Trade Arithmetic for David Brooks

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Friday, 02 September 2011 05:02

The NYT has been sponsoring a competition between Thomas Friedman and David Brooks to see who can say more silly things about the economy. Brooks has a couple of good entries in today's column. Brooks told readers that:

"There’s strong evidence to suggest that the rate of technological innovation has been slowing down."

Actually there is zero evidence to support this assertion. The standard measure of technological innovation is productivity growth. This was close to 3.0 percent annually from 1947 to 1973. It fell to about 1.5 percent from 1973 to 1995. It then increased to 2.5 percent in the years since 1995. Brooks might have a point if he were writing in the late 70s or early 80s, but he isn't.

He then tells readers the distressing news that:

"nearly all of the job growth over the past 20 years has been in sectors where American workers don’t have to compete with workers overseas."

This is true and it implies the exact opposite of the sort of genuflection that we get in the rest of Brooks' piece. Suppose that the United States produces both manufactured goods and professional services (e.g. physicians' services, lawyers' services, etc.). Suppose that we prohibit the importation of professional services but promote the importation of manufactured goods with "free-trade" agreements. We would expect that we lose jobs in manufactured goods, although we might continue to generate jobs in professional services.

Let's take it a step further and imagine that we then jack up the value of the dollar because the tough guys at the Treasury believe in a "strong dollar." This will make U.S. manufactured goods even more expensive relative to their foreign competition, causing manufacturing employment to decline even further.

There are two simple remedies to the plunge in employment in manufacturing. One would be to open the professional services to international competition. This means eliminating the barriers that protect highly paid professions (e.g. doctors, dentists, lawyers)  from international competition. This will make the services that they produce (i.e. medical care) much cheaper for the rest of the country, thereby raising real wages.

Increased imports of professional services will also put downward pressure on the value of the dollar, which gets us to the other simple remedy: get the dollar down. The dollar is the main determinant of the relative price of foreign and domestically produced goods. If we want to generate more jobs in sectors that compete internationally then the key is to make our goods relatively less expensive. This is very simple, although the politics of bringing about a lower valued dollar might be somewhat difficult.

So there you have Brooks' entries. He has a tirade about a decline in the rate of innovation that does not exist,  and he fails to notice the impact of trade barriers and an over-valued dollar on trade. This is pretty good in the missing the boat category, but he doesn't hold a candle to Thomas Friedman.