Janet Yellen on Inequality in America

A survey of trends in income inequality, and some thoughts on what policy responses might be appropriate.


There has been a tremendous amount of discussion, and misinformation, regarding this issue. In fact, some observers even deny the existence of a trend toward greater income inequality (e.g., here). A welcome anodyne to such treatments is provided by the San Francisco Fed’s President Janet Yellen in “Economic Inequality in the United States”:


“Given these two developments — more macro stability and more rapid labor productivity growth — it is tempting to conclude that most Americans are feeling “better off.” But a glance at the newspapers suggests that this is not necessarily the case…


Looking beyond the headline numbers on the macro economy provides some clues to the source of this discomfort. In particular, over the past three decades, much of the gain from excellent macroeconomic performance has gone to just a small segment of the population—those already in the upper part of the distribution. As a result, inequality has grown. This inequality, coupled with increased turbulence in family incomes associated with job displacement and restructuring, sheds substantial light on the sources of the disappointment and concern that show up in the opinion polls.”

These trends are depicted in Figure 1 from the FRBSF Economic Letter.


incineq.gif

Figure 1: Source: Yellen, FRBSF Economic Letter 2006-33-34 (December 1, 2006).

Yellen continues with a closer examination of some of the hypotheses, including those regarding education, globalization, and the interaction of these factors with technology. She also spends time discussing how the magic of the marketplace (my words) might not always work efficiently.

“Globalization in combination with advances in technology, especially communications technology, leads to similar patterns. At the upper end, it has boosted demand for those who have the skills to manage large, complex, global operations. In contrast, an increasing share of domestic jobs in the middle of the wage spectrum has experienced lower demand because companies can now look all over the world for workers able to perform computer programming tasks, communications tasks, and similar jobs—even medical services. At the same time, such outsourcing is far less feasible for manual jobs and for service jobs that require face-to-face interactions and lie at the low end of the wage distribution.


These changes in technology and growing globalization go a long way towards explaining the inequality trends I have described. And there certainly are other factors that have also likely played a role. For example, the fall in the real value of the minimum wage appears to have especially depressed the wages of less-skilled women, while declines in unionization particularly impacted the wages of less-skilled men. However, none of these factors provides a complete and compelling explanation for the rapid growth of real wages at the very top of the distribution, the top 1%, which, according to IRS data, doubled between 1972 and 2001.


The market forces of changing technology and rising globalization, broadly understood, may matter to some degree for this group. For example, these forces have substantially increased the size of the markets that American companies serve. This has, in turn, increased the impact of individuals who are at the very top end of the talent and skill distributions—and who tend to be in very short supply. These individuals include so-called superstars, such as top entertainers and athletes, highly successful investment bankers and venture capitalists, and perhaps CEOs, although the latter point is hotly debated. For example, people had a high demand to see Michael Jordan perform—far higher than the demand for even a large number of average NBA players—and technology enabled his performances to be broadcast to a very large worldwide audience at relatively low cost. It’s not surprising that he, and other superstars, could earn very large incomes (Rosen 1981).


The superstar argument is less clear-cut with CEO salaries, in part because a CEO’s contribution to the bottom line of a corporation is difficult to measure. Some argue that CEO compensation has been driven up by market forces, like the large increase in the size of many American companies, which increases the potential benefit of hiring the right CEO from the limited pool of candidates (Gabaix and Landier 2006).


Another possible explanation is the so-called “tournament” model, in which the CEO’s direct contribution to the bottom line is not so much of an issue. This model suggests that large pay differentials for those at the top of an organization function as incentives for lower-ranked executives to compete for those positions, in other words, to work harder in order to win the top spots themselves one day. The resulting increase in effort generates benefits for the company that go well beyond the direct contribution made by the CEO (Lazear and Rosen 1981).


While such competitive factors may matter, I cannot ignore the concerns that have been raised of late regarding corporate standards for executive pay-setting. Some observers have argued that corporate boards are increasingly beholden to the CEOs whose salaries they determine; as a result, CEO salaries may be inadequately monitored and sometimes set higher than market conditions or company performance merits. Critics of rising executive compensation also have pointed to inappropriate reliance on compensation schemes that hide payments from shareholders and the market—for example, the backdating of stock options for top executives, which increases executive payouts without properly reflecting the resulting costs in corporate balance sheets.


The hidden nature of these payouts may reflect an imbalance in the setting of executive pay relative to shareholder returns and worker pay more generally. Issues like these quite naturally raise concerns for the public and contribute to feelings of dissatisfaction.”

I think from my perspective the most important part of this speech is the recognition of what can — and cannot — be accomplished by various policy measures.


“…it’s not uncommon to hear proposals to put up barriers to trade as a way to mitigate economic disruption and inequality. I don’t think that is the way to go. By providing for specialization in production across countries, trade enhances the size of the economic “pie” here and abroad, and in doing so, enhances overall economic welfare. I think we should look to other policy tools to address inequality, and I will attempt to provide a useful overview of some key considerations.


I will begin with education. There can be little doubt that programs that support investment in education, broadly conceived, are worthwhile. Increasing skill has been a significant source of productivity growth. Moreover, since the gap between the earnings of workers with more and less skill in part represents the return to education, a widening of that gap clearly signals the need for such investment to increase the supply of higher-skilled workers.


But investment in education takes resources, which complicates the debate: the resources are limited and to a large degree should be directed to where they will pay the highest return. At the college level, one possibility is just to “let the market work.” If college pays off, more young people will enroll. Indeed, the rising returns to education at the upper end of the earnings distribution did precede an increase in college attendance through the mid-1990s, suggesting that market forces may have worked as expected. Since then, however, despite further growth in the returns to college and advanced degrees, college attendance has flattened out. For example, enrollment rates among recent high school graduates hovered around 65% between 1996 and 2004, after increasing noticeably in the preceding decade (NCES 2005).”

I find it of interest that the Bush Administration on several occasions attempted to cut funding for student loans programs. At the same time, several state governments have over the past few years reduced state funding for higher education. In the context of this analysis, these are wrongheaded moves. Inadequate funding of “No Child Left Behind” (a.k.a. “unfunded mandates”) is also susceptible to this same criticism.


Beyond education and training, the U.S. has long deployed an array of policy tools to combat inequality and diminish economic insecurity. One example is the earned income tax credit, which supplements the earnings of low-income workers. Unemployment and disability insurance cushion family income in the face of job loss and illness, while Social Security shelters many elderly households from poverty. Indeed, inequality in consumption among U.S. families is notably lower than inequality in pre-tax income due to these programs and others that involve the direct provision of services such as healthcare, housing, childcare, and food stamps to families in need. The real question is whether government should and can do more.


“To assess the value of and potential need for additional government intervention, it is instructive to draw some comparisons between the U.S. and other countries. In regard to inequality, over the past few decades it has risen more in the U.S. than in most other advanced industrial countries in the Organization for Economic Cooperation and Development (OECD). Indeed, by most measures, the U.S. ranks near the top (some might say the bottom) in terms of household income inequality. The inequality gap in the United States is associated with higher levels of overall and child poverty relative to a majority of OECD countries.8


This high and growing level of relative inequality in the U.S. reflects, in part, differences in the “social safety net.” Among the 30 OECD countries, the U.S. ranks above only Mexico, Korea, and Ireland in gross public social expenditures as a share of GDP spending, and it does the least to target government taxes and transfers towards moving families out of poverty. Not surprisingly, outcomes such as infant mortality and life expectancy are worse in the U.S. than in most advanced industrial countries. As for workplace protections, unemployment insurance in the U.S. replaces a smaller share of income and offers benefits of shorter duration, while the minimum wage is quite low relative to average wages in the U.S. Moreover, U.S. firms face far fewer restrictions in their ability to fire or lay off workers than do firms in most other OECD countries.


Other countries’ efforts to mitigate inequality and provide a safety net may come at a price, however, since these efforts may hinder job growth and intensify unemployment, especially for young and less-skilled workers…”

She concludes:


“… The possible responses to rising inequality do not boil down to “either/or” kinds of solutions. Rather, these responses range along a fairly wide continuum, reflecting the tradeoffs that policymakers face between efficiency and equity. Certainly some market-determined income differences are needed to create incentives to work, invest, and take risks. However, there are signs that rising inequality is intensifying resistance to globalization, impairing social cohesion, and could, ultimately, undermine American democracy. Improvements in education are an imperative for reducing inequality and an easily justifiable investment, given its high social return. In contrast, improvements in the social safety net entail costs, even when policy interventions are well-designed from an efficiency standpoint. Even so, in my opinion, they deserve high policy priority. Inequality has risen to the point that it seems to me worthwhile for the U.S. to seriously consider taking the risk of making our economy more rewarding for more of the people.”

So, at the risk of being repetitive, I think these remarks support my assertion that it’s not enough to “Just say ‘no’” to protectionism. One has to develop a popular consensus, and build a constituency, for an open trading regime. Doing so might require laissez-faire adherents to jettison objections to measures that minimize economic uncertainty.


[Late Addition 12/29/06: I now realize that Mark Thoma at Economists View scooped me on this one with a post back on November 6th].

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20 thoughts on “Janet Yellen on Inequality in America

  1. Gabriel M.

    I don’t know if overt political activist from a member of the Fed board is a good idea. Here (Romania) the governor of the National Bank does well and stays clear of the politics (especially of the “hot topics” of the day).
    The problem with Ms. Yellen’s point of view is that it’s a “World Planner”‘s point of view. It is therefore painfully clear in which camp she places herself.
    For example… CEO pay is not a matter to be settled between between the shareholders and the CEO, based on their freedom of association. It’s a `social` issue.
    The wage is not a matter between prospecting employer and employee (re: minimum wage). Etc. Etc. Everything in that text suggests a centralist, activist, planner p.o.v. (I will agree that this is common, though.)
    That Ms. Yellen would publish this might be an unfortunate signal sent to America’s most productive individuals (in the US the vast majority of wages are still productivity-determined, the politics has not gone far enough to undermine that, but it’s never too late).
    The issue here is 99.99% purely political. Regarding income inequality, the economic science can only elucidate the determinants of income, outside of any value judgment. So economists’ preoccupation with [income] inequality is all too often [partisan] politics disguised as science.
    From my inevitably biased p.o.v., for the US Federal Government to create sides and take sides, to tell the most productive that it is going to handicap them, to actively search to hurt them, in order to subsidize the less productive, is a dereliction of its constitutional mandate. It’s not a matter of “incentives to work”, it’s a matter of fairness, of equal treatment before the law, regardless of (sex, religion, race AND) income.

  2. Stormy

    Some observations:
    1. Not everyone can afford or is intellectually equipped to have a college education. What do we do about them? Consign them to the dustbin of history? Wait for evolution to make us all smarter monkeys?
    2. Looking a Figure 2, I note the following:
    a. College degrees peaked in 2000-2001. Remember that the dot.com boom in the 1900s opened a lot of doors for people. Those doors are closing as more and more technical expertise is being off-shored: Cheaper wages being the primary incentive. As a side note, take a look at Verizons lay-off practices: Slowly but surely all but the very top of management is being off-shored. These job loses include almost all of IT; now it is including middle management, i.e., those people with education.
    b. Globalization has accelerated rapidly since the 1990s, especially with the entry of China into the WTO. Those making the money are out the top of the management pile or those engaged in financial services or investment firms. How do we educate for that? Everyone become a banker?
    I offer again some often neglected economic facts, ones at which economists simply avert their gaze:
    1. FDI in places like China receive an enormous tax break, half that of local firms. In some cases, no taxation at all. In short, local Chinese firms cannot compete with foreign firms inside China.
    2. Developing nations often have nonexistent labor practices. When is the last time this blog actually addressed sweat-shop labor in Asia? Do you think it really does not matter, that the economic advantages for us simply outweigh the disadvantages? Do you think these practices have no effect on our own labor pool, on those who have neither the ability nor the opportunity to climb the educational ladder?
    3. Developing nations often have weak or nonexistent environmental regulations. While some FDI may not directly benefit from such regulatory paucity, they do benefit indirectly. The infrastructure in China, for example, has been built on the back of non-existing regulations.
    A request:
    Can we seriously discuss the role and philosophy of the WTO in terms of how it is guiding globalization?
    No economist in this blog or any of the other that I have read is willing to tackle this issue.

  3. Aaron Krowne

    I’m glad Yellen is looking into this. I wouldn’t say it is political activism; it is just common sense. The distribution of wealth in society matters for both economic efficiency and social unrest. An economist should be concerned with a system producing a high degree of inequality. Where there is smoke, there may be fire.

    As a related anecdote, I was just pouring over a number of economic charts yesterday, and I think one can see the effect of the investment bank (proprietary trader) Christmas bonuses on the macroeconomic stats — possibly responsible for most of the alleged “soft landing” data. The influence shows up as an outlier in buying and retail activity in the Northeast US. For home sales, I think this is in turn showing up as a large spike in median home prices nationwide (an illusory phenomenon discussed on this blog before).

    As for jobs, I know in my field (IT) just about the only domestic opportunities left are in defense contracting (they can’t offshore that — yet!). I also calculated recently that my whole college education was a waste compared to what I could have saved up and collected in raises over the same time period. That was depressing.

    We are in a situation where a college education is now so widespread, coupled with certificationism, that it has been diluted to near-meaninglessness. As someone who is involved in technical hiring, I cannot even expect competence from someone with a master’s degree.

    So I think the real problems are economic; some perceived “education gap” is a red herring. To some extent, nothing will make up for the severe disjuncts inherent in a world where low-cost basis countries are competing with high-cost basis countries in the same labor and goods markets. This will take time to adjust. Of course, the US has made even more problems for itself, by blowing tremendous sums of money on pointless and ill-spent military and security buildup.

    As for the “tournament” model for CEOs; I don’t see how this could be valid, since promotion-from-ranks into positions of high level management is now so rare. Management has been specialized, for better or worse (and some would argue worse, i.e., given that at least in certain sectors it can be shown coporate performance is negatively correlated with CEO pay. Those MBA boyz sure know how to hustle).

  4. menzie chinn

    Gabriele M.: First, it’s Professor Yellen. Second, she is not a member of the Fed board. The Federal Reserve Banks were by design separate from the Board in Washington, D.C. Third, the Fed was set up with this decentralized structure in order to allow a diversity of views. Fourth, Yellen did not advocate a particular policy. Hence, I don’t see a problem with her statements.

    Stormy: If domestic Chinese firms can’t compete with foreign FDI, why are there so many Chinese firms in China…? Maybe I can deal with the issues you mention in a future post, but having just had to teach trade and trade policy, I’ll wait a while. In the meantime, take a look at the readings here (with special reference to the Krugman and Obstfeld textbook).

  5. Willem Thorbecke

    Thanks Menzie for bringing our attention to Prof. Yellens speech. Along with stagnating incomes, another problem confronting middle class Americans is the types of jobs we do. Talking to my friends I hear them say that school is boring but that it does not even compare to how boring work is. As a professor I know that when students are interested they can do amazing things and when they are bored their minds shut off. My graduate advisor went to a small high school that produced three Nobel Prize winners. He taught me by his example that both education and work can be satisfying and enjoyable. If American students and workers can find more stimulation in their intellectual pursuits and more fulfillment in their jobs, we might be more productive and fare better in the global economy. Even if our incomes dont increase, though, our lives would be less dehumanizing.

  6. John Konop

    UNHOLLY ALLINANCE DESTROYING AMERICA
    PART 1
    We have an unholy alliance between many leaders of the Republican and Democratic Party who have sold out our Country to finance their campaigns to maintain power. This policy may help the stock market yet has hurt the average American family. They have pitted Small business and Middle Class America against overseas workers and illegal immigrants with limited rights.
    Adam Smith the one of the fathers of the free market system in his Book Wealth of Nations (which is used most universities economics programs) talks about the right of workers to negotiate wages as a key principal in a free market economy.
    Yet both Parties with the help of many bought and paid for economist never mention this principal when they talk about trade or immigration policy. Economist and Politicians act baffled as to why real wages are going backwards around the world as we do trade deals ( NAFTA, CAFTA WTO CHINA) with Countries that have workers who are treated like slaves competing with Americans. They are even more surprised as to why wages would be hurt by an unlimited supply of workers (visa) legal and (Illegal immigrants) illegal with very few rights also pitted against Americans.
    The only solution is real trade and immigration reform that does not over supply our Country with workers and pit Americans against overseas child and slave labor. What do you think?

  7. jg

    Income inequality is much ado about nothing, in my opinion. What matters is the ability to move up the ladder. Without that, we’d have big problems.
    From my perspective, more spending on higher education does not make sense. I rely upon my dated read of “The Bell Curve,” and concur, based on my observations, that it is IQ and family structure that matters, not education.
    What’s the secret to remaining above the poverty line? It’s not rocket science: graduate from high school, get married, and stay married. Folks with IQs of 80-90 can do this, because I’ve seen it.
    That, combined with sealing our borders to illegal immigrants so that there are rational limits placed on the supply of low-skilled labor, is the real poverty relief program.
    Here in America, we don’t suffer from money envy because many of us (1) are religious (and money is not the end all and be all) and (2) know that if we work hard, we, too, or our children, can earn big bucks. Here in America, income and wealth are fluid: “From shirt-sleeves (low-level work) back to shirt-sleeves in three generations.”
    Seal those borders, Pres. Bush, and relentlessly push the ideal of family stability. Heck, let’s reintroduce the concept of ‘shame’ for broken homes. That’s how you combat poverty and move folks up the income ladder.

  8. Seth Crawford

    I sincerely hope that the previous post (by jg) was a joke. If anyone still thinks that any of the sociobiology garbage that was rehashed in "The Bell Curve" even feigns to hold water, pick up Stephen Jay Gould’s "Mismeasure of Man"–or simply read an anniversary review/description by two of my colleagues at The Monthly Review.

    I also wanted to contribute an addendum to the described wage increases that this post originally alluded to–real after-tax household disposable income between 1984-2005 (from the Consumer Expenditure division of BLS) has followed the same pattern as wages (tautological I realize, but interesting when viewed from the perspective of yearly incomes).

  9. Nathan

    Menzie,
    As a correction, I do believe Janet Yellen served on the FOMC in 2006 as a voting member. Secondly, I do believe Professor Yellen is trying to make a point about income inequality, and I don’t think she proved that is an issue, she simply dismisses anyone who disagrees by citing newspapers… not a very convincing argument. Her graph, citing wages is also misleading, given that the statistic takes a static picture of the population, and does not take into account non-wage income (which is an increasing large portion of total income) and does not reflect income mobility. A more accurate and more difficult picture would track a representative cohort of households over a period of time. That would give a picture of actual income inequality, and from my understanding that type of research is very scarce. A static picture can be very misleading, because as Professor Yellen herself notes, household wages are very “turbulent”.
    I do think she is trying to make a point with this essay as she favorably compares European social systems to US and glosses over the downside of it, but at least she does note it, which is more than most redistributionists do. I think in order to determine if income inequality is a problem, it needs to be measured properly. Then a range of policy solutions could be considered.

  10. menzie chinn

    Nathan: Your correction is not, as far as I can tell, a correction. By statute, the Fed bank presidents rotate through as voting members of the FOMC (with the exception of the NY Fed president, who has a permanent seat). That does not change their status as presidents of Federal Reserve Banks. For further clarification, Dr. Yellen was a Board governor from 1994-97; I agree that is a somewhat different post than a Fed Bank president.

    jg: I suggest you refer to some of the analyses of the Murray Bell curve hypothesis by Bill Dickens.

  11. jg

    Thank you, Professor, for referring me to Dr. Dickens’ work. I enjoyed running through his PowerPoint on black IQ gains and his paper on projected returns to universal pre-school. But, as he’s from Brookings, I’m suspicious of his assumptions and conclusions on his universal pre-school work. I’ll have to check with my trusted sources at Hoover and AEI!

  12. flygernorske

    Tax policy is increasing income disparity. Payroll taxes and especially FICA take an ugly bite out off a minimum wage earner’s takehome pay. Income taxes that start at $8000 are unfair to low and middle income taxpayers. Why isn’t the standard deduction $20,000? Inflation is the most insidious thief. The Fed has watched over the erosion of the value of the dollar (subsquently any attempt at saving) for what, 50 of the last 50 years?

  13. menzie chinn

    jg: First, let me observe that your implication that Brookings is suspect could profitably be re-examined. I bring your attention for instance to the work of Clifford Winston and Bob Crandall. (Full disclosure: I worked for both of these individuals two decades ago.)

    Second, before going to AEI or Hoover, try taking a look at the work of econometrician James Heckman (U.Chicago, and Nobel laureate, 2000). In particular, you might wish to see J. Heckman, “Lessons from the Bell Curve,” The Journal of Political Economy, Vol. 103, No. 5. (Oct., 1995), pp. 1091-1120. I think by no stretch of imagination is JPE a “liberal” publication.

  14. calmo

    I think this belief in education (actually, technical training) to solve our inequality problems is a tad heroic, but not altogether unexpected coming from educators.
    Not exactly misplaced as much as it is ingenuine. The US attracts the brightest minds (except for CEOs) because generally we pay the best and bright minds prefer to study with bright minds (just a hopeless guess). So by and large, we get the brightest…its just the IQ of the herd (not a guess, I swear).
    Despite this capacity, gini coefs do not reflect favorably on the US and it does not appear to be that the bright minds are just getting all the money warping those gini coef.
    I think Romanian Gabriel above may have it right if only the cultural barrier wasn’t impeding my view of his position. Yes, even if he could not choke down Yellen’s

    Inequality has risen to the point that it seems to me worthwhile for the U.S. to seriously consider taking the risk of making our economy more rewarding for more of the people.

    There is something political (99.99%?) about the difference between the US and Europe when it comes to inequality and the role that education plays. I think this is dramatized when we look at CEO compensation in the 2 regions but also by the standard of general education after a dozen years of public schooling. Americans don’t look real smart compared to their public school counterparts in Europe, but the fuss is not about that unfortunately.
    Moreover, Americans don’t look real inspired/motivated about their economic opportunities judging by participation rates in elections. Is it because they are so happy and content about the choices that they entrust this task to others?
    Yellen, among others, smells the disenchantment.

  15. jg

    Okay, you win, Professor; I will be more open-minded about Brookings!
    Thanks for the reference to Dr. Heckman’s work; I look forward to reading his paper (You found my weak spot; I picked up my MBA at U. of Chicago, so I must read the good Professor’s paper, now).

  16. John Thacker

    Professor Chinn:
    The analysis presented in the post ignores some other significant contributions to income inequality.
    Immigration is of course fairly obvious. It is extremely easy to have the common statistics “paradox” of everyone getting better off *and* even global inequality decreasing, while American inequality yet gets worse. All it requires is that immigrants immigrate from poorer countries. They can easily be better off in the USA than they were before, yet still form part of the lowest income brackets. If they are substantially poorer than the average American, then the gap between rich and poor grows even as globally it may shrink. Certainly there is cause for concern on the effects on society of inequality decreasing, but I would argue that it’s less of a concern than if the inequality increase was solely domestic in cause, and certainly not a reason to shut off immigration. However, it would be interesting to see statistics which somehow excluded immigrants and measured only how the income of people who were in this country over the entire 25 to 35 year period changed. When I’ve seen such statistics, they look quite different.
    Secondly, education itself demonstrably increases inequality. The average person trades years in poverty as a student for a higher income once he or she gets out. Since different people are at different stages in their lives, the net effect is more inequality.
    Relatedly, the statistics given generally indicate household inequality; I assume that those presented now indicate that. Education exacerbates another societal trend, towards later marriage. You end up with more people who spend more years as two single students in poverty, and then years as two wealthy married highly educated people later. (Another related effect, of course, is that of married wealthy women being more likely to work.)
    In addition, the explosion in divorce and single parenthood is mostly at the bottom of the income percentiles as well. If all the poor families divorce while the rich ones are more likely to stay together, then the inequality rate, measured by households, explodes. The effect on actual inequality is difficult to measure. To be sure, there are plenty of fixed costs of living that can be minimized by sharing residences, so to some extent it is a real increase in inequality.

  17. Anchoku

    I, too am concerned about the widening gap in incomes. Obviously, a double-hump curve in income would cause civil unrest, to put it lightly. So, what kind of actions should the policy makers take to encourage a nice bell-curve with lots of happy people between the first standard deviations? How wide should the curve be?
    The standard tweak is income taxes – adjust the rates and brackets to artificially help the low end and hold back the high end.
    Death taxes are another, cruder, method encouraging following generations to work to keep the wealth and income advantage their ancestors built.
    Education, as mentioned above, is another key to increasing income through increasing worker value as is importing workers with valuable skills or education. The USA was founded on importing ambitious, hard-working people and the model has just as much validity, today. Myself, I believe we must increase the value of our worker pool through both education and acquisition.
    Favoring strategic business sectors through government incentives is practiced around the world. We should do more of this, better. Agriculture, education, certain industrials and manufacturing, development of intellectual property, technology, medicine and so forth can provide a more solid footing for productivity growth and international trade.
    Economic development requires policy makers take the long view and stick to it for decades to see the effects. Can an elected government do this or, will political ADS prove it’s impossible to positively affect our economy by meddling with it?

  18. Stormy

    Menzie,
    An interesting article on China’s development is in the Guardian:
    http://observer.guardian.co.uk/review/story/0,,1984044,00.html
    While it iterates much of what Brad Setser have been saying, it also echoes exactly what I have been saying: Most of China’s export machine is Western–by that, I mean from already industrialized nations.
    “The reason why so few Britons can name a great Chinese brand or company, despite China’s export success, is that there aren’t any. China needs to build them, but doing that in a one-party authoritarian state, where the party second-guesses business strategy for ideological and political ends, is impossible. In any case, nearly three-fifths of its exports and nearly all its hi-tech exports are made by non-Chinese, foreign firms, another expression of China’s weakness. ”
    Now, while you and I can certainly name some Chinese companies, the author’s point is essentially true. The brand names are essentially foreign, as are most of the exports. The golden collar around China’s neck is leashed to western financial and commercial interests. Herein lies the reason why this game has continued and will continue. The crash is a ways off yet.
    More importantly, the scale of environmental degradation is horrific, all this in the name of globalization and free trade.
    My beef is with the WTO and those here who think its policies are dandy. Labor and environmental arbitrage, when pushed to the limit–and they are being pushed to the limit–are dangerous to everyone on the planet.
    I have read the reports exonerating Western companies from the noxious fumes that pervade China; Western companies may not be directly responsible, but they are certainly capitalizing on them, for they provide cheap energy among other things.
    You know, it is hard to compress all this into a pin sized comment on a tiny blog. Often responses take advantage of inexact phrasing or a slightly overblown phrase. And that counts as a rebuttal.
    Look at the larger picture of what is happening and tell me that you are pleased, pleased with how globalization is proceeding and with WTO policies.

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