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Thank you Tom, I am going to talk for 20 25 minutes, mostly about China, a little bit about Robert Frost, do we have any Robert Frost fans in the audience? Good. I am a I am a big Robert Frost fan. But when we open up for questions just feel free to ask anything you would like about what we are talking about in the talk or outside, related to economics or economic policy. I want to start with a confession. It's a little bit awkward you know please don't tell anybody this. Okay it's just between us, okay. I am not normal. This is being I see taped, it's a little bit scary you could probably tell a few friends, it's okay. You know I realized this, the lack of my normalness particularly when I am in a parking garage with my four kids, because when I am in a parking garage I love the acoustics and I often burst into song. So you know, the acoustics in here are really I am a little bit worried about them. But I am going to give it a shot. You know I am a big fan of Robert Burns and people who are like Robert Burns. So I will be in the parking garage and I will be with my four kids and I will do something like this. And I will clear my throat and they will get nervous and I go, "oh my love is like a red, red rose that's newly sprung in June", thank you. It sounds much better in the shower or the parking garage. But when I hit that opening note that, "ohhhh", they panic and they start pulling on me, dad, dad come on. At first I thought, may be they don't like Robert Burns. But I don't think that's it. It's just that they don't hear lot of other dads in the parking garage singing at the top of their lungs and they say that's not normal. So about I am kind of aware of it. But I recently realized just how abnormal I am. I read a book that just came out by a woman named Sara Bongiorni and it's called a year it's called 'A Year Without "Made In China"'. One day during the Christmas holiday seasons Sara Bongiorni realized that, as she put it, Christmas was made in China. She later finds out that Halloween is made in China, July 4th is made in China, her clothes closet is made in China, virtually every toy, every anything made out of plastic is made in China, everything her kid wants is made in China. And it scares her. After all in 2006 the US imported $288 billion worth of stuff from China. That's about a $1000 for every man, woman and child. And it's growing. In 2004 it was a $196 billion, then $243 billion, now $288 billion scary or not scary. Sara Bongiorni decided it was scary and she embarked on a year long experiment to see how hard it would be to buy nothing that was made in China. And she got her husband and her four year old in this crusade. And she spent the year buying nothing made in China. It was a very tough year. She suffered a lot. The book chronicles the suffering. And as she explained to her four year old her four year old didn't really go along with her road well, he'd see stuff he wanted and she would explain he couldn't have it and one day he said, why why is it again? And she said I just want to give other countries a chance to sell a stuff. And she spends hours on the phone, hours on the web trying to find where stuff is made, hours trying to satisfy some fraction of her son's list for Santa because almost none of it is almost all of it is made in china. She spends hours designing a home made mouse trap. She has a mouse in the kitchen, the American made traps or the Victor traps, the snapping things she wants a humane trap, they are made in China. She makes her own trap out of a milk bottle a milk jug. Her husband spends hours sewing their own sleeping bags from scratch. Now this part you know it sounds like I am making this up. It's in the book. Her husband has a growth in his eye and he is supposed to wear sun glasses to protect them from sunlight, this growth. But because all those cheap glasses are made in China, she makes him go without for while until she can find some used ones or the Italian ones are 150. That interesting calculus 150, husbands eye sight, she goes with keeping the 150. But she eventually I think she would have broken down, but she eventually allows him I think somebody gives him some I can't remember, but gives him some sunglasses, whether they are made in China or not doesn't matter, gifts are allowed in the experiment. Now what did she learned from this? What did she learned from this? She learned that it's hard to live without China. I learned something too. I am not normal, chapter two; because I tell my kids I tell my kids it's good to buy stuff of China. One of us is wrong, right? She is worried about China; thinks we ought to be careful, may be not buy anything. I am aggressively encouraging my children to buy stuff from China. So we can't both be right. One of us is on the wrong track. I tell my kids, people in China are really poor, when we buy stuff from them it increases the demand for the skills of Chinese workers and drives up their wages. Now, did you hear that phrase? Let me try to repeat it again. Something like, when we buy stuff from China it increases the demand for the skills of Chinese workers and drives up their wages. And what would you call that that statement. What would you call that? It's a theory, right. It's an idea, it's a hypothesis, it's a claim, right. It's a claim rooted in my perverse world view as an economist, you see. I have got this weird view that prices and wages are determined mostly by supply and demand, even though China is not a market anything close to a free market economy, right. So my claim would be that when demand by Americans for Chinese stuff goes up that helps Chinese workers, is it true? Well, it's hard to measure precisely. But here is a remarkable thing. And this claim I am going to make now is a fact; I will put it in quotes. This is one of the many kind of facts you here in policy debates that are sort of true, all right, sort of true. Mostly true, kind of true, probably true here is the fact. "Since 1970 the number of desperately poor people in China has decreased by 250 million people". So roughly almost by the amount of the population of the United States there are a fewer desperately poor Chinese, even though the population of China is up about 400 million. So think about what that requires. It requires an enormous decrease in the poverty rate in China, so big that it compensates for the fact that the total population is growing, right. If the poverty rates is still constant and the population of China grew there would be hundreds of millions of more poor Chinese, but the absolute number of poor Chinese has fallen since 1970 as China has liberalized its economy, as China has joined the world trading system. I would argue that that is evidence it's limited, limited evidence for the view that trade with China is good for the Chinese; it takes desperately poor people out of desperately poor straits. Now I said it's a fact, a sort of true, a kind of true, a may be true, because you have to think about it for a minute, it's the kind of thing that rolls off the tone, right. Oh there is 250 million fewer poor people in China, it sounds great, doesn't it. But I didn't tell you what the definition of poor is, right. Definition of poor is about $1.50 a day. So you don't know whether they went from $1.40 a day desperately poor, to $1.60 a day, no longer desperately poor by the definition but still horribly poor, right? You also don't know whether the data are any good. Like who collects data in China, right. The Chinese, right. It's a very mobile and in many dimensions unmodern, still society those are crude, crude numbers. I wouldn't put a lot of deep faith in them. But I bet there are fewer poor people in China. I don't think its 250 million, don't know how much progress it made, but I would argue there is progress against poverty in China and the trade is a big part of that. Still long way to go, but I would argue the trade is part of the way we would go to make it better. By the way I told the kids the other night; I said to them I am going to mention you in this talk I am going to give over at Hoover and I am going to talk about how it's good to buy stuff from china, and I sort of told them about an article I had seen kind of an amazing thing that when you buy iPod an iPod is made in China if you look on the back and about iPod of say they cost $300, about a 150 of that is contributes to our "trade deficit with China" as a measure of stuff we import. So the value of that iPod, a lot of it is "made in China". But it turns out that only a really tiny, tiny fraction of the value added comes from China, because they are buying stuff from Indonesia and the Philippines that goes into it. And I was explaining that the trade deficit is a really tricky number and you know it's one of these fascinating conversations we have after we come out of the parking garage. You know, you got to get interesting perspective on life as a child of my family. You get the Robert Burn singing, then you get the trade deficit lecture, we did watch the entire All Star game last night and had a great time. I just want to mention that almost no economics mentioned that I can remember of here. But after I told my kids this about the iPod, my 12 year old had a brilliant idea he said you know, to help all those poor Chinese people you ought to buy an iPod for every kid in the family. They don't have any, right now. It's kind of it's what I love about. It's kind of the flip version of the eat your broccoli because there are people starving in India, right. It's a new world we live in. And by the way there are about 140 million fewer poor Indians people living in India because over the last 35 years or so for the same reason. That India has become more integrated into the world economy and as we and others buy services from India, outsourcing and computer programming and all the stuff that we hear about as being scary, in fact one of the things that's happening as a result of that is that people in India and China and elsewhere are much less poor than they were 25-30 years ago. One generation ago has made an enormous difference. What I really learnt about from this book that I read, by Sara Bongiorni, besides the fact that I am not normal because of what I tell about my kids, is the virtue of being and the good fortune of being an economist. People think that being an economist means you turn everything into a commodity. You know, it's all dollars and cents. It's all green eye shade stuff. But economics is really a form of imagination. It's like having X-ray vision. Knowing economics helps you see things that are real but can't be seen by just looking. You have to have an idea about the connections between things that economics gives you to get the full picture of what's going on. So one point in this book Sara Bongiorni laments what she calls the news of the week. So listen to this. Auto parts maker Delphi files for bankruptcy and is cutting thousands of American jobs, in part because of competition from far cheaper Chinese labor. Meanwhile China sends two astronauts into space. I don't begrudge China this milestone, but I wish there was some good news from home to latch on to. American textile workers continue to reel from job cuts driven by market encroachment by Chinese factories. So she is she wrote by the way, she is very conflictive in the book, she doesn't hate the Chinese. She even has a Chinese ancestor. So it isn't feel bad about but just worries are getting so big. So here is appropriate example, we have a factory closing and she wishes there were good there was good news from home, all the news seems bad, this factory closing, that factory closing. But there is good news from home. There is good news from home all around us that we don't see unless we know some economics. She sees a factory closing; she doesn't see the products and opportunities that are created because we trade with China. But they are there. All the jobs lost to China and Japan and Mexico and all the examples that we have given, of countries that we have to be afraid of because they are supposedly hurting us, those jobs are replaced by other jobs and more jobs. And the children and grand children of those textile workers that she is worried about will have better lives because of the jobs and opportunities that are created by trade. She only sees the bad news. She doesn't see that the good news is connected to it. When I tell my kids about how good it is to buy stuff made by poor Chinese, I also tell them how we are better of too. Not just because we get cheap iPods and shirts and shoes, although that's nice. But because we don't have to make everything for ourselves and let other people make stuff for us, we free up resources and opportunities to have more stuff than if we were self sufficient. If we try to make everything for ourselves, we'll be poor. Self sufficiency is the road to poverty. Think about the Chinese toy industry that she is particularly worried about. Are we really harmed by inexpensive almost, nearly free toys? If we said if we all have joined her crusade and said, "I am going to keep out Chinese stuff; I am not going to buy it. I am not going to buy any Chinese toy this year." If every American said that think about what would happen? Think about the when one person does that, it's just a painful experience that yields a book. But if we all did it, there will be something more complex that would be set in place, set in motion. One thing that would happen would be obvious. We would get an American toy industry that we really don't have now. We have a little bit of a toy industry in America, but we'll get a much bigger one, right. Our toy industry would expand dramatically and similarly, I mean it would be a fascinating experience, perhaps too animate, for us to look around ourselves and find out what we are wearing right now that's made in China, right. Every one of us right now probably is wearing something made in China. You have something in your pocket made in China. I am just wondering I haven't even look; my cell phone might be made in China, my shoes might be made in China. If we said we are not going to do any of that stuff any more; we are going to rebuild the great American ancient industries of textiles and clothing manufacturing and the toy industry and the watch industry and the shoe industry that used to fill the factories of New England and then South Carolina and elsewhere. We would have more jobs in all those industries. Where would those workers come from? What would we have less of? We would end up paying more for shoes, more for textiles, more for our watches, more for our clothes, more for our toys; we will be poor. More jobs in one area but fewer jobs elsewhere. You know it's like saying, if somebody gave you, it's purely it's a remarkable thing, it takes a tragic amount of economic ignorance. And I say that in the most benign and uncritical way possible. In America today the two great creators of our standard of living, if you had to get a pick two, would be China and the Wal-Mart, if you had to name somebody. All right. Those are really the underpinnings of our standard of living. But those are the things we can point to that have dramatically changed, in the last say 10-15 years, our command over goods and services and everything that those goods and services buy. And what are those two institutions, countries, companies doing? They are driving down the price of stuff, which is expanding what we can afford outside of the things we buy from them, which is expanding our standard of living and making us richer. And yet we have an enormous social movement, a cultural movement that says, dangerous, those things are dangerous. It's dangerous to shop at Wal-Mart. It's dangerous to buy from China. How would you how do you how can it be? Then in the country with the world's highest standard of living, in the most economically most successful country in history, that claim that buying cheap stuff is dangerous can take root among a non trivial portion of the population. It is the same logic it is the same logic that says it is better to farm with the hoe and a shovel than a tractor and a combine because tractors and combines take away jobs from farming. They do. But does anyone really believe that we are poor as a nation because only two percent of our population or may be one and a half works on farms instead of the 40 percent that worked in farming in 1900. Think about that transformation, from 1900 to today a change from 40 percent to one and a half because of technology. What logic says that was a mistake, because we lost all those jobs. That logic totally misses the fundamental thing that's going on when we find cheaper ways to do stuff. When we find cheaper ways to do stuff we get wealthy. It's the only way to get wealthy is to find cheaper ways to do stuff. And there are only two ways to find cheaper ways to do stuff, technology or trade. And they have the same liberating effect on our standard of living. Trade is about cooperation. It's about letting people do things for me or I in turn do things for them. Unfortunately Sara Bongiorni is not alone. China's success worries a lot of people, a lot of Americans think that when we trade with China or Japan or Mexico or India that some how they win and we lose. The success of China in this view means less for us some how. China is going to catch us and pass us as if economic success were like a race with winners and losers. Those worriers misunderstand the process of wealth creation and how China succeeds. Economic success is not like a race. China gets ahead by helping us. China's growth comes from selling us and other nations stuff that we choose to buy only because it's better, either cheaper or higher quality than the alternatives we have available and that makes us better off. A lot of Americans who do not understand this fundamental aspect of trade want walls, figurative or literal to keep out foreign products and foreign workers. Robert Frost has some advice for the builders of walls. Before I built a wall I would ask to know what I as walling in or walling out and to whom I was like to give a fence. When we wall out foreign things, be they workers or products we can see the benefits, more jobs making toys and shoes and textiles, the loss is harder to see. Fewer iPods, fewer heart devices, fewer resources for all kind of things we care about. And most importantly an economy and a life that is less dynamic and less creative. If you want to make the world a better place keep buying stuff made in China free of guilt. Thank you very much.