WWII
* b) Decreased transportation costs
* c) Specialization in manufacturing clusters - agglomeration economies (efficiencies) - the Japanese auto manufacturers
V d) Most developing countries did not participate:
* (1) Trade barriers
* (2) Hostility to openness (imports and investment)
V 3. Wave 3:
Wave 3
1980 - present
* a) Developing countries entered the world economy and realized the income gains
* b) International capital movements
* c) Communication technology improvement
V d) Outsourcing!!!!!
* (1) Initially manufacturing
* (2) Now white collar jobs (approx. 1/10th the cost)
* (3) Domestic workers are not in direct competition with foreign workers
* (4) Does outsourcing help domestic workers?
V 4. What drives the current wave of globalization?
* a) Transportation costs
* b) Computers and communication
* c) Liberalization of trading rules
* d) Companies now have globalized production structures - affiliates all over the world. (production sharing)
* e) "Production sharing" now accounts for 30% of world trade.
V II. The US - An Open Economy
V A. Remarkably integrated into the world economy
* 1. Look at the supermarket
* 2. The US is the world's largest importer - - and exporter!
* 3. Openness ratio:
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* 4. Smaller countries higher ratios - Netherlands 123, Canada 72, US 25, Japan 24
* 5. Without trade, ...
V 6. Factor movements is a part of openness
* a) Capital flows, yes; labor flows, no.
* b) Foreign born: 1900 - 14%, 1960 - 6%, 2000 - 12%
V 7. Capital flows - enormous, beginning with the petrodollars in the 70's
* a) FX markets, more than $1.5 TRILLION per day!!
* b) US became a net borrower (again) in the 1980's
* c) International banking growth
* d) 24 hours a day trading in FX, stocks, bonds & securities
V III. Globalization - Importance
V A. Larger joint output
* 1. Comparative advantage
V 2. Resources shift to more productive uses
* a) Less efficient firms exit
* b) Labor churning
* c) More efficient but disruptive
* B. Competition and innovation
* C. Reduced monopoly power
V IV. Fallacies Associated with International Trade
* A. Trade is a zero sum game
V B. Imports reduce employment
* 1. The issue of jobs: bananas in Tustin!
Bananas In Tustin2
Bananas In Tustin2

* 2. Export vs. Import Competing industries
* 3. The data
Trade&Jobs
Trade&Jobs

* 4. Cox and Alms - FRB Dallas - normal job gains and losses 1990's
Both Republican and Democratic interventionist like to focus on job losses as they call for trade restrictions, but let us look at what was happening in the 1990s. Cox and Alm report that recent Bureau of Labor Statistics show an annual job loss from a low of 27 million jobs in 1993 to a high of 35.4 million in 2001. In 2000, when unemployment reached its lowest level 33 million jobs were lost. That's the loss side. However, annual jobs created ranged from 29.6 million in 1993 to a high of 35.6 million in 1999.
These are signs of a healthy economy where: businesses start up, fail, downsize, upsize, and workers are fired and workers are hired all in the process of adapting to changing technological, economic and global conditions. Societies become richer when this process is allowed to occur. Indeed because our nation has a history of allowing this process to occur goes a long way toward explaining why we are richer than the rest of the world.
V C. Trade restrictions save jobs - no it only affects wealth.
* 1. The costs of trade restrictions. is there a net benefit?
Protection
Protection

V V. Effects of Free Trade on:
V A. Employment in Manufacturing
* 1. Share of employment in manufacturing among countries:
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* 2. Share of employment in manufacturing - US. Can you see the losses from China's development?
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* 3. The relationship between manufacturing share and real wage growth, state by state.
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V B. Competitiveness
* 1. US manufacturing losses in the last 40 years?
cafehayek.typepad.com—the-state-of-ma.html


1)     In what year did U.S. Manufacturing output reach its all-time peak? 
a.     1966   b. 1976   c. 1986   d. 1996   e. 2006
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2)     In what year did U.S. Manufacturing revenue reach its all-time peak?(inflation adjusted)
a.     1966   b. 1976   c. 1986   d. 1996   e. 2006
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3)     In what year did U.S. Manufacturing profits reach their all-time peak?(inflation adjusted)
a.     1966   b. 1976   c. 1986   d. 1996   e. 2006
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4)     In what year did U.S. Manufacturing exports reach their all-time peak?(inflation adjusted)
a.     1966   b. 1976   c. 1986   d. 1996   e. 2006
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5)     Average annual compensation (wages + benefits) for US manufacturing jobs is
a.     $36,000    b. $46,0000  c. $56,0000  d. $66,000
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6)     What are the relative sizes of the US and Chinese manufacturingsectors?
a.     China outputs 2.5 times the US  b. Equal  c. The US outputs 2.5 times China
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7)     Which country produces the largest share of total world manufacturing output?
a.     China   b. Japan   c. Germany   d. France   e. US

Answers:
1)  e. 2006 (Source: Economic Report of the President, 2007)
2)  e. 2006 (Source: Bureau of the Census)
3)  e. 2006 (Source: Bureau of the Census)
4)  a. 2006 (Source: U.S. International Trade Commission)
5)  d. $66,414 (Source: National Association of Manufacturers)
6)  c. The U.S. output is 2.5 times as much as China (Source: U.N. Industrial Development Org.)
7)  e. U.S. manufacturing output is 21 percent of world total (Source: U,N. Industrial Development Org.)
(HT: David Boaz)
* 2. Firms or industries are competitive based on relative price and quality
Carbaugh4LaborCosts
Carbaugh4LaborCosts

V 3. Nations - what does "competitive" mean
* a) Wealth depends on productivity
* b) Trade shifts resources to more productive uses
* c) Imports & exports are necessary for rising productivity
* d) Relative labor costs - by industry:
E13LaborCosts
E13LaborCosts

V C. Wages
* 1. Factor prices tend to equalize - between countries
* 2.
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E13Ch3FactorPEq

V 3. Factor prices within the US have widened
V a) The 90's - incomes in the US increased
* (1) Top 10% increased incomes; bottom 10% decreased
V (2) The disparity between high school and college graduates has increased from 1970's to 1990's
* i) The ratio of college to high school income was 1.5 in 1980 If a high schooler made $50k, college made $75k
* ii) By 2000 the ratio was about 1.8 - If a high schooler make $50k, college made $90k
V iii) Why?
* (a) Trade
* (b) Increased demand for goods that require skilled labor
* (c) Which is more consequential?
V (3) Some problems with income statistics
* i) Income statistics look different if you count benefits (the difference between "wages and salaries" and "total compensation" - including contributions to insurance). Constant at 70% of GDP.
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* ii) Underground economy
V (4) Is Trade To Blame?
* i) Underdeveloped countries now comprise a larger share of trade with the US (70's a sixth, 90's a third)
* ii) Competition of US unskilled workers with the world's unskilled workers (min wage vs. 12 cents/hr)
V iii) Resources shift with free trade:
* (a) From areas where the country does NOT have a comparative advantage (unskilled labor areas of production)
* (b) To areas of comparative advantage (like skilled labor areas of production in the US)
* (5) Overall, both skilled and unskilled workers in the US have benefitted from trade - it's the proportions that are at issue.
V D. Growth
* 1. Openness forces innovation & increased paroductivity
* 2. More open, more growth!!!!! (Fig 1.2)
* 3.
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V E. Workers
* 1. More productive, higher real wages
* 2. More dislocation
* 3. Openness permits firms to buy the best equipment that makes workers more productive
* 4. Not all workers - with an open eonomy, domestic workers compete with workers in the rest of the world (unskilled in the US?)
* 5. Trade aligns prices and wages with the rest of the world.
V VI. Criticisms and Problems
V A. Critics claim:
* 1. Corporations, not average Joe's benefit
* 2. Environmental degradation
* 3. Competition with cheap labor and countries with low labor safety standards is unfair
V B. The Political Economy of Trade
* 1. Bastiat
V 2. Protection-biased sector
* a) Import competing industries
* b) Unionized industries
* c) Aging industries
V 3. Free - trade - biased industries
* a) Exporting companies, their workers & suppliers
* b) Consumers
* c) Sellers of imported goods
* 4. Costs of free trade narrowly borne, benefits widely dispersed.
* 5. The costs of trade restrictions. Who gains and who loses?
V VII. Freedom and Wealth
* A. Pasted Graphic