Thursday, January 29, 2009

Narrative History and the Social Sciences

I just listened to an interview with John Demos at the Making History Podcast. Demos is author of the award winning books Entertaining Satan: Witchcraft and the Culture of Early New England(1982) and The Unredeemed Captive: A Family Story from Early America (1994). He talks about his movement from doing social science history to doing narrative history. I was thinking I would rather not draw a line between the two. It doesn't matter whether you consider yourself a social scientist or an historian, sometimes the best way to answer a question is to tell a story.

Some places narrative never seems to go out of style. Story appears to be the primary method of learning at top business schools. And, by the way, MIT is putting more free stuff on the web including case studies from the Sloan school.

Wednesday, January 28, 2009

More Historical Perspective on Economic Crises

Video of a forum at The Council on Foreign Relations with Michael Bordo, Jerry Muller, Robert Shiller, and Richard Sylla

Tuesday, January 27, 2009

Historical Perspective on Financial Crises

For many years it was regarded as appropriate to lay the blame for the Panic of 1837 on Andrew Jackson. In 1832 Jackson vetoed the recharter of the second Bank of the United States and began to place the government’s deposits in other banks. With the conservative influence of the Bank of the United States gone, his critics claimed, other banks over issued their notes, fueling a speculative boom. Peter Temin showed that this explanation of the Panic of 1837 paid insufficient attention to the international sector. If banks were over issuing their notes, he argued, then the ratio of notes to reserves should have been decreasing, but it was increasing. The number of bank notes in circulation was increasing, but bank reserves were increasing even more rapidly. Reserves were increasing not because of Jackson’s policies but because of international forces. Because the country was on a bimetallic standard, the supply of money was ultimately dependent on the amount of specie in the country. Temin argued that both the inflation of the early 1830s and the crisis were caused by specie flows that were driven by external events. While acknowledging the negative influence of external forces, Peter Rousseau has recently shifted attention back to internal forces. International forces set the conditions for the Panic, but the economy was pushed over the edge by distribution of the federal surplus and the Jackson administration’s requirement that land purchases be made in specie, both of which drained specie from New York City banks.
The Panic of 1837 has received far more attention than the Panic of 1839, but for many the real trouble did not begin until 1839. The Panic of 1839 initially appeared to be a sequel to the Panic of 1837. However, unlike the Panic of 1837, there was no quick recovery. John Wallis has attributed the difference between the two panics to the run up in state debt that occurred between them. The boom of the 1830s involved mutually reinforcing expansions of land sales and internal improvements. The prospect of low cost transportation fueled demand for western lands; land sales in turn raised the revenue of western states and promised even further increases in revenue in the future. People were willing to buy land because states were going to build railroads and canals, the states were willing to borrow for internal improvements because people were going to come and buy the land. The credit crunch brought and end to both. Land sales and prices fell, the market for state bonds collapsed.
Possibly the most useful lesson to be gained from this history is humility. More than a century and a half after the panics of 1837 and 1839 we are still trying figure out what happened. It might be useful to keep this in mind when reading (or writing) diagnoses of the current financial problems.

Monday, January 26, 2009

Sunday, December 31, 2006

The Costs of Free Trade?

The Costs of Free Trade?
There is probably no subject upon which the average economist and the average non-economist disagree more. A recent opinion piece in the Washington Post (December 23, 2006 A21) by Byron Dorgan and Sherrod Brown on "The Costs of Free Trade" provides an illustration of why economists tend to support free trade. Dorgan and Brown argue that because of free trade multinational corporations search the world for the cheap labor and lax regulation. These corporations exploit people, including children, working them for long hours and for little pay. The competition from this low wage labor hurts American workers, driving down their real wages, and driving up our trade deficit because American producers can’t compete. It is easy to show that every element of the argument is wrong.

“The result has been a global race to the bottom as corporations troll the world for the cheapest labor, the fewest health, safety and environmental regulations, and the governments most unfriendly to labor rights.” (Dorgan and Brown)

Multinational corporations do not scour the World for cheap labor. If they did, the majority of foreign direct investment would go to the lowest income countries in the World. It does not. For instance, in 2003, the top three targets for U.S. foreign investment were the United Kingdom, Canada, and the Netherlands. People in the United States invested more in Switzerland than in all of Africa. Most of our imports also come from developed countries. China and Mexico are the only non-developed countries in the list of top ten suppliers of imports to the United States.

“Workers are grossly underpaid, exploited and abused, and they have virtually no rights. Many, including children, work 10, 12, 14 hours a day, six or seven days a week, for only a few dollars a day.” (Dorgan and Brown)

It is of course possible to find example of corporations operating in less developed countries and paying low wages for long hours. What we should not overlook is that people often line up to get these jobs because they are better than the next best alternative. Would these people be better off if we did not buy the products they produce? It would be nice if people in less developed countries had higher incomes, but taking away the jobs created by foreign corporations won’t do the trick.

“It is no coincidence that salaries and wages today are the lowest percentage of gross domestic product since the government began keeping track of this in 1947.” (Dorgan and Brown)

Wages and salaries as a share of national income have fallen, but total compensation of labor has not. Total compensation includes wages and salaries plus employer contributions to pension plans and insurance and employer contributions to government social insurance. Total compensation of labor rose from about 61 percent of national income in 1959 to 66 percent in 1970 and has been between 64 and 66 percent in almost every year since then, including the most recent decade. Raising trade barriers would only low real wages by increasing the costs of goods that people want to buy.

“The results of such trade agreements are skyrocketing trade deficits” (Dorgan and Brown)

It is not true that American firms and American workers can’t compete. While it is true that the United States has been running record trade deficits, exports have also reached all time highs. American firms successfully sell many goods and services abroad. We run trade deficits because we use more goods than we produce, just as China’s trade surplus is the result not of low wages, but of the fact that the Chinese produce more goods and services each year than they use. Our production and exports have increased rapidly but not as rapidly as the amount of goods we are using for consumption and investment.