Living in the 70s*

(As a historical note, when Milton Friedman formulated the permanent-income hypothesis, he actually had in mind something much closer to the old-fashioned Keynesian consumption function, in that households were supposed to discount future income at 30% or more, so that income more than a couple years out is essentially irrelevant. There’s really no basis for thinking permanent income has any economic meaning, it’s just a toy for people who like to play with models of intertemporal optimization.)

If I remember my history correctly, didn’t 1945 mark the end of a period where lots of industrial infrastructure was destroyed and millions of people were killed in pretty much every industrialized nation except the US?

I’d expect workers in the sole industrial superpower to do pretty well for themselves. And to do less well once they actually had competition from other parts of the world. I’m sure it’s not the only factor, but it seems like a pretty big one not to mention.

So tell me — when you say the standard of living of a worker earning the median income in 2010 was higher than the standard of living of a worker earning the same income in 1975, because the lifetime income of the former was higher, what concretely do you have in mind?

The canonical lifetime income hypothesis answer would be that the 1975 worker was paying back the loans he’d taken out when he was younger in anticipation of his higher future income, while the 2010 worker knew his future income would be the same as his current income, so didn’t borrow when young and doesn’t have to pay it back when old. When you say conservatives believe in lifetime income, that’s the story they have in mind. Can we agree that it is definitely not the case that disposable income in 2010 is higher than in 1975 because people have less debt to repay?

Or maybe you mean that the 2010 worker has accumulated a larger stock of durable goods, because of higher income over the earlier years of life? That sounds more plausible, superficially –except that by far the most important durable good for most households is the house, and the value of the housing stock has tracked the growth of income pretty much exactly. So that won’t work either.

So let me ask you, John: What is the mechanism by which a higher lifetime income is producing a higher standard of living for the 2010 household, compared with the 1975 one?

Jake @6

I’ve never understood the argument you make. How exactly is the material productivity of American workers enhanced by the destruction of Japanese or English or French or German factories? And, when production resumes abroad, and Americans can trade for those goods, that hurts Americans how exactly?

If I am rich, and some other guy is poor, I can, sort of, understand how I can better dominate him, and, maybe, my relative status is enhanced by his poverty, but how is my material prosperity enhanced? Although I can think of immiserating scenarios, why shouldn’t we presume Pareto improvement results from getting the poor guy a better job, so that the total produced is more, and both of us can have more, because there is more?

@bruce wilder: a few things might be relevant. First, credit. An industrialized country with a destroyed industry is not a development country on an uncertain path to riches. It’s a country that can borrow lots of money to rebuild with a fairly high certainty that they will be able to repay in the future. Especially when they are militarily beholden to their creditor, so they can’t easily dodge the debt by default or depreciation.

Second, most stuff doesn’t trade at marginal cost of production. Attractive businesses to be in are those where you can charge a nice premium, by virtue of a strong market presence. By being the only seller, or a unique quality seller, or having the most economies of scale. Ww2 turned a wide range of American industries into such attractive businesses, at least for a while. And it allowed American businesses to become dominant market leaders abroad even in the long run, in markets where they previously had to compete at unfavourable terms with established local firms.

‘the main reason people believe these arguments is that, for anyone who was around at the time, it seems implausible that our parents’ living standards in the 1970s were comparable to our own today.’

This is the sort of statement that makes me really wonder about the various worlds people live in. My parents’ living standards in the 1970s were incomparably superior to mine now, in every way. And I am not alone, looking at others in my generation. What seems implausible is that anyone is really doing well in the current economic climate (apart from the super rich).

It seems that we are all forgetting something: I don’t know my future income. So a rise in income only counts 1/x, where x is the number of time periods until retirement, towards an increase in my average income, and so I save the excess. So a constantly rising income fools people into saving more then they otherwise would. But this shouldn’t make you feel good: as Freud pointed out the satisfaction of having money is pathological since green paper doesn’t do anything for you. Also don’t forget that many goods like higher education were subsidized in the 1970s. A lot of working class people could feel confident their children would be able to go to university and do better. Today that is much harder. Does anyone know the statistics for Brezhnev era Russia vs. todays Russia?

I don’t see why this absolute comparison would be enlightening; it has to be considered relative to productivity. If I produce 10 times the amount of widgets my father was producing 40 years ago, but can only afford 3 times more, then even though my standard of living has vastly improved, it’s still clear that someone is robbing me.

Yeah, my parents’ standards of living were pretty good in the late 70s. It’s why my dad wooed her in the MGB, they got married, went on a honeymoon in California (although mates’ rates were involved), had me and my sister, and moved into a pretty sizable gaff with a dales view on the strength of a promising civil service career.

I’m about to write a review of the new Tinker, Tailor, Soldier, Spy flick that makes the point that the 1970s were not actually grimdark in doomed Britain and that the official memory of the postwar era being a time of grey tea and also of massive utopian reconstruction schemes and yet also of whorish consumerism is self-evidently nonsense, engineered for political ends.

We can’t have been simultaneously stagnating in rotten decay and also luxuriating in prosperity, unless your point is just that Those People got paid and waaah.

Again, I think a lot of this is to do with class. Most of the people on this board are from the class that has done pretty well over the last 30 years. I think if you asked the same question of people in the bottom 25% the response would be “Well of course my parents were better off”, cos its true. On the other hand if you asked a banker that question they’d look at you as if you were mad.

I find this blog post missing several key points. If one remembers the 1970s, one must remember Viet Nam, Nixon’s fall from grace, sky-high interest rates on mortgages (well into the teens). OPEC’s rise to power, the Iran hostage situation and gas rationing (yes, Virginia, there was a time in America when we rationed gas – and I’m not talking WWII).

So things were, as they are today, humming with massive economic hits to the consumer and the violence and expense of war.

In terms of “standard of living” – I once lived as a child in a neighborhood that included doctors, lawyers and laborers – this in the historic early 1970s. Today, that’s not possible. Income stratification since the Reagan Revolution prohibits such a mix. The rich live in McMansions; the middle class and below live elsewhere. All have seen the value of their homes first skyrocket, then vanish in the recent crash of the housing market.

In the 1970s, I would be curious to know how much debt families took on to pay for their standard of living. In today’s world, debt is a key lever in attaining a higher standard of living. It’s used by consumers to fund our need for immediate gratification. It’s used by students to gain a college degree. And debt is used by corporations to fund their focus on short term gain (at the expense of long term growth.)

In post-millennial America, debt is pretty much the only pillar of our economy left standing, and it’s a rickety pillar to rely on. We saw in 2008 that our financial sector’s reliance on debt and leverage left the global economy completely exposed and vulnerable to collapse. Were it not for government interventions across the globe, the global financial sector would have ended up in bankruptcy.

So when we talk about income inequality in America, and we ponder whether or not it has grown since the 1970s, we must factor in all the variables – especially the post-1970s reliance on debt to finance an unsustainable standard of living. It is a fallacy to think that debt-financed acquisitions represent an improvement in our standard of living. Instead, it’s a false standard and should not be held as an example.

@Cian
I don’t think anybody is disputing that a person’s class affects how they answer the question whether they are better off than their parents are, or whether they expect to be. “Wages fell over 30 years” does not mean “everyone’s wages fell.” “Standards of living won’t rise over the next 30 years” does not mean “nobody will be better off in 30 years than they are now.”

Bruce @10. Your argument about most of the rest of the world had been knocked backwards, is very free tradeish. However, I want to consider two sorts of goods traded on the world market. The first is industrialized finished goods, for which your argument (that relatively poor trading partners don’t help) is valid. But, I think we have a second commodity type of good, mostly natural resources, like for example oil, whose rate of supply doesn’t seem to scale with global prosperity. Certainly the ability to buy tracts of land in foreign countries is in the later category. But many natural resources are at least partially in the second category. So for instance in todays economy, advancing prosperity in the BRIC countries, means they can bid up the prices of global commodities, such as oil, forcing the rest of us to consume less. I believe we are entering an era where multiple commodities will be supply limited (mainly by geology/biology, as opposed to technology and capital). In the supply limited environment, relative economic prosperity determines ones ability to enjoy physical prosperity.

Technological progress has softened the effects of the marked change in the relative economic and political power of middling people in the U.S. You have to go into debt peonage to pay for a college education, but look at this Ipad. You can’t afford your own place, but you and your roommates have a wonderful T.V. It may be that future innovations in areas such as biotech and nanotechnology will bail us out, but in the absence of such a god on the machine (machine on the machine?), I think we can look forward to an era of profound social strife as it becomes clearer to the losers that they have indeed lost.

@28

You make an excellent point.

I’m not tempermentally inclined to be “free tradeish” at all, but I try not to lose track of such basic points of economics as the importance of specialization to productivity. Specialization and trade, as another commenter pointed out, should not be modeled as a road race, with a winner and a loser.

The U.S. was, relative to other countries, very wealthy, in 1945, because it was technologically very advanced, had the largest market and so had been able to go farthest in exploiting increasing returns in mass production and mass distribution, had enormous natural resource endowments relative to its population size, had a remarkably honest government, etc. These kinds of factors explain why the U.S. (and the Soviet Union) had won the Second World War. Winning the Second World War doesn’t explain the prosperity, even if escaping massive destruction helped.

Going forward from ~2000, the world’s economy has passed an important inflection point, with regard to natural resource constraints. Malthus is back. That doesn’t obviate anything about specialization and trade, and their relation to productivity and trade. Some of the most prosperous countries in the world haven’t been exactly loaded down with natural resource endowments, historically. (And, no, I’m not the kind of pollyanna, who doesn’t see the importance of European world conquest to the industrial revolution.)

With all the frequently nonsensical argument over Keynesian stimulus and austerity, the critically important issue of the commodity-price ceiling looming over world prosperity is ignored by Krugman and Barro, alike. Economics is blind to the second law of thermodynamics, and that’s a problem for analysis of our prospects. But, it does have insights about externalities and congestion costs, which apply.

If you think economic trade, post peak oil (and peak farmland, etc.) is becoming a zero-sum game, you are wildly optimistic.

Bruce @32, Thanks for the response, it is clear you understand that constraints are an increasing part of our future. No, I don’t think post peaks, that trade is a zero sum game. However on the extreme end of the scarcity spectrum, where a finite resource can only be divvied up, your trading partner’s misfortune becomes your fortune. The world economy consists of a basket of goods, some of those goods will behave in a near zerosum way wrt the global economy, while others will more closely approximate the classical comparative advantage theory. But, the weighting is moving more towards the zerosum end of the spectrum, then we’ve seen before. The effects on international relations are likely to be profound.

think you get the same answer (maybe even more so) with a standard Keynesian model in which people’s marginal propensity to consume out of income increases is below their average propensity to consume in the long run. If you have steadily rising income, you save. If income stabilises, your consumption adjusts to your income. If it falls (and maybe even if it falls relative to what you expected) and credit is easily available, you borrow.

This sounds reasonable, but it is not the lifetime income story that conservatives believe. Just the opposite. While people are supposed to borrow in response to transitory declines in income and save in response to transitory increases, a rising path of income over the lifetime leads to borrowing early in the lifecycle, not saving. The purpose of credit in this story is to flatten consumption over the lifecycle relative too the rising path of income, both because of pure time preference and declining marginal utility of income in each period. So we should expect to see *more* use of consumer credit in a world where incomes rise over time, than in one where they are flat.

If you want to say, the standard of living is higher for the median earner in 2010 than in 1975 because they are saving less, so consumption is higher relative to income, fine, I agree. That’s true. Add that one big reason for this is that people are acculturated to expect incomes to rise over time so they borrow more than a rational intertemporal utility maximizer would, and I like it even better. But that’s really nothing like the permanent-income hypothesiis you hear from conservatives.

The effects on international relations are likely to be profound.

What, you guys don’t believe in a world without nations and peoples, with “one vast and ecumenical holding company for whom all men will work to serve a common profit and in which all men will own a share of stock, all necessities provided, all anxieties tranquilized, all boredom amused”?

It seems obvious to me that standards of living were higher back in the 70s.

My parents talk about being able to just walk onto a place of employment and land a job. Even before the recession it was nothing like that.

The HUGE difference was that housing was cheap, cheap, cheap. If you had roommates, you could basically be a bum with a part time job and spend the rest of your time on other pursuits. If you had a full time job, there was no question that you could afford your own place.

Also, the safety net was much stronger. Getting health care if you were uninsured wasn’t as difficult as it is today. A lot of older people will say things like “Oh, you can just go to a county hospital and get free care” when they hear about the uninsured. That sort of thing was at least partially true back then.

Today, if you go to a county hospital for “free” care you’ll have a $60,000 lien against you for the rest of your life.

Yes, we have iPads today, but we also have college graduates living with roommates or their parents, with no access to health care, and staggering student loan debts.

But any narrative of robbery has to be tempered by the fact that there isn’t what we ordinarily think of as coercion taking place. The exploitation of the laborer is a consequence of his second nature, not some plot by the capitalist.

But any narrative of robbery has to be tempered by the fact that there isn’t what we ordinarily think of as coercion taking place. The exploitation of the laborer is a consequence of his second nature, not some plot by the capitalist.

What do you mean “we”, Kemosabe? You, personally, may think that the choices “work or starve” represents a real set of choices. Everyone I personally know of does not.

Thank you for pointing once again point out the necessity of giving your figures for the optimal splitting of productivity gains before it’s measured and not after ;-)

*sigh*

Dudes.

It’s not work or starve, since work results in the things that allow us to keep going…

It’s that the ability to work is only granted if you’re willing to hand all or even more of your surplus to someone else for the privilege of using someone else’s hoarded resources.

Is there anything in this that marks the fact that in the 70s a smaller percentage of households contained two full time workers than today? And that hours on the job have remained stagnant or increased for people lucky enough to have employment?
If there’s increased stress on people because their jobs are less secure, and people cannot choose the family structure they remember (perhaps mistakenly), and because life seems (and often is) precarious with everybody working as hard as she/he can, no wonder there’s nostalgia for a time that I personally remember as pretty bleak.

Is there anything in this that marks the fact that in the 70s a smaller percentage of households contained two full time workers than today? And that hours on the job have remained stagnant or increased for people lucky enough to have employment?

I’m sure this has been posted here many times already, but for convenience let me post Elizabeth Warren’s The Coming Collapse of the Middle Class. There’s also a pdf of this lecture you should be able to find for yourself.

It’s got all sorts of good information that goes against the current truthiness; for example, the “average” 4-person family of today lives in a house that is about half a room larger than it was in the 70’s. That’s a little bit bigger, yes – but not the hundreds or thousands of square feet bigger that those factoids comparing the square footage of houses being built today as opposed to the square footage of what was being built in the 70’s. As she points out, what’s really happened is that the market as shifted from building starter houses to building second or third houses, because that’s where the money is.

I’m pointing to the fact that the coercion you see in capital is constantly reinstated by the working class. Its very different from everyday coercion. I’m not sure what coercion is doing here other then being emotive.

Sigh. No, you’re giving your opinion and you want it to be taken for fact.

Enough. You haven’t done anything to convince me that your opinion is the correct one, nor are you likely to do so, and contrariwise, I get the impression that no matter how hard I work, you’ve decided in advance that nothing is going to change your mind.

So further discussion is quite profitless. Feel free to get in the last word and say that no, your opinion really is “fact”.

Bruce @32
Peak Oil – SO WHAT ? all the energy we need shines in AZ and blows in ND. sure, there are load mismatch (the sun ain’t shining in the middle of the night in a New England Winter) but those problems ain’t that hard.

Cropland – that is more difficult; I don’t think people really understand how fragile our ecosystem is; however, people will put up with a lot if it occurs slowly.
I maybe a pessimist, but I actually expect my grandchildren to live in a world with 12 billion people, and never eat meat, cause meat is to exspensive to produce. but they will look at people in India or wherever, where cannibilism is rampant, and think things are great in the US.
If you just compare my childhood, when large areas of cape cod were still house free (now coated with icky mcmansions) or the area around Hilton Head Island was still undeveloped, and full of wildlife, you can see how far we have fallen…
Isn’t adaptability a great survival mechanism ?

Have a look at http://dx.doi.org/10.1787/421373283813

This shows that among 9 OECD countries, the USA was the only country that saw falls in real full-time earnings for males in the bottom half of the earnings distribution between 1980 and 2005.

(The data for Canada only covers the period from 1997 to 2005, although it seems likely that the Canadian labour market is influenced by proximity to the US labour market. )

Now you also get this for some periods in Australia – but not over the whole 25 year period as in the USA. In the UK, earnings inequality widened even more than in the USA – but all deciles of workers had rising real earnings – it is just that they were a lot higher at the top than at the bottom.

Now it is plausible that real wage levels (PPP adjusted) in the USA were higher at the beginning of the period than in other countries.

More of the the total US compensation bill went to healthcare and private pensions in 2005 than in 1980 – although it seems likely to me that much of this went to workers in the top half of the earnings distribution rather than those in the bottom half. and even if the cost of employer-provided pensions went up, the coverage went down. (In contrast, in Australia during this period we got the reintroduction of universal health care and the introduction of compulsory private pensions – both of which were more likely to benefit the lower paid than the better paid.)

I think there is also a story in here about joblessness – in this period (although not now) the USA kept more people in employment than many other countries. In Australia and the UK and Germany, for example, joblessness is a lot more concentrated among households where no one is in paid work compared to the USA.

So one possible story is that in response to the recessions of the 1970s and early 1980s the more flexible US labour market kept a higher proportion of people employed but at the cost of falling real wages at the bottom.

One of the problems with falling real wages at the bottom is that this puts pressure on your welfare system – how do you have adequate welfare benefits for the poor, when wages for the low paid are falling for 10 or 15 years or longer? Ultimately you end up “ending welfare as we know it”.

Also of course, this trade-off only works while you maintain high employment among low skilled workers. Post 2008 the model looks much less attractive.

My income is exactly the same as it was ten years ago. (We haven’t had a raise and promotions have been frozen for the last ten years.)

Ten years ago I used to buy sandwiches from the local deli for lunch because they only cost $3.29. Now they cost $6.29 and I never buy them; I bring sandwiches from home. And I notice the deli has reduced staff and cut back their hours.

On the other hand, I think nothing of going out for an afternoon’s scenic drive and taking 100 pictures with my digital camera, because it costs nothing for the photos. I would never have done that when I had to use a film camera and pay for processing. But the cost of gasoline used on the trip has more than doubled, so that should be included in the total cost of my photos.

So according to the Sandwich Index I’m falling behind. By the Scenic Photo Index I’m probably still ahead.

I think the difficulties in measuring value because of technological change go back further. For example, more people owned automobiles in the 1970s than the 1950s. But they lost access to a number of services that were available in the 1950s: public transportation in general, milk delivery to your house, laundry pick-up and delivery to your house, etc. You get a car to drive to the supermarket, but the milkman doesn’t come around any more.

There’s an interesting discussion about the economics of delivering groceries in the 1930s in The Grapes of Wrath. My father could remember the butcher’s cart coming round to the house and his mother buying meat for dinner. That economic model assumed that the wife was always home to buy household items while her husband was at work.

My father battled his way up into the middle class, helped by a subsidized university education because of his service in WWII, but his own efforts still were a major contribution. But once he’d arrived, he had a secure career and a comfortable retirement. He wasn’t wealthy, but I don’t think he really worried that much about money. He could buy season tickets to the opera, stock up a nice wine cellar and buy clothes from Brooks Brothers (and occasionally from Gieves & Hawkes) without batting an eye.

In some ways I live better than him, but I’m constantly pinching pennies and I have no idea whether I’ll ever be able to retire.

Can economists measure how much that lost sense of security is worth?

I think if you look closely, you will see that biggest change is that things that really matter to families (health, housing, education) have got more expensive and things that really matter to singles (entertainment, eating out etc) have got cheaper. My father raised 5 university educated children on basically a single income and ended up with a very comfortable retirement. He was educated to Ph D level but never earned a particularly large salary. (He was part of the “lucky generation” – born during the depression – that was generously supported by the state when raising children and benefited from massive land price (often mistakenly called house price) inflation.) Only the very elite can do that now.

I was thinking about this post in the context of my own experience (b. 1958) and the nature of the house I live in in the UK (constructed 1911). ….. rather than in terms of income.

One thing it might be interesting to know: how have house prices altered over the period since 1911 in terms of multiples of the median wage?

But thinking about how things have changed for occupants of a building like my house in terms of capabilities, functionings etc. I.e changes in real experience rather than income numbers.

1930s – a radio
Some time around 1950is (I’m guessing, the house gets a bathroom).
Some time around the 1960s – TV
Some time around the 1970s – colour TV
1970s – washing machine
1970s – central heating …. A big change in well-being!
1970s – HiFi music reproduction at an affordable price
1980s – a computer
1980s – drier
1990s – loft conversion and more space
1990s – internet connectivity, cable tv
1990s – dishwasher
2000s – more channels, wireless internet, second bathroom

Most of the changes since the 1970s are things that people adapt to, well-being wise. To lose some of them now would be a welfare loss, but never to have had then not so much.

** The really big gains: Indoor bathroom, central heating, washing machine. – all by the 1970s.

(The other gain is the car … though this is less of a gain given that everyone else has one too, and some more than one, meaning there’s nowhere to park and everybody is stuck in jams. )

There’s also some relevant detail concerning the kinds of people who used to live in a house like mine earlier in the century. Then it was the upper layers of the working class, now it is people like college professors who (as recently as the 1960s) got to live in the really posh parts of town.

I was thinking about this post in the context of my own experience (b. 1958) and the nature of the house I live in in the UK (constructed 1911). ….. rather than in terms of income.

The 1911 (coincidentally) UK census is good for this sort of thing. In that year, the house we now live in was occupied by a builder’s clerk and his mother (so: non-professional, single income). There’s been population growth since 1911, of course, and I don’t know how you’d disentangle that from competing explanations of change.

ragweed 09.19.11 at 6:17 am

” Jake, Bruce Wilder, etc. – if you look at the actual numbers, there was no huge rise in US net exports as a percentage of GDP after WWII. There was a slight bump in 47-49, most likely from the Marshall plan, but by the 1950s it was back to the historical average. ”

Thanks for checking this.

“Post WWII, Europe had lost much of its manufacturing base (though this was more true of Germany than say the UK) but a bombed out country also doesn’t have much money to buy imports – it does have a lot of idle human resources to put to work.”

Which will be at a very low level of production.

@65, Joshua Cullick

NASA’s own claims for Apollo programme spinoffs are distinctly modest. This isn’t that surprising; only relatively recently has NASA started tackling technology independently from the requirements of specific missions and synergies between rocketry and the civilian economy are hard to imagine.

Against this unimpressive list must be set not just the direct expense incurred but also the opportunity cost of detailing to the project so many people of such undoubted talent. Of course satellite technology has found a myriad of important commercial applications, but these would have been attainable with the missile technology of the 1950s in any case.

The military contribution to technology is much more impressive, albeit on a larger budget. Once again, the opportunity costs of the technological hothousing of the 1940s-60s must be taken into account, however.

Latterly, NASA has adopted the DARPA approach to fostering innovation. I must admit I’m very impressed by DARPA which has often worked wonders with tiny budgets (relatively speaking). I’m ambivalent about many sorts of government interventions in the economy, but DARPA demonstrates that judiciously chosen and effected interventions can achieve results the private sector never will.

@52
If you’re like me you won’t watch an hour-long Youtube lecture, so here’s a link to a Harvard Magazine story by Elizabeth Warren, “The Middle Class on the Precipice”. Her major points: Since the 1970s household incomes have risen about 75 percent, but that includes the second income, which wasn’t routine a generation ago. At the same time fixed costs (housing, transportation, childcare, insurance) take up twice the portion of the household budget, so that real discretionary income is actually less than it was in the 1970s. In other words, people today are actually spending less on food, clothes, entertainment, etc., in real dollars, despite the two incomes.

Warren makes the point that there is no margin of error today. Back then the potential second earner could go to work in case of a layoff or illness. Today, the second earner has to work just to make the mortgage and car payments. If one or both gets sick or loses a job, there’s nowhere to trim. And a worker today is much more likely to face a layoff than in the 70s.

The whole thing is worth reading.

Henri, explain why North Korea isn’t so fantastically rich because it doesn’t import anything. What part of Lenin on trade union consciousness did you forget? Sit down, take a good microeconomics book or Das Kapital, or any econ book you care for, and work out what tariffs do to the workers. This is guild consciousness, not even trade union consciousness. Down with guilds! Down with the protectionist nation state!

Del, having cheap labor isn’t a good thing. It means there aren’t that many good ways to use it, because if their were it would be more expensive. Right now China is about to go through a wave of inflation and appreciation of the currency because the supply of labor is about to dry up. That’s not going to hurt capitalists: they gain from the increased productivity.

What does North Korea have to do with this? And, as a matter of fact, they had their period of very rapid and successful economic development too.

And who said anything about “fantastically rich”? Some do, indeed, get fantastically rich by paying Chinese workers 25c/hr to produce sneakers sold in the US for $150 a pair. Same pair of shoes could be produced in the US by people paid $20/hr, sold in the US for the same price, and no one gets fantastically rich off it; that’s the point.

“And who said anything about “fantastically rich”? Some do, indeed, get fantastically rich by paying Chinese workers 25c/hr to produce sneakers sold in the US for $150 a pair. Same pair of shoes could be produced in the US by people paid $20/hr, sold in the US for the same price, and no one gets fantastically rich off it; that’s the point.”

You see this is what drives me crazy! Companies were making a healthy profit building the damn shoes in the US and paying decent wages. All of a sudden that isn’t good enough and some sociopath decides to lay-off all of these working people, some of who have been with the company for decades, and ship the whole operation to some third world hellhole. Just to make an already profitable company even more profitable. Is there no limit to these peoples’ greed?

So they help those who want the jobs more get them? I don’t see a problem with letting people eat in the third world. If the job wasn’t better then the alternative, people wouldn’t take it. The only thing worse then capitalist exploitation is not being exploited. Short of revolution we can’t change that.

@78 Well, of course it’s not people, it’s market’s invisible hand. If you don’t ship your operations there, someone else will, and then you’re out of business anyway. It can only be stopped by the national government.

@80, so, it sounds like you don’t disagree with my suggestion that the post-70s income stagnation has a lot to do with competition from cheap labor abroad. You just think it’s a good thing. So then, moral judgments aside, we agree.

“I don’t see how one can feasibly go back to a world in which sneakers were made in the US rather than China or tennis balls were made in the US rather than the Philippines, etc. That train has left the station. At least some rich countries can still manufacture lots of products (cf. Germany) but they aren’t sneakers.”

Inact tarrifs to level the playing field. Problem solved.

Barry @67: Try this chart at K-Drum’s. It may be true that lifetime income determines the standard of living, rather than any particular year’s results – but particular years, especially recessions, determine lifetime income.

@69: You’re better off surrounded by poor people because you can get their labour more cheaply. . . . “The poor we have with us always” turns out to be a fervent prayer.

Yes, and this “insight” (their insight that they want most people to be poor), and a degree of elite ambivalence about it, drives a lot of elite politics. In Victorian politics, Liberal revulsion at the spectacle of the Irish potato famine gave the Liberals a presumptive majority, and Home Rule for Ireland took it away. In antebellum American politics, revulsion at slavery drove the fervent embrace of free labor, free soil and free men, but didn’t seem to dull the fervent breaking of unions.

One reason many people do not seem able to grasp this bit of “rocket science” is that neoclassical economics fervently denies it. Ask Krugman, and I’m sure he would assert that an economy with any income distribution can be a full-employment economy. It’s not true, but he would say it, and beleive it, I think. Lots of commentators have juxtaposed an abstract increased inequality in the American economy with disinvestment, high and persistent unemployment and general sense of decline, without sharpening the stick of class warfare.

The rich, out of an instinct for self-preservation I suppose, actively suppress and discourage the reciprocal insight that the poor have the rich to thank for their oppression and deprivation.

Neoclassical economics also contributes the hoary doctrine of comparative advantage and a head-up-your-ass theory of trade, which results in thoroughly confused discussions, like the one above between Henri, Watson Ladd, LFC, et alia.

ragweed @ 59: “I think we should not underestimate the increased consumption that goes with having two incomes…”
Wives have gone out to work as well as divorcées. The general “more women going to work” effect clearly swamps your hypothetical “both former spouses now having to work”. More interesting is the fact that young single working women can afford to marry much later. That freedom is clearly a welfare gain, that offsets the economic inefficiencies of living alone.
I notice that John Q has not replied to my comment or corrected what I still think is a simple mistake in the post.

So if I’ve understood Watson correctly, the USA needs to turn itself into a giant port.

Incidentally, as Bruce observes, the Theory of Comparative Advantage doesn’t actually work in practice. So there’s that.

Capital controls, and select non-prohibitive tariffs, Henri. Autarky, even for an area the size of North America, with its still relatively modest population, is a bad, bad idea.

Going back to the original post, I think this lifetime earnings argument is a very interesting one, but on it’s own it’s not very convincing. Maybe you need to follow up with an argument that a false expectation of ever increasing income has led to consumer fueled debt expansion which has just now blown up on us. Which is especially compelling if you consider that the real stagnation did not set in until 2000 or so, right around the start of this late housing boom.

It’s also possible that we’re just mistaken about the quality of life in the 70s. Maybe it was just as good, if not a bit more boring and restricted. What about healthcare, though? When health insurance costs go up, is this all measured as inflation? What if the quality of care is improving? Does anyone know how this get figured if at all? I’m pretty sure the improvement in quality of care doesn’t justify the absurd increase in cost since the 70s, but there really has been an awful lot of improvement in that sector.

Watson, I got nothing against trade. The assembly line worker in Detroit trades with the farmer in Iowa, and they are both better off. One gets food every day, the other a new car every 5 years. That’s trade, what’s the problem?

Now tell me what the assembly line worker in China gets from the guy in America in exchange for his iPad.

“I’m not sure why you single out foreigners. Why not left handed people or those south of the Mason-Dixon line?”

Don’t we have a responsibility to take care of people in our community? And I don’t think we have to impoverish Detroit to enrich Shanghai?

If the guy in Detroit starts buying cheap wheat from Russia, and the farmer in Iowa cheap cars from China, then both of them lose their jobs. To get them back, they’ll have to lower their standard of living down to that of the Russian peasant and Chinese factory worker, and some more. I know, you like the idea, but they probably don’t.

Henri, the problem with your argument is that you could apply the same critique to any industrialization process. How can the handmade furniture maker compete with assembly line goods? How can the day labourer compete with automated farm equipment? Won’t they both be worse off? In fact being able to acquire goods more cheaply generally improves quality of living, whether the source is automation, some form of worker productivity enhancement, or cheap foreign labor. To advance your argument you have to establish what is particularly special about the case you’re interested in. There is something there, I believe, but not where you are looking.

In fact being able to acquire goods more cheaply generally improves quality of living, whether the source is automation, some form of worker productivity enhancement, or cheap foreign labor.

How about acquiring goods more cheaply because a foreign factory is allowed to dump all it’s toxic waste into the nearest sewer and vents its sooty high-sulfur coal emissions unscrubbed into the atmosphere?

Your argument is way too broad.

What is it that he can produce instead, that can’t be made, for a bowl of rice a day, by starving people somewhere and imported?

Much bloviating and willful ignorance to the contrary, btw, this is not an example of comparative advantage.

As an addendum to my earlier comment above, I’d note that in the US itself, manufacturing output, in absolute terms, has not fallen in recent decades (h/t an exchange a while ago w K. Winnecoff), though manufacturing employment of course has fallen, as has mfg output as a percentage of GDP (as well as, I would assume, the nature of what is manufactured).

Henri says national govts can do whatever they want (at least those that still have nuclear weapons). In terms of economic policy, no. Nat’l govts cannot do whatever they want. One ex.: Capital flight forced Mitterand to change his ec. policy in c.83. France has nuclear weapons. That didn’t seem to matter.

If the US slapped high tariffs on imports of soccer balls and sewer pipe caps from India, India would put high tariffs on its imports of Harley-Davidson motorcycles, fancy tractors, nuclear power plant parts, jet engine parts and whatever else it may import from the US. I doubt the results would be happy.

I’m not denying that the displaced furniture worker (and the loss of mfg jobs more generally) is a problem. And there may be a place for protection of certain established industries in certain cases. But I don’t think autarky is a solution.

Honestly, the US really could do whatever it wanted, as long as it avoided an oil embargo. If the US is trading high-end motorcycles, fancy tractors, nuclear power plant parts, and jet engine parts for soccer balls and sewer pipe caps, I’m sure we could find a way do without the soccer balls.

If the US slapped high tariffs on imports of soccer balls and sewer pipe caps from India, India would put high tariffs on its imports of Harley-Davidson motorcycles, fancy tractors, nuclear power plant parts, jet engine parts and whatever else it may import from the US. I doubt the results would be happy.

So, what about that post-war economy: 1950s, 60s, 70s? That wasn’t too long ago. Did the US import soccer balls from India? Did it export motorcycles and tractors, except perhaps as a part of those post-war European recovery programs? How come it’s suddenly unthinkable to produce a soccer ball, and to sell Harley-Davidsons domestically? And remember, this means no Honda, no Suzuki, no BMW.

Adrian @ 70

I think your argument is a good one. I have no strong views on whether or not Apollo programme was a good decision economically, though it occurred to me to mention the oft-repeated cw on the issue, which ironically is not repeated in full force on the link you provided–as you say very modest claims there.

DARPA another example. Though I kind of think Apollo programme and associated cultural appetite for engaging in projects of such magnitude part of what made DARPA et al possible. In this view, the direct single-generation technological descendants of the Apollo programme much less important than the organisational/cultural halo which surrounded it. So many people, so many new problems and dealing with solving them. I’m focusing less on the machine hardware and primitive computational technology and more on human expertise developed. These people would have gone on to contribute to the milieu which produced Apple, et cetera.

The word that pops up often in this kind of conversation when someone makes claims similar to those I’m making is “intangibles” (not so much academics thankfully, but mgmt culture loves this word), but I don’t like its unscientific ring (as if there were a ghost in the room, somehow present but distinct from material reality, not subject to measurement, intrinsically unamenable to scientific inquiry and explication). Imo, something may be subtle, difficult to measure or to model with regards to conditioning/inputs, eg creative problem solving culture or generic intelligence, but there is nothing in the least bit ‘intangible’ about the resultants/outputs, eg economic and structural ramifications of high technology.

This is in not intended as rebuttal of your assessment re Apollo programme in particular. I’m just thinking further about the issues of economic modeling and measurement of subtle, dispersed conditioning factors to not-so-subtle phenomena in conditioned states-of-affairs.

This Stross post has suggestions and discussion on what a US-only economy would look like:

http://www.antipope.org/charlie/blog-static/2010/07/insufficient-data.html

Around 1900, it took the effort of about 20-30% of a nation’s work-force to provide food for everybody; and another 30-50% working in factories to produce clothing, machinery, and processed materials like bricks and billets of pig iron. Today, we only need 0.5-1% of the work force to feed everyone, and another 1-4% working in industry to produce the basics — but the microspecialities have exploded, to the extent that a lot of our needs seem to require a trans-national economy to provide.

Henri 116:
It’s not that it “suddenly became unthinkable” to produce a soccer ball in the US. The word “suddenly” is out of place, and the word “unthinkable” probably also out of place.

There are, I presume, people around here who are more qualified to discuss this argumentatively with you than I am. But I guess they have better things to do. And come to think of it, so do I. You win. I wish you luck with your new soccer ball factory in Indianapolis. (Unfortunately I don’t know any venture capitalists so I can’t help you on that front.)

bianca steele:
” Re. the Apollo program: It’s also the case that when the program was wound down, a reasonably large swath of US industry was decimated, that is, in the early 1970s.”

I’ve heard this period credited towards the creation of the modern Silicon Valley (combined with the drawdown in aerospace spending).

Strategic advantage for a pile of waste? I’m not sure I see the problem if the people who have to deal with the waste are fine with it.

Strategic advantage for a pile of waste? I’m not sure I see the problem if the people who have to deal with the waste are fine with it.

Sigh. Iow, you really don’t see how comparative advantage works, do you? In fact, I’d guess that you’re confusing it with absolute advantage.

I’m not sure I see the problem if the people who have to deal with the waste are fine with it.

The people who have to deal with the waste are not the ones who made the decision to process the rare earths, nor are they the ones who benefit.

You didn’t learn your Marx from the Spiked guys did you? Because you’re the strangest Marxist I’ve encountered, and I’ve met some odd ones in my time.

Henri,
there’s nothing wrong with trade per se. Specialisation is not only a good thing, but tends to happen naturally. Clusters of industry end up in a geographical area, and very few countries are big enough to produce all their needs anyway.

The other thing, is why would we particularly want to produce soccer balls. They’re a fairly low value item (sold for a lot – but that’s a separate story) – that’s exactly the kind of thing poor countries should be producing, particularly as they can’t produce other things very easily.

But I think you are getting at something. One of the big problems with outsourcing to the third world, is its basically a way for corporations to screw labour and the environment. Not only would we not want to have workers working for 12 hours with a bathroom break (I exaggerate, but only slightly), neither would we wish to rape our environment to do so. But its not really in our interests for it to happen across the world either.

So we should probably be talking instead about fair trade barriers. Tarifs on goods made in countries which don’t meet certain minimum protections. Not only would that probably be better for our own economy (often it would be possible to produce many of these things in the USA with increased skills, mechanisation, etc), but it would be better for ordinary people living in those countries. If there is an advantage in cheap labour, which is not horribly exploited, then that seems reasonable. If there is an advantage in using workers who die of industrial diseases by the age of 30; no, that doesn’t seem fair. That seems disgusting.

And of course the other thing is that we should allow countries to set up capital controls like China does.

Cian, when the cost of labor increases its because labor has moved up the value chain. China is experiencing inflation and outsourcing to Vietnam and Cambodia not because the Chinese workers are on strike, but because they are now able to negotiate better because the manufacturers are more productive. Also, Marx was for the development of productive forces around the world. I learned my Marx from Moshe Postone and Chris Cultrone, and he learned it from the Sparticists. Making a labor conditions tarrif is something I would support as it could potentially lead to an international mobilization of labor.

Henri, the only way to have a global safety net is worldwide revolution. A return to autarky will doom all hope of international redistribution.

Look I understand that therse are times when for whatever reason economists have to talk in these terms but there is a lumpen utilitarianism in all of this (does anyone seriously believe that Ipods have made us happier?, and it seems to me their is a much stronger argument for cars as disutility than the opposite, especially from the seventies when they ceased to be a luxury on empty roads for going to the beach and became iron cage surrounded by others in traffick) .
Anyway as I understand it JQ’s post basically confirms that lots of crap got cheaper but access to education stagnated (it improved as a percentage of population because oldies without education died) and homeownership and employment, got worse. Maybe this is wrong, have houses got cheaper relative to income in other parts of the forest, is youth unemployment a local problem?

Cian, when the cost of labor increases its because labor has moved up the value chain.

So the cost of labor can’t increase with increased bargaining power? Which could happen by, say, starting or joining a union?

Like what’s happened many, many times in U.S. history over the last hundred-odd years?

I think I can safely say that this one has jumped the shark.

Unions might affect the distribution of the gains of labor vs. capital to some extent, but they can’t do so by more then returns on capital and labor.