Jim Manzi, On The Edge

Conor Friedersdorf at Sully’s place last December:

In National Affairs, a new magazine run by the estimable Yuval Levin, entrepreneur Jim Manzi presents a manifesto of sorts for bringing about the continued prosperity of the United States. The whole article is worth a read, so I am not going to excerpt it, though I am going to return to narrow points in later posts. Like Grand New Party, the thoughtful product of Reihan Salam and Ross Douthat, Mr. Manzi’s piece suggests a framework for understanding the challenges that America faces — thank goodness another serious voice is getting us beyond bromides about liberty and tyranny — the trade-offs we must resolve in our public policy, and specific policy proposals for those persuaded by what precedes them. I hope it gets the attention it deserves, including thoughtful responses from across the political spectrum.

And should it reach folks making policy within the Obama Administration and the current Congress, I hope it lays bare for them how negligent they are in grappling with grave challenges that have gone ignored for too long already.

Jim Manzi at National Affairs (can’t excerpt it all, so be sure to read the whole thing to understand the commentary below):

Most great powers throughout history would have reacted to such circumstances by seizing direct, long-term control over as much of the globe as possible. Instead, the United States established itself as first among equals in a loose coalition of nations that came to be known as the Free World. It also established a set of political and economic institutions and programs — the North Atlantic Treaty Organization, the Marshall Plan, the Bretton Woods system, the International Monetary Fund, the World Bank, and so forth — that encouraged rapid economic development within this coalition. Combined with the policy of containment toward the Soviet Union, this approach to geopolitics turned out to have huge strategic benefits for America.

Indeed, the fact that this strategy worked in the decades after World War II is precisely our problem today. The wealth-creation engine of the post-war world was designed in America, but available to other nations too — and so in time those that had more advanced economies before the war (predominantly Western Europe and Japan) re-industrialized to the point that, by the 1970s, they began to challenge America’s position. This revived competition, along with the oil shocks of the ’70s, dramatically changed the global circumstances that had allowed the United States to have it all: high rates of economic and wage growth along with a high degree of economic equality.

Ronald Reagan’s solution to the ’70s crisis proceeded from two ­diagnoses. The first was that macroeconomic pump-priming was merely creating inflation, not growth. The second was that America’s economy had large untapped potential for growth, but that this potential went ­unrealized because of the restrictions on markets intended to promote social harmony as part of the post-war economic consensus. These included everything from price controls to government encouragement of private-sector unionization to zealous anti-trust enforcement. ­Reagan’s strategy, therefore, was to promote sound money plus ­deregulation. He succeeded, and America re-emerged as the acknowledged global economic leader. Economic output per person is now 20 to 25% higher in the U.S. than in Japan and the major European economies, and America’s economy dominates the world in size and prestige.

But it is important to see that this robust growth means only that America has not lost ground in global economic competition, not that it has gained much. From 1980 through today, America’s share of global output has been constant at about 21%. Europe’s share, meanwhile, has been collapsing in the face of global competition — going from a little less than 40% of global production in the 1970s to about 25% today. Opting for social democracy instead of innovative capitalism, Europe has ceded this share to China (predominantly), India, and the rest of the developing world. The economic rise of the Asian heartland is the central geopolitical fact of our era, and it is safe to assume that economic and strategic competition will only increase further over the next several decades.

It is common to think of the post-war global economy as a baseline of normalcy to which we wish to return. But it seems more accurate to see that era as an anomaly: the apogee of relative global economic dominance by the West, and by the United States within the Western coalition. The hard truth is that the economic world of 1955 is gone, and even if we wanted it back — short of emerging from another global war unscathed with the rest of the world a smoking heap of rubble — we could not have it.

Yet the strategy of giving up and opting out of this international economic competition in order to focus on quality of life is simply not feasible for the United States. Europeans can get away with it only because they benefit from the external military protection America provides; we, however, have no similar guardian to turn to. We do not live in a Kantian world of perpetual commercial peace. Were America to retreat from global competition, sooner or later those who oppose our values would become strong enough to take away our wealth and freedom.

More Friedersdorf at Sully’s place:

What frustrates me is that, among many of the folks who style themselves immigrant advocates or pro-immigration, there is an utter refusal to articulate specific, workable views about what the limits should be, let alone to abide enforcing limits that are duly signed into law. One pernicious effect is that restrictionists are the only game in town for folks who want to enforce some limits on immigration, hence the rise of demagogues like Joe Arapaio, who are able to cast their extra-legal racial profiling as a defense of American sovereignty, rather than the assault on even legal Latino immigrants that it frequently ends up being.

Even the ill-conceived, so-called comprehensive immigration reform championed by George W. Bush and Ted Kennedy, legislation that would’ve institutionalized a second class of non-citizen guest workers at the mercy of their employers, wouldn’t have resolved questions about limits and enforcement, except temporarily. What foolishness to imagine that short term boon was worth violating what ought to be a foundational aspect of any immigration regime: that the newcomers are welcomed as full citizens with the same rights as everyone else, an obvious enough arrangement if from them one expects commensurate loyalty.

So what does Mr. Manzi recommend?

…we should reconceptualize immigration as recruiting. Assimilating immigrants is a demonstrated core capability of America’s political economy — and it is one we should take advantage of. A robust-yet-reasonable amount of immigration is healthy for America. It is a continuing source of vitality — and, in combination with birth rates around the replacement level, creates a sustainable rate of overall ­population growth and age-demographic balance. But unfortunately, the manner in which we have actually handled immigration since the 1970s has yielded large-scale legal and illegal immigration of a low-skilled population from Latin America. It is hard to imagine a more damaging way to expose the fault lines of America’s political economy: We have chosen a strategy that provides low-wage gardeners and nannies for the elite, low-cost home improvement and fresh produce for the middle class, and fierce wage competition for the working class.

Instead, we should think of immigration as an opportunity to improve our stock of human capital. Once we have re-established control of our southern border, and as we preserve our commitment to political asylum, we should also set up recruiting offices looking for the best possible talent everywhere: from Mexico City to Beijing to Helsinki to Calcutta. Australia and Canada have demonstrated the practicality of skills-based immigration policies for many years. We should improve upon their example by using testing and other methods to apply a basic tenet of all human capital-intensive organizations managing for the long term: Always pick talent over skill. It would be great for America as a whole to have, say, 500,000 smart, motivated people move here each year with the intention of becoming citizens.

This is an imperfect foundation for a system of immigration, to be sure, but I am hard pressed to articulate anything better, and it offers substantial upsides that are absent from the present approach.

Arnold Kling:

His essay dwells on the theme that economic innovation threatens social cohesion, a theme that can be found in Schumpeter, Fukuyama, Brink Lindsey, and no doubt many others.

I find the issue interesting, but I find that I have little to say. I think that I know what economic innovation is, what its benefits are, and some of the conditions that foster and impede it. Book 1 (with Nick Schulz) reflects my thinking there.

But I do not know exactly what we mean by social cohesion. I mean, if you have a civil war, that would seem to represent a loss of cohesion, and clearly civil wars are very bad things. But beyond that, the concept has a vague, “I know it when I see it” connotation.

I think libertarians need to take a stand on the topic of social cohesion. If we do not think it is important, we have to say why. If we think that it is best promoted by libertarian means, we should say how. Serious people like James Manzi worry about social cohesion, so I think we owe them a response.

Jim Manzi responds at The American Scene:

In other words, I never defined social cohesion well. Here is my working definition (that I should have made clear in the piece, and will do in the book): the widespread and irrational willingness and propensity to sometimes and to some extent sacrifice narrowly-defined rational self-interest to the needs of a greater collective, and the expectation that others will do the same. In general, in a capitalist democracy this does not mean the expectation that everyone (or even most people) will become martyrs to the Greater Good, but more that they will pursue narrow self-interest within the written and unwritten rules of the society which tend to channel self-interest “as if by an invisible hand” to the good of the society as a whole over time.

David Brooks gives the article a Sidney award in NYT here

Steve Pearlstein in WaPo

Ross Douthat in NYT:

Social democracy has its benefits, but global competitiveness isn’t one of them. As Jim Manzi points out, in an essay on “Keeping America’s Edge” in the latest issue of National Affairs, “from 1980 through today, America’s share of global output has been constant at about 21 percent. Europe’s share, meanwhile, has been collapsing in the face of global competition — going from a little less than 40 percent of global production in the 1970s to about 25 percent today.”

If we hope to avoid a similar plunge, the Obama-era tilt toward government intervention needs to be balanced, and soon, by a new growth-oriented agenda. This will require more than the rote invocations of Reaganism that too many Republican politicians have fallen back on, however. The age of sweeping tax cuts financed by deficit spending is over. The policies of the 1980s will not keep America competitive in the 2010s. Our challenges are new, and we must think and act anew.

Manzi’s National Affairs essay, a tour d’horizon of our socioeconomic situation, provides a solid place to start. He proposes a fourfold agenda: Unwind the partnerships forged between Big Business and Big Government in the wake of the 2008 crash; seek financial regulations that “contain busts,” by segregating high-risk transactions from lower-risk enterprises; deregulate the public school system, to let a thousand charter schools and start-ups bloom; and shift our immigration policy away from low-skilled immigration, and toward the recruitment of high-skilled émigrés from around the globe.

To this list, I would add tax reform and entitlement reform. The former should broaden the tax base while cutting taxes on work, childrearing and investment. The latter should means-test both Social Security and Medicare, reducing both programs’ spending on well-off retirees rather than questing fruitlessly for their privatization.

This is a right-of-center agenda, broadly speaking, but it’s also one that you could imagine attracting bipartisan support, even in the current polarized environment.

Reihan Salam:

A friend objected to this passage, arguing that U.S. population growth over that period accounts for the difference. Population growth does account for some of the difference, but it doesn’t eliminate the growth gap. This is despite the fact that the U.S. economy should have performed less well on this front according to the Solow-Swan model of convergence. For the most advanced and productive economy, further productivity gains are necessarily more “expensive” because they reflect the cost of experimentation designed to push beyond existing best practices. Many of those experiments will fail. This is the essence of entrepreneurship. Other economies can “follow-the-leader” by learning from its mistakes and apply domestic savings to the practices and technologies that emerge from the Darwinian competition that defines a competitive, entrepreneurial economy.

That is, European productivity growth should have been much higher than U.S. levels, according to the logic of conditional convergence. It was not, however. The real mystery is why Europe has been underperforming. One assumes that labor market rigidities are part of the problem, but there’s room for disagreement.
As for the higher productivity per worker hour in France, it is to some extent an artifact of lower rates of labor force participation — if we excluded more young workers, low-skill immigrants, and part-timers from the workforce, we’d presumably have much higher productivity per worker hour.
The post-1981 increase in work effort in the U.S. has, as economist Edward Prescott has noted, came primarily from high earners in response to lower marginal tax rates at the top. Before then, Europeans tended to work longer hours than Americans. As Casey Mulligan always says, incentives matter.

Michael Barone at Real Clear Politics:

Manzi notes that the behavioral revolution of the 1960s and 1970s produced hugely higher divorce and out-of-wedlock childbirth rates. Then, in the past two decades, the rates of divorce and unmarried parenthood have fallen back to 1950s levels among college graduates. But they have remained high, or even increased, among non-college graduates, which we may take as a reasonable proxy for the underhalf.

It’s clear that there’s a high correlation between lifestyle patterns and economic performance. Almost no one who graduates from high school, gets married and stays married, and gets a job falls into poverty. Many who do not do these things do.

Conservative public policy reforms in the 1990s significantly reduced bad behaviors. Tough policing, pioneered by New York Mayor Rudy Giuliani and widely copied, vastly reduced violent crime. Work-oriented welfare reform pioneered by Wisconsin Gov. Tommy Thompson and widely copied, vastly reduced welfare dependency. Economic and job growth in the 1990s and 2000s surely owes much to these policy successes.

But more is plainly needed. One possible area is education, where 1990s reforms and the Bush education law have encountered strong institutional resistance from teachers’ unions and education schools. Manzi, citing models in Sweden and the Netherlands, calls for “the creation of a real marketplace among ever more deregulated publicly financed schools — a market in which funding follows students, and far broader discretion is permitted to those who actually teach and manage in our schools.”

Democrats are prevented by their teacher union paymasters from pursuing such goals seriously — witness their battle to kill a small school voucher program in the District of Columbia. Republicans could do much better, starting at the state level and daring the Obama administration to stop them in Washington.

Another possibility is pro-family tax reform. The post-World War II tax regime, with its big dependent deductions, produced the equivalent of a generous children’s allowance for married parents. Republicans should try to tilt tax policy in the same direction again.

Jonathan Chait at TNR:

The weakness of Manzi’s essay is that it does almost nothing to establish its key premise that President Obama’s agenda will stifle growth. Almost all the work of establishing this point comes in this section:

From 1980 through today, America’s share of global output has been constant at about 21%. Europe’s share, meanwhile, has been collapsing in the face of global competition — going from a little less than 40% of global production in the 1970s to about 25% today. Opting for social democracy instead of innovative capitalism, Europe has ceded this share to China (predominantly), India, and the rest of the developing world.

If you read that passage quickly, or even very slowly and repeatedly, you probably think Manzi is saying that, since Ronald Reagan took office, United States has enjoyed dramatically faster economic growth than European social democracies. (Ross Douthat, citing this passage, reaches that conclusion.) In fact, Manzi isn’t showing that at all.

First of all, let’s note that while he concludes with a swipe at “social democracy,” Manzi is comparing a unit he calls “Europe.” I emailed Manzi, and he explained that “Europe” includes, well, all of Europe — not just social democratic western Europe but eastern Europe, the Ukraine, and Russia, which are not social democracies by any means.

Second, Manzi has an odd description of timing in his first sentence that, even after several readings, I didn’t notice until somebody else pointed it out to me. He cites America’s economic growth since 1980, but counts Europe starting in “the 1970s.” What is the 1970s? Over email, he specified that he meant 1973. So he’s comparing The U.S. since 1980 with Europe since 1973 — which is, to put it mildly, a very unusual way to construct a comparison. Of course, this causes the 1973-1980 economic slowdown to be counted against Europe but not the United States.

And third, Manzi cites total share of of world GDP, which is a measure of population growth along with rising wealth. And, since 1980, the population of the United Stated has grown 35%, compared with 7% in the European Union and 0.7% in Russia. But of course, merely adding more people does not make your population better off. The more common measure of living standards in GDP per capita.

So, let’s look at a straight-up measure. How did the United States perform in comparison with European social democracies? Well, since 1980, the original 15 members of the European Union saw their real per capita income grow by 58%. Real per capita GDP in the United States grew by… 63%. And that measure actually overstates the difference. The European Union does not include Switzerland, Norway or Iceland — three countries that clearly qualify as European social democracies. Those three countries had 71% growth in per capita GDP since 1980 — thanks to Isha Vij of the Center for American Progress for pointing this out to me — which, if added to the EU 15, would bring the growth record of the United States and the social democracies even closer to parity.

Manzi responds:

Mr. Chait has two basic criticisms of these sentences, as I see it. He asserts that:

1. While technically accurate, the statements present the data in a misleading way because (i) I am comparing a period starting in the 1970s with one starting in 1980, and (ii) I quote a GDP figure for all of Europe, and then proceed to describe Europe “opting for social democracy”, which implies that this should have referred only to Western Europe.

2. I discuss total GDP, rather than GDP per capita, which is a better measure of prosperity.

Let me take these one at a time.

1. I used the word Europe as per its dictionary definition. I apologize for any confusion the wording might have created; as always, such confusion is the fault of the author, not the reader. I don’t think, however, the statement is misleading. The basic conclusion that Europe has ceded enormous global GDP share, while the U.S. has retained close to constant GDP share, holds for any reasonable geographic definition of Europe, for any time periods beginning in the 1970s or 1980, and when using any data source that I investigated for comparing currencies.

I’ll start with the change in U.S and European shares of global GDP, using Mr. Chait’s preferred (and entirely reasonable) definitions: a common start date of 1980, and the EU15 as a proxy for Western Europe. According to the US Economic Research Service Macroeconomic Dataset; GDP Shares by Country and Region Data Table; 11/4/09 update, the U.S. share of global GDP was 26.2% in 1980, and grew very slightly to 26.7% in 2009. This is a net share change of +2% (1 – 26.7/26.2) for the U.S. over this period. Germany, as another example, had a global share of 8.2% in 1980, which declined to 5.85% in 2009. This is a net share change of -29% for Germany over this period.

According to this data source, the net share changes from 1980 to 2009 are:

U.S. +2%

EU15 -22%
Of which,
Germany -29%
France -20%
Italy -32%

Now I’ll show almost the same analysis with a different data source – the OECD Publication The World Economy: Historical Statistics – that only has data through 2006. (In general, these calculations show slightly worse performance for both the U.S. and Europe as compared to the rest of the world, but almost identical U.S. vs. Europe performance). This table will show the change in share of global GDP between 1980 and 2006 for a core group of 12 European economies identified by the publication, plus each of the “big three” continental social democracies individually, plus the U.S.

Net share changes from 1980 to 2006 are:

U.S. -7%

Euro 12 -29%
Of which,
Germany -37%
France -28%
Italy -34%

However you slice it, the same observation holds true: European countries as a whole, and especially the major “social market” economies of Germany, France and Italy, have lost 20% – 30% of their share of global GDP versus the U.S.

2. Exactly as Mr. Chait indicates, GDP per capita would be a far better measure of prosperity – which is why I used that metric when discussing relative prosperity earlier in the piece. I used total GDP in the paragraph in question for the reasons I stated in the article. This was a description of the loss of European economic power to Asia. Ultimately, absolute size of an economy matters, because economic clout represents the latent capacity for military and cultural power. Not all large, successful economies become military powers, but many do. And per capita wealth will not protect a society from a large, aggressive military power. As an extreme illustration, annual GDP per capita is more than $40,000 in Hong Kong and more than $30,000 in Taiwan, but this did not allow Hong Kong to remain independent of PRC China, which has annual GDP per capita of about $6,000, and would not allow Taiwan to do so without the presence of the U.S Navy.

UPDATE: Reihan Salam:

Jonathan Chait of The New Republic suggests that Jim Manzi wasn’t comparing apples to apples in his National Affairs essay. Jim responds directly, and convincingly, here, but I have some additional thoughts.

First, we’re dealing with counterfactuals and ideas that are difficult to soundbite. The real mystery, as I suggested below, is why Europe didn’t grow much faster than it did relative to the U.S., which, by virtue of being the economic leader, should have experienced slower productivity growth than economies that were simply applying its lessons to their own economies — applying high savings rates to implementing techniques that had proven successful in a competitive environment.

I’d go further. The United States had a number of handicaps relative to Europe over this period, including the burden of very high defense expenditures and a tax system that focuses on income rather than consumption, unlike the more efficient (and more regressive) tax systems that predominate in Europe. Also, our educational system — not exactly the most neoliberal feature of the U.S. economy — failed miserably to yield the productivity gains we saw across other domains of the economy. Our human capital advantage, which was enormous for most of the 20th century, eroded and eventually vanished.

Moreover, the U.S. did a far better job of creating an inclusive labor market, which absorbed workers from throughout the developing world but particularly from neighboring Mexico, where more-skilled individuals tended to stay in-country or migrate to large cities while large numbers of less-skilled migrated to the U.S. There are costs and benefits to this strategy, and it may be productivity-enhancing due to the match between increased work effort among more-skilled Americans and the use of less-skilled to outsource household labor, e.g., child care, preparation of meals, etc. But it could also have proven a drag on productivity per worker hour.

Given these challenges, why did the U.S. experience relatively robust productivity growth? One argument — which I believe — is that we unleashed the entrepreneurial energy of Americans in such a way that we overcame these challenges. Had we also pursued aggressive education reform and tax reform and entitlement reform, and if the USSR decided to go under a decade early or Europe decided to bear a fair share of the defense burden, it seems plausible that the U.S. productivity growth edge would have been even higher.

Matthew Yglesias:

There are three main differences in living standards between the United States and Europe. One is that the US has long been somewhat wealthier than the biggest European countries, dating back to the 19th century. Two is that the US is much less egalitarian than Europe—a bigger share of European output is in the hands of the poor and the middle class, and a smaller share in the hands of the rich. The third is that Americans work more than most western Europeans:

Hours_Worked 1

These last two show us what I think is the real meaning of social democracy for a developed country—you get more equality and more vacation, with no real impact on the rate of growth. There’s a case to be made that less vacation and better televisions are a better deal than more vacation and worse televisions (the two things I like to do on vacation are go to Europe and watch TV, so I have mixed feelings about this) and there’s a tradition of philosophical argument which holds that the failure of modern mixed economies to be sufficiently solicitous of the interests of the wealthy is a major source of injustice. But though some level of income inequality would seem to be necessary to achieve economic growth, within the range that actual developed countries exist at there’s no evidence that inegalitarian policies boost growth.

UPDATE: Justin Fox at Time

Reihan Salam

Ross Douthat

UPDATE #2: Jim Manzi responds

UPDATE #3: Chait responds

Manzi responds to Chait

PEG at TAS

UPDATE #4: Paul Krugman

UPDATE #5: Manzi responds to Krugman

Noah Millman at TAS

UPDATE #6: Krugman’s column today

Tyler Cowen

Matt Y. on Cowen

UPDATE #7: Dan Drezner and Henry Farrell at Bloggingheads

UPDATE #8: More Manzi

More Krugman

More Salam

UPDATE #9: Gail Collins and David Brooks at NYT

Ross Douthat

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2 Comments

Filed under Economics, Go Meta, History

2 responses to “Jim Manzi, On The Edge

  1. Pingback: What We’ve Built Today « Around The Sphere

  2. Pingback: What We’ve Built This Weekend « Around The Sphere

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