Economists’ Next Big Idea: The “Invisible Foot” (?!?)

March 2, 2013

http://blogs.reuters.com/reihan-salam/2013/03/01/to-create-growth-unleash-the-invisible-foot/#comment-330

This is the 21st century.  An unmanned vehicle roams the Martian terrain, beaming back analyses of soil samples.  The human genome has been mapped, opening the door to incredible medical advances.  Human organs can be reproduced on a 3-D printer with ink of living stem cells.  We carry incredible computing and communication technology in our shirt pockets.  Physicists work on nano-structures and discover ever-smaller particles while unlocking the mysteries of the universe. 

Then there’s the pseudo-science of economics.  As central banks feverishly shovel money into the economy in a clumsy effort to fend off global economic collapse, economists grope in the dark to find explanations that fit their gilded 19th century theories.  The above-linked article by Reuters columnist and economist Reihan Salam reports on economists’ latest and greatest answer – the “Invisible Foot” – apparently the long-ignored but newly rediscovered and dusted-off counterpart to Adam Smith’s “invisible hand.” 

Can you believe this?  Here we are, in the 21st century, with the global economy collapsing all around us, and we’re talking about invisible hands and feet.  This is the best that the progeny of our best economics universities can come up with?  Invisible hands and feet?  It seems more suited to a Harry Potter movie than 21st century economic reality.  (Not that I’ve ever seen a Harry Potter move.)

The idea goes something like this:  as opposed to Adam Smith’s “invisible hand” of consumption driving economic growth, the “invisible foot” (brainchild of mid-20th century economist Joseph Berliner) aims to give productivity a swift kick in the pants.  Here’s how the author of the article explains it:

… This invisible foot of new competition is what drives incumbent firms to either step up their games ‑ a process that often involves burning through stockpiles of cash and shrinking profits ‑ or go out of business.

… Unfortunately, this reallocation of resources ‑ from inefficient incumbents to innovative upstarts and the incumbents that manage to keep up with them ‑ stops when incumbent firms succeed in erecting regulatory and legal barriers to shield themselves against competitors, which is why regulatory reform and patent reform are so important. It is also why we ought to take care not to give large incumbents any undue advantages in our tax code.

… the tax-deductibility of interest expenses and not dividends gives the entrenched corporate Goliaths that have the option to borrow a big boost, while doing nothing for the would-be corporate Davids eager to take them on.

… With this in mind, Robert Pozen of the Brookings Institution and Harvard Business School and his research associate, Lucas Goodman, have devised an ingenious plan to level the playing field.  First, they call for cutting the corporate tax rate from 35 percent to 25 percent. … To finance this substantial cut, Pozen and Goodman propose a modest 60 percent to 85 percent cap on the amount of interest companies can deduct from their tax bills, sharply reducing debt bias and keeping the proposal revenue-neutral. … The end result could be an entrepreneurial renaissance, as lumbering corporate dinosaurs that had used cheap credit to scare off competitors are forced to reckon with innovative new rivals.

The following is the comment I posted in response to this article (which you can find by scrolling down to about the 7th comment), repeated here for your convenience:

There seems to be no limit to the goofy places that economists’ tortured logic will take them. The “Invisible Foot?” Here we are in the 21st century and this is what we get from the field of economics – the “Invisible Foot?”

The real problem has, for many decades now, been economists’ inability to distinguish true, healthy economic growth from macroeconomic growth, a large component of the latter being a malignant growth fed by nothing more than population growth. If the macroeconomy grows by 1%, but the population has grown by the same amount, no one is better off. In fact, all are worse off.

Because of their self-imposed blindness to the economic ramifications of population growth (no self-respecting economist dares risk being labeled a “Malthusian”) the field of economics is blind to the very real inverse relationship between population density and per capita consumption, and its implications for worsening unemployment, poverty and global trade imbalances. Economists can’t see that, beyond some critical population density, while population growth continues to stoke total sales volumes and corporate bottom lines, the cost of dealing with rising poverty while maintaining an illusion of prosperity through deficit spending is bankrupting local and national governments across the globe.

Instead, the field of economics maintains its “see no evil” posture and dreams up things like the “Invisible Foot,” an idea that might have played well during the dawn of economics in the 18th century. Are we really to believe that a revenue-neutral reshuffling of the tax code will spawn some sort of economic renaissance? Has no one noticed that the economies of those countries with lower corporate tax rates are still dominated by the same global mega-corporations as the U.S.? Are we to believe that these corporations grew as they did by being sloppy and inefficient, instead of mercilessly boosting productivity by cannibalizing the competition and slashing redundant workers?

The cowardly refusal of the pseudo-science called “economics” to even consider the most dominant factor driving economic trends today makes it the laughing stock of the 21st century. This nutty idea is just one more example of why.


“Adam Smith Lost Legacy” Counters My “Clumsy Trade Policy” Post

February 2, 2009

http://adamsmithslostlegacy.com/2009/01/reckless-optimist-writes.html

Thought you’d be interested in seeing this post on the “Adam Smith’s Lost Legacy” blog in which the author, Gavin Kennedy, disagrees with my Clumsy Trade Policy post.  You’ll see that I also posted a response. 

Obviously, I disagree with Gavin, but appreciate the reasonable discussion and arguments made there.  We need more rational discussion of trade policy like this.


Economists: America’s Worst Villains?

July 29, 2008

http://www.city-journal.org/2008/18_3_economics.html

America is on the brink of what may be history’s greatest economic collapse, similar to but greater in magnitude than the pre-Nazism collapse of Germany. And we have economists to thank – economists advising our leaders and formulating economic policy. This article is a good summary of the sorry state of modern economics. It’s pretty lengthy, so I’ll just comment on a few noteworthy passages, especially the point dealing with free trade.  (It should be noted that the author of this article, Guy Sorman, is a French economist and that France enjoys a large trade surplus with the United States.  No suprise that he’s a big fan of free trade!)

The uncontrolled printing of currency destabilized Weimar Germany, facilitating the rise of Nazism.

History is repeating itself in the U.S. today. The uncontrolled printing of currency to counter the effects of our enormous trade deficit is undeniably destabilizing America. The only question is what will arise in America when the economic collapse happens. Will it survive at all?

Opening economies and promoting trade have helped reconstruct Eastern Europe after 1990 and lifted 800 million people, many of them in China, Brazil, and a now-license-free India, out of poverty. Even in Africa and the Arab Middle East, nations that have embraced capitalism have begun to escape from the terrible underdevelopment that has long plagued them.

Behind all this unprecedented growth is … a scientific revolution in economics, as yet dimly understood by the public but increasingly embraced by policymakers around the globe. … No longer does economics lie; no longer would Baudelaire be able to write that “economics is a horror.” For the mass of mankind, on the contrary, it has become a source of hope.

Here, the effects have been correctly identified, but not the cause. All of this rise in wealth around the globe has been bought and paid for by America – by the transfer of $9 trillion from America’s economy to the rest of the world through its staggering trade deficit. No wonder the rest of the world is thriving! Economics now perpetrates the biggest lie in the history of the world on the American people. It has graduated from being a liar and a “horror” to an abomination.

2. Free trade helps economic development.As Smith observed when his native Scotland began to benefit from free trade, it is through access to the world market that poor nations become rich. … Free trade also makes rich countries richer, economists agree.

We now know that free trade helps poor, overpopulated nations become rich, and wealthy, overpopulated nations to become even richer at the expense of wealthy, less densely populated nations like America.

By importing less expensive goods made in low-wage nations like China, wealthy nations effectively increase their own citizens’ income—and the main beneficiaries are poor and middle-class people, who can buy cheaper clothes, electronics, and myriad other goods.

The evidence speaks otherwise. Incomes in America have been steadily declining since free trade took root and began wiping out millions of high-paying manufacturing jobs. And when incomes decline faster than prices, people are poorer. Period. Regardless of the price of junk at Wal*Mart.

In fact, economists have long understood the law of comparative advantage: whenever differences in the cost of producing goods exist between two countries, both will benefit from free trade, a mechanism that allocates their resources most effectively.

That law has now been disproven by the rapid decline of America’s economy. The “law of comparative advantage” breaks down between two nations grossly disparate in population density. Since it doesn’t even consider the role of population density, it is not a law at all but a flawed, incomplete theory at best. At worst, it’s a failed theory that belongs atop history’s scrap heap of failed theories.

Free trade not only generates the greatest possible growth; it tends to distribute it widely, both within nations and among them. For evidence, consider the emergence of vast middle classes in all free-market societies, as well as the economic convergence among nations that have embraced capitalist economics. After less than 20 years of market-driven growth, Brazil, China, and India—whatever their injustices—are closer to the Western level of development than they were before that growth got under way.

This does not mean, as some observers fret or gleefully predict, that the United States is about to stop leading the world economically. Other nations may draw closer to it—Western Europe in 1950 had a per-capita income half that of the U.S.; now it’s 80 percent—but the American economy has remained the world’s most vigorous for more than a century because of its superior efficiency, demographic dynamism, and innovation.

This is the biggest lie of all. In spite of the listed advantages of the American economy, it has lost badly to predation by the parasitic economies of overpopulated nations. We now stand at the precipice of total economic collapse, our economy having been drained of trillions of dollars of wealth and our assets sold off and placed in control of the parasites. We’ve been transformed from the world’s greatest industrial power – the wealthiest and most envied nation on earth – into the world’s economic laughingstock, a pathetic, hollowed-out shell of what it once was.

There are a very few good, open-minded economists who objectively evaluate the destruction of America’s economy and acknowledge the folly of unfettered free trade. This is not an indictment of them. But the remainder are an absolute disgrace, clinging like drowning rats to the sinking ship of their failed 18th century theories of Smith and Ricardo, in spite of the mountain of evidence piling up to discredit the very “laws of economics” they use to rape and plunder America’s economy. If America survives, a very open question, they will likely go down in history as America’s greatest villains.


“Global economy a world of hurt for U.S. workers” by Cynthia Tucker

April 26, 2008

http://www.ajc.com/opinion/content/opinion/tucker/stories/2008/04/25/tucked_0427.html

This op-ed piece is by Cynthia Tucker, columnist for the Atlanta Journal-Constitution.  She has appeared on the PBS News Hour with Jim Lehrer many times over the years and is a highly respected journalist.

She absolutely hits the nail on the head with this piece in which she takes John McCain to task, but her criticism could apply equally to virtually any politician.  This editorial is a must read!  Following are a couple of key quotes:

“The campaign stop, part of McCain’s tour of “forgotten places,” highlighted the senator’s reputed penchant for straight talk, for refusing to pander no matter how unpopular his message. “Protectionism and isolationism have never worked in American history,” McCain said, according to The Associated Press.

He may be right, but McCain’s message would be more palatable if he were offering hard-pressed workers something other than the same dried-out message about education and job training. Retraining for what?”

Exactly!  I’ve wanted to scream the same question at the television every time I hear another politician suggest “job retraining” for displaced workers!  And I can’t let McCain’s lie that “Protectionism and isolationism have never worked…” pass.  The fact is that for the first 170 years of our nation’s history, we relied upon tariffs for all of our federal revenue and to afford domestic industry the protection it needed to grow.  As a result, we built ourselves into the most powerful, wealthy nation the world had ever seen – its preeminent industrial power and the envy of every nation.  By contrast, since turning toward “free” trade with the signing of the Global Agreement on Tariffs and Trade in 1947, our nation has been reduced to a skid row bum, literally begging the rest of the world for cash to keep us afloat.  McCain was right when he said he knew almost nothing about economics. 

“Here’s what the new economy has done for the average American: precious little. In 2000, median yearly household income, in 2006 dollars, was $49,447, according to The Wall Street Journal, which crunched data from the Census Bureau. By 2006, median household income had fallen to $48,223.”

In 1973 it was $40,000.  Take away the enormous increase enjoyed by the top one or two percent, and factor out the understatement of inflation by the Consumer Price Index, and you’d find that it has actually declined since then.  In other words, Americans are worse off today than they were 35 years ago. 

“… Princeton economist Alan Blinder, a longtime proponent of cross-border commerce, now says that it will create more severe social and economic upheaval than he once believed. He predicts that 30 million to 40 million American jobs are likely to be shipped overseas in the next 10 to 20 years, some of them in white-collar occupations such as financial analyst, microbiologist, graphic designer, radiologist and, oddly, economist.”

Alan Blinder is a former Fed governor and a long-time cheerleader for “free” trade and the supposed “benefits” it was going to bring to America.  Thanks for nothing, Alan!

“Those who still put great faith in free trade — Democrats and Republicans alike — need to look beyond their platitudes to see the displacement and anxiety it has created among middle-class workers. Their worries are not born of ideology but of a hard and bitter experience that has left them anxious about the future. When the factory where you’ve worked for years shuts down or your company stops offering health insurance, you’re not much interested in hearing about Adam Smith and theories of comparative advantage.”

It’s especially encouraging to hear someone call into question Ricardo’s (not Smith’s) principle of comparative advantage, the economic theory upon which the concept of “free” trade is based!

It’s great to see more and more prominent economists and journalists beginning to wake up to what’s being done to our country by “free” (blind!) trade. 

Pete