Pulling out the comparative advantage card

Since everyone is talking about the drop in manufacturing output and employment and trying to figure out “how to fix it” I thought I’d pull out the old comparative advantage card to show why it may not be a problem.   In case you are wondering what it is, Wikipedia is always rock and roll.

New Zealand is a sparsely populated country that is far away from most large international markets. With fuel prices going up, increasing vertical integration (when different aspects of the production process are joined together in the same firm) and the rise of just-in-time inventory management, more and more manufacturers are positioning themselves “close” to market.

This trend, combined with the benefits of agglomeration in production and the improving use of technology overseas, has made manufacturing in countries like New Zealand less and less competitive.

This is tough for people who have invested time and skills in specific forms of manufacturing, but in so far as these changes are the result of changes in technology and the habits of global consumers, we cannot stand in the way of them.

And this is the flipside – although New Zealand is comparatively bad at manufacturing things that require large scale (such as say cars) it is comparatively good at other things (producing milk).

Other countries having become more productive in the export manufacturing space it actually a good thing for New Zealand as a whole – as it has driven down the price of what we buy from overseas relative to the price of what we sell.

This can be seen in our terms of trade (the ratio of export prices to import prices), which has risen 10% since manufacturing activity peaked.

No doubt my article may overstate the case – I would prefer not to make a policy based conclusion until there is some data heavy analysis of the issue.  However, given that changing technology and production patterns around the world will be a major driver of what is going on I felt that the argument actually needed to get some air.  I have noticed that it is popular to focus on esoteric issues when looking at what is going on – among both economists and non-economists.  However, doing so often leads us to lose sight of some of the most important issues!

As people who have done training in economics we have covered this issue a number of times on the blog (eg *,*,*,*,*) – the key point is that we need to understand “why” something is going on before we can truly define whether it is good or bad, change in itself is not bad.  Some people may not like the “descriptive” vs “prescriptive” split economics pushes, but it is the most transparent and honest, and dare I say it scientific, way of doing things.

Joining in on the robot pileup

Here is me talking about robots.  Here is the conclusion:

One of the concerns is that even with current technology robots can essentially work for an implied wage of $4 an hour achieving many of the same tasks that a low skilled worker can achieve. If robots could do all unskilled work for $4 an hour, where does that leave our hypothetical low skilled worker?

Even in the extreme case, where there are a set of people who could never have the skills to be gainfully employed due to the arrival of robots, the answer here is not to stand in the way of the technological improvement.

The key question to ask is how does the individual live in a society where the “reservation job” now pays a lot less?

The simple answer seems to be that we allow people in this situation the opportunity to increase their skills, and where they can’t redistribute some of the gains from mechanisation to these people in the form of an income payment – where the income payment represents the fact that the “reservation job” that previously gave an individual a certain standard of living no longer exists.

The existence of an unemployment benefit, the existence of student loans, and the subsidisation of education are clear and consistent methods that society has already taken on board to deal with the possibility of the increasing mechanisation of low skilled work – and it is this these types of solutions that are appropriate moving forward, not an arbitrary call to stand in the way of technological innovation.

As a result, the rise of the robots is not something to fear, as long as society and the government that represents it are conscious of the changes that are occurring – and that they provide a security net for those who may otherwise lose out.

With great power comes great responsibility

Romer and Romer think monetary policy could do more if only central bankers believed in themselves. Scott Sumner might agree these days.

Our thesis in this paper is that overly pessimistic views about the power of monetary policy have been a more important source of these errors than have overly optimistic views. There is little doubt that an overinflated belief in the power of monetary policy has contributed to some major policy errors. Most famously, policymakers in the mid-1960s believed that they faced an exploitable long-run inflation-unemployment tradeoff, and thus that monetary policy could move the economy to a sustained path of low unemployment and low inflation. This belief led them to pursue highly expansionary policy, starting the economy down the path to the inflation of the 1970s. The record of such errors has led many to argue that perhaps the most important attribute of a successful central banker is humility.

In this paper, we present evidence that the opposite belief—an unduly pessimistic view of what monetary policy can accomplish—has been a more important source of policy errors and poor outcomes over the history of the Federal Reserve. At various times in the 1930s, faced with the Great Depression, Federal Reserve officials believed that the power of monetary policy to combat the downturn or stimulate recovery was minimal. In both the midand late 1970s, faced with high inflation, policymakers believed that monetary policy could not reduce inflation at any reasonable cost. And there is evidence that in the past few years, faced with high unemployment and a weak recovery, monetary policymakers believed that policy was relatively weak and potentially costly. In each episode, the belief that monetary policy was ineffective led to a marked passivity in policymaking.

Matt Yglesias comments.

Embarrassment is a barrier to sales

Why shop online? Avoid the embarrassment of mispronouncing foreign words or being viewed as a giant fattie! Nom nom nom nom…


We show that social interaction reduces the diversity of products purchased by consumers in two retail settings. First, we consider a field experiment conducted by Sweden’s monopoly alcohol retailer and find that moving purchases from behind the counter to self-service disproportionately increases the sales of difficult-to-pronounce products. Second, we use individual-level panel data from a pizza delivery restaurant to show that online orders have greater complexity and more calories, which increases both consumer and producer surplus. Combined, these results suggest that social inhibitions can substantially affect market outcomes, likely due to consumers’ fear of embarrassment.

Impact of file sharing on film industry

Interesting that movie downloads haven’t had a significant impact on video rentals. That will probably change as video streaming services like Netflix become more common.


The music industry has struggled during the past decade due to file sharing and movie business executives fear the same fate. This paper seeks to provide measurements of the effects of peer-to-peer file sharing on the movie industry. We use a long panel of data at the country level containing information on theatrical, video rental, and video retail movie commercial performances, as well as Internet and broadband penetration. We compare the impacts of increased high-speed online connectedness replacing slow-speed Internet connectedness before and after the introduction of the second-generation file sharing technology that has made movie file sharing feasible. This empirical strategy allows us to isolate the effects of file sharing from any other possible Internet impacts on the commercial performance of movies unrelated to file sharing. Our results indicate that the effect of peer-to-peer file sharing is negative and large on video sales, but we do not have confidence regarding the impacts of file sharing on either the theatrical commercial performance of movies or video rentals.

Get out and shout about it

Another study where the main question is whether you believe in their identification strategy.


Can protests cause political change, or are they merely symptoms of underlying shifts in policy preferences? We address this question by studying the Tea Party movement in the United States, which rose to prominence through coordinated rallies across the country on Tax Day, April 15, 2009. We exploit variation in rainfall on the day of these rallies as an exogenous source of variation in attendance. We show that good weather at this initial, coordinating event had significant consequences for the subsequent local strength of the movement, increased public support for Tea Party positions, and led to more Republican votes in the 2010 midterm elections. Policymaking was also affected, as incumbents responded to large protests in their district by voting more conservatively in Congress. Our estimates suggest significant multiplier effects: an additional protester increased the number of Republican votes by a factor well above one. Together our results show that protests can build political movements that ultimately affect policymaking, and that these effects arise from influencing political views rather than solely through the revelation of existing political preferences.