Monday, February 7, 2011

Random Reflections: 2/7

Russ Roberts has an interesting piece about the recent financial crisis. It’s a commentary on an essay by Robert Samuelson, who outlines the Left and Right's respective explanations for the financial crisis, and why they are both wrong. Samuelson argues that the Right's moral hazard explanation, in which they argue that the collapse was due in part to government bailouts artificially increasing risk-taking, is faulty because investors largely weren't shielded from losses in this financial collapse. Roberts points out that this is irrelevant, because creditors were protected. This caused banks and other bondholders to continue to lend to companies that were overly risky because they expected bailouts.

The Washington Post has a remarkable article about the pace of global poverty since 2005. They report that during this six-year period, over half of a billion people were lifted out of extreme poverty. This is a remarkable achievement on its own, and it seems that the trend will continue in coming decades. In my opinion, public discourse focuses far too much on charity and "solving" economic inequality. While charity and generosity are certainly commendable, this article reminds us that economic development is the best way to reduce poverty.

Jeff Jacoby has an excellent article about the current state of US manufacturing. He does a great job explaining why the mainstream idea that the US manufacturing sector is in decline is bogus. My favorite stat is that "Americans manufactured more goods in 2009 than the Japanese, Germans, British, and Italians — combined". The only sense in which American manufacturing is in decline is in the sense that there are fewer manufacturing jobs as a result of higher productivity. What this really means, however, is that more people are free to work in other sectors than ever before, while at the same time those who are in manufacturing are getting paid higher wages than ever* (remember that wages are derived from worker productivity). Unfortunately, Jacoby neglects the fact that US manufacturing superiority is economically irrelevant. What matters is our standard of living, and if other countries can sell us goods at lower prices than we can make them ourselves while we produce something else, then we're all the better for it. There is no reason to think a decline in US manufacturing output, as long as it is accompanied by an increase in output in some other sector, has a negative effect on our economy. Don Boudreaux makes a similar point here.

*Two Centuries of Compensation for U.S. Production Workers in Manufacturing, Lawrence H. Officer, Professor of Economics at the University of Illinois at Chicago, 2009, Page 171,, through here