1/18/2008

01-18-08 - 1

Economists who argue that there is no disadvantage to job losses caused by free trade are being intentionally dense, and it's frustrating. The debate is centered on the affects on the US in terms of outsourcing - we lose some manufacturing jobs to 3rd world countries, and in exchange we get cheaper goods to buy. Basically their argument says the net benefit from the cheaper goods is greater than the loss of someone's job. They argue that someone losing their job because it's no longer as cost effective as overseas is nothing to be bothered by, and the types of jobs we do will wind up being more efficient and profitable.

This is all sort of true, but it's also very naive and "1st level" discussion. It's the background that everyone should already know that gets us started talking about the more subtle issues.

1. risk/stability of jobs : Every economist should know that making a "trade" (in this case giving up a manufacturing job for cheaper goods) is not necessarilly good just because it's +EV - you need to look at the risk you're accepting as well. Manufacturing jobs provide a powerful stabilizing base to an economy. It provides a certain number of jobs at a factory which you know with relatively high certainty will be there, because the company needs to keep the factory pumping. Having a stable job base like that has value far beyond its basic income level, because it smooths out economic bumps and it provides a reliable job for people in a certain location. Different types of job are more or less fluid. Jobs that require little specific training and low cost or time to set up are very fluid (call center operators is one example). Some jobs are very non-fluid, which brings us to :

2. industrial inertia and economic fluctuations : Having an economy based entirely on fluid jobs is very dangerous, because it means that those jobs can quickly leave for more suitable places if economic conditions change. Having an economy based on very non-fluid jobs such as manufacturing is very stable in the sense that even if it becomes more desirable to have those jobs elsewhere, it will still take a lot of startup money and time to get them set up there. The problem is that once you lose those manufacturing jobs, you are now in the position of having difficulty getting them back. Say the world economic conditions swing the other way and suddenly it would be best for you to get back into manufacturing. Because it's not a fluid job, you can't just do that, you don't have the trained people, the facilities, the infrastructure, and you may go through a very long recession before you can get back into manufacturing. BTW this is why there is some value to producing your own food and extracting your own natural resources even if it's not the cheapest place to do it, just to keep the capacity domestic so that you have some stability in case you need it.

3. nonlinear value of money : When a worker loses a job and we get cheaper goods, our economy may have a net benefit, but who gets that benefit? It's generally everyone but the workers who lost their jobs, even if they get other jobs the median salary of the new jobs is much lower. It maybe +EV in terms of total dollars in the economy, but it's unclear if it's +EV for the median (not the mean). In particular we'd like to judge using a nonlinear measure of value. Providing slightly cheaper goods to rich people is of very little benefit to the economic health of the society. Providing a slightly higher wage to the lower/middle class is of much greater benefit. Basically dollars should be valued at something like log(dollars) per person.

4. individual difficulty of job change : In general, there are a lot of people who say "if your employer is rotten, get a different job" ; they treat jobs as if they are a fluid thing where someone can just jump to the most suitable job, and thus the system will shake out so that the appropriate jobs go to the appropriate people. The reality is that job change is very difficult and of very high cost (both monetary and non-monetary cost). For example, someone who loses a manufacturing job may need years of expensive training to find an equivalent job; that's not only high cost, it's high risk since they don't know if that job will be there when they're done. They may have to move to a different part of the country; again that's high cost and high risk and has very high non-monetary cost, they may have various reasons they want to stay where they are in their home with family/friends etc.

Now, what should we actually do about it? Then we can get into interesting tradeoffs. Protectionism is very bad in a lot of ways; certainly the extreme French-style protectionism is very harmful. The US has long practiced (and still does) protectionism through subsidy and tarriff. On the other hand, contending that losing stable manufacturing jobs is not a bad thing at all puts us back on level 0 where we can't even start an interesting discussion because we're arguing about what the problem is.

This has been a brilliant tactic for scuttling progress on a myriad of issues. The most obvious is global warming, where instead of having a mature discussion about what we should try to do about global warming and what the costs would be, instead we're mired in this ridiculous farce of a debate over whether it even exists.

Let's be clear, free trade on the whole is generally good (though what we have now is really a complex set of rules that distort the system far too much to be called "free"). The benefits on the whole are too good to pass up, but that doesn't mean we should ignore the downsides. If we can make some small policy tweaks to shift the economics so that good quality stable jobs are viable in our country, that's clearly a good thing.

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