US Economy and Permanent Job Losses

Great Debates
81

Been there. Hate it.

[hijack]

Certainly worth asking. I must say that I can’t say.

Neo-classical economics, in some sense, can be thought of as pretty much what most economists utilize to do economics. Again, others may contradict me on this, and you can judge their arguments. Of course, there are more knowledgeable people than me, so caveat emptor.

It has been said, more-or-less correctly IMO, that the layperson thinks that there is disagreement in economics where most economists and certainty in economics where economists disagree. In neo-classical economics, the basic “unit,” the consumer, is built axiomatically. There are two very simple and general statements about her preferences, and these are made in precise logico-mathematical language. With these, and a couple assumptions about budgets for example, economists have created a series of mathematical if-and-only-if links proving that if a consumer has certain preferences, she will choose in a certain way; and if she chooses in a certain way, then she will have certain preferences. What they’ve done is used math to actually look inside a person’s head and (possibly) make definite conclusions.

Do people choose in this certain way? This is the first point of controversy. There is a growing body of experimental evidence suggesting that they do, to a fair approximation. Experiments on rats & pigeons find them to choose consistent with rationality. One study of some 140 subjects found the vast majority to choose not only consistent with rationality, but also so that to choose that way they must have been rational. Of the ones who didn’t, one or two minor changes brought them in line w/ rationality. There was only one subject who was irrational in an economic sense. I saw the choice set that they had to pick from, and those errors looked pretty understandable. If you wish, google for “experonomics,” and you will find two online journals whose contents are classroom experiments in economics. I think you’ll be impressed with the range of experiments that are being increasingly used as teaching tools to show students that what they’re learning isn’t Ivory Tower Crap.

The consumer is built up from there, adding assumptions like no lexicographic preferences. That is, a person won’t judge consumption with one particular item being the first choice. For example, there is a great car at a great price, but it doesn’t have cup holders vs. a lemon at a high price with cup holders. Someone who lexicographically prefers cup holders will take the lemon. We don’t even have such a strong preference for air; if we did, people would have done whatever they could to get out of L.A. and live in the country.

What we end up with are models built in tight, compactly reasoned mathematical statements from basic assumptions whenever possible. I think that neo-classical economics has more-or-less become synonymous with this sort of reasoning, and the growing experimental filed is just one more part of that. Personally, I think it is fair to say that neo-Keynesianism, rational expectations, monetarism, real business cycle, etc. have been more-or-less subsumed into this way of thinking. Moreover, I would bet that most economists would use these various tools as needed. And if one fails to deliver, the evidence, the assumptions, and the logic will addressed and improved, modified, or scrapped as needed.

To put it another way, I think that monetarism, neo-Keynesianism, etc. are all models in the same paradigm: Neo-classical economics. Others may disagree.

Austrian economics and Marxism are whole different paradigms. At the risk of getting myself beat up, Austrian economics is basically philosophy, and has completely abandoned, or never even tried to utilize, the scientific method. As gurus utilize Deepak Chopra, so politicians may utilize Austrian economics.

Marxism is dead, its zombie corpse cruelly paraded by those who don’t have olfactory receptors and are unable to smell the stench of death. To put another way, Marxism is to economics as Zeno is to motion. I’m sure there are some who will disagree with this assessment as well.

[/hijack]

It is certainly reasonable to ask if there are shifts in which models are best or most accurate. It wasn’t very long ago that unequal information was incorporated into economic models, and that caused an expansion of economic thinking with good results. Lemon laws being one example.

I would suspect that most fundamental shifts that are motivated by the real world will arise from the field of experimental economics rather than the U.S. or world economy as we see it. I’m trying very hard to think of things that are unexplained or contradict the current paradigm. I think that the information age really won’t cause any big theoretical shifts because it is just lowering costs and making information more easily available. I would suggest perusing Hal Varian’s web page, www.sims.berkeley.edu/~hal/ , and going to his links on articles and papers—the papers link does have many non-techical articles. You will find some interesting stuff, I’m sure. David Levine also has a rich site for information on game theory & intellectual property: http://levine.sscnet.ucla.edu/ .

I’m betting that regulation/de-regulation will be one of the richer sources for economic innovation. Market design is going to be affected by the results of this sort of stuff. There are also issues of choice and uncertainty that may be affected by real-world observations. E.g., a finance Ph.D. student once told me how nobody could yet explain why there is consistently a price overshoot for IPOs. Also, learning is a rich field of research. (I think you can find some papers on that under Levine’s recent papers link.)

But the trends in the news just aren’t the sort of things that cause problems. Out-sourcing, trade, etc. have been around for a long time and for most economists it is a settled issue. Economists might see protectionist & anti-out-sourcing arguments the same way that an evolutionary biologist may see young-earth creationist arguments. They are of about equal merit, and both are hopelessly out of date. The move away from manufacturing isn’t very ground-breaking: Unions have monopolies in the labor markets—give the entire computer software industry to Microsoft and tell me that we could expect great results; American secondary education is not up to par; the information age is making service jobs more productive and expanding the possibilities; more people are becoming better educated elsewhere in the world; other countries’ infrastructures are improving; I’m sure the list could go on.

So I just don’t see any real reason why the economic changes making headlines should affect economic theory. It’s economic theory that is ready to discuss, understand, & explain what is happening; but, people just want to believe what they want to believe. Economists don’t agree with them, therefore economics must change.

That’s my perspective, anyway. I’m sure there are plenty of qualified people who will disagree.

82

SS: Everyone wants the economic benefits of capitalism, but part of that benefit comes from the efficiency of its rather ruthless dynamism. If a company can’t compete, it dies. If workers can’t compete, they lose their jobs. If you try to shield us from the very forces of capitalism that make it so efficient, then in the end you’ll destroy the goose that lays the golden egg.

This is the crux, though: if that “golden egg” ends up benefiting only a minority of people, then why should the rest of us care if we kill the goose?

It’s simply not true that markets can do everything better than government can, or that markets will voluntarily undertake all the things human beings want their societies to do. It’s up to the market to demonstrate that it really can provide the benefits we want.

If the market isn’t delivering what we want when we want it (not just promising pie in the sky a couple decades down the road), then by golly, we’re going to supplement it (hopefully in wise and moderate ways) by government action. And we’re not going to be deterred by market fundamentalists uttering vague but dire prophecies about how we’re going to wreck the whole economy by daring to interfere with the “ruthless” (but somehow simultaneously terribly fragile and wreckable) “dynamism” of capitalism.

83

To me, the crux of the issue is what is “wise and moderate.” There are a lot of different solutions being thrown around, and I’m not sure how many of them are in fact “wise and moderate.” Refusing to provide subsidies to companies that are outsourcing most of their labor is one thing, levying prohibitory tariffs and enacting compulsory import quotas is another. Due to the nature of the American political system, however, I expect most remedies that are actually passed into laws will be “moderate” if not necessarily “wise.” It is simply not a foregone conclusion that any regulation of imports or labor outsourcing will necessarily benefit anyone, including the lower income groups. Such regulations even have the potential to harm these groups, and only rational, educated discussion can weed out the good suggestions from the bad.

I can also tell you that wise solutions must take into account the fact that we can’t have everything we want all the time due to the limited nature of all resources. Nearly without fail, there are going to be costs and we have to figure out what they are and how the compare to the potential gains.

Anyone who says “we shouldn’t do this just because markets should be free” is not saying anything of significance. It is a good general principle, but it is the rare economist that will not acknowledge the existence of market failures that can be at least partially remedied through government action. At the same time, “we need to do such and such because the poor are hurting” doesn’t really help us, either, because we can do a lot of harm very quickly if we enact very poor regulations. The proper solution, obviously, is to think of things we can do to improve the situation, and then rationally discuss the pros and cons. “Free Markets All the Time” and “Won’t Someone Please Think of the Children?” don’t really get us anywhere.

84

As opposed to giving the market free rein to do as it likes, which is the cause of the current problem, eh?

The auto industry may be “healthy” again, but the auto workers aren’t – I’m sure Michael Moore would gladly take you on a tour across the vast swatches of Wisconsin and Michigan that are still trying to recover from the departure of the Big Three auto makers.

But hey, who cares about the workers, as long as the companies are profitable, right? They’re just people…

85

I didn’t just talk in vague terms about free markets. I pointed out some specific things going on here:

  1. U.S. computer professionals were overpaid and underqualified, due to the tech boom.

  2. Indian programmers are paid roughly what they are worth. They are not worth as much as American programmers due to their location, lack of infrastructure, language difficulties, etc. This means they aren’t going to be taking over. They are one hiring option among many. This can be easily seen by the fact that the amount of IT jobs being outsourced is still very small (something like 425,000 total tech jobs have moved overseas, out of a total industry size of what, 10 million?)

  3. If Indian programmers become better and eliminate some of their disadvantages, their wages will rise, offsetting the new advantages.

  4. Many IT jobs are never coming back. Not because of outsourcing, but because the industry was far too big to begin with due to the tech boom. Blaming job losses in IT on those damned foreigners makes for good politics, but in reality it has a lot more to do with unreasonable expectations of jobs and wages in the U.S.

  5. Over time, wages in the U.S. will fall to reasonable levels, the people unwilling to work for those new wages or unable to find jobs will retrain and move into an industry that has a demand for their labor.

I’ve been around long enough to see this protectionist crap rise up at least two or three other times. Foreigners have been ‘stealing’ U.S. jobs for decades, yet somehow the U.S. manages to have one of the lowest unemployment rates in the modern world. The real problem is political - the drawbacks of international trade are quite visible, but the benefits are diffuse. If 100 million people get cars at lower cost and higher quality, that’s a huge boon to the economy. But it’s fairly invisible. But if a plant closes, you have a thousand angree people writing their congressmen and marching on Washington. The political playing field is skewed against free trade.

But if there is one issue economists of all political persuations agree on, it’s the value of free trade.

86

Are you talking to me? or to whom?

I hope it is not me, because I agree with you.

GM and Chrysler already are foreign outsourcing 40% of their engineering, and they plan to increase that to over 80%. Microsoft, oracle, Intel, Boeing, and others, all are expanding their engineering staffs and R&D centers in asia - not here.

87

[QUOTE=KimstuThis is the crux, though: if that “golden egg” ends up benefiting only a minority of people, then why should the rest of us care if we kill the goose?
[/QUOTE]
Well said. However, you’d have to prove beyond most doubt that only a minority of people are benifiting. Simple angst about relative disparity won’t do it here.

from another post:

Can you give evidence of this? Certainly there are “many”. “many” can be several hundreds. But can you give evidence that this “many” is any sort of significant percentage of the ordinary Americans?

Just to be clear, are you suggesting that we’d have a greater quality of life with a lower productive, high-jobs, maximal-taxation economy?

88

I never claimed that auto workers would forever more be guaranteed high wages. But I don’t see you shedding tears over the decimated telephone operator industry, or the receptionist industry destroyed by advanced phone systems. Efficiency improvements often result in labor displacement. That’s too bad for the workers, but trying to ‘protect’ us from those displacements costs a hell of a lot.

Auto workers may not make as much as they used to, and there may not be as many as there used to be, but on the other hand I can buy a car that is orders of magnitude better than what I could buy with the same constant dollars in 1978. So all those OTHER workers out there who have to use part of their paychecks to pay for the purchase and maintenance of the cars benefit greatly. Don’t they count?

Did you advocate ‘protecting’ telephone operators by making PBX automation illegal? How about a PBX tariff to make such systems expensive so that operators could keep their jobs? Perhaps a tariff on laser printers would have been a good idea so we could ‘protect’ the small print houses, which have largely vanished in the past 20 years? Would that be a good thing?

Now, let’s say instead of technology eliminating these jobs we would have ‘outsourced’ our telephone operators to Asia. The jobs in the U.S. are still gone, and for the same reason - improvements in efficiency. I’ll bet if they had been lost this way there would have been a huge hue-and-cry about jobs being ‘stolen’, and calls for legislation to protect the poor beleaguered telephone operators. But the issue is exactly the same. It doesn’t matter if the thing that cost the operator her job was a person in Asia or a black box in the room next door.

The protectionist impulse needs to be avoided. It’s an easy issue for politicians to demagogue over, however, so we’ll have to suffer listening to it forever.

Perhaps a new Smoot-Hawley tariff will solve all our problems!

89

desdinova: Refusing to provide subsidies to companies that are outsourcing most of their labor is one thing, levying prohibitory tariffs and enacting compulsory import quotas is another.

Sam Stone: *I’ve been around long enough to see this protectionist crap rise up at least two or three other times. *

Just to clear up where I personally stand on the issue of protectionism in general, from my first post to this thread:

Kimstu: I think we can all agree that the effects of free trade in the long run, between economies with roughly comparable labor markets, are bound to be positive overall. It’s the good old principle of comparative advantage […]

Also see my anti-protectionism posts in the parallel “McJobs” thread.

desdinova: *I can also tell you that wise solutions must take into account the fact that we can’t have everything we want all the time due to the limited nature of all resources. *

Very true. It never hurts to be reminded that utopia is impossible under any economic system, although I don’t see anyone here suggesting the contrary.

*Anyone who says “we shouldn’t do this just because markets should be free” is not saying anything of significance. It is a good general principle, but it is the rare economist that will not acknowledge the existence of market failures that can be at least partially remedied through government action. *

Meet Sam Stone, a rare economist. Actually, if pushed to the wall, Sam generally will admit that market failures sometimes exist and that government regulation and social safety nets are not all bad. But most of the time he is just repeating the general principles of his free-market creed, as in a recent post here:

I agree with you that Sam’s oversimplified generalizations about the virtues of markets don’t contribute much to a discussion of specific economic problems, and I will try to refrain in future from countering them with oversimplified generalizations about the limitations of markets.

SS: The real problem is political - the drawbacks of international trade are quite visible, but the benefits are diffuse. If 100 million people get cars at lower cost and higher quality, that’s a huge boon to the economy. But it’s fairly invisible. But if a plant closes, you have a thousand [angry] people writing their congressmen and marching on Washington. The political playing field is skewed against free trade.

You sort of make it sound as though a thousand people who’ve suddenly lost their incomes are only a political problem, not an economic one. Surely job loss and impoverishment, and the consequent shrinking of the tax base, constitute an economic burden as well. Yes, a devastating economic hit to a mere 1000 people probably has less overall impact than a small economic benefit to 100 million people. However, we’re not talking a mere thousand jobs lost in our present situation.

Moreover, you may be to some extent talking past the point I was discussing. I happen to agree with you that (as I pointed out in my above-cited first post to this thread) outsourcing is currently quite a small factor in jobs loss and “jobs deterioration”, the replacement of lost jobs with new ones that are worse. I’ve been assuming, for the sake of argument, epo’s and EC’s premise that current job shrinkage reflects something more serious and structural than an ordinary blip in the global business cycle.

So what I’ve been talking about in recent posts is not “how bad is the problem of outsourcing and how should we deal with it?” but rather “if what we’re seeing is actually the start of a ‘Permanent Job Loss’ economy that will never again adequately support its labor pool, how should we deal with it?”

90

Who says there is ANY price advantage because of foreign outsourcing?

Just because Nike shoes are being made by cheap foreign labor, does not mean that their shoes are now priced as low as the Kmart brand.

Companies use cheap foreign labor, not to lower prices, but to increase profits. There is no rule at all that any price will be lowered just because an american worker is fired and then replaced by a cheap chinese communist worker.

91

There are clearly a lot of very smart people here who can eloquently argue their perspective on the problem. However, few have presented a succinct list of actions that should be taken to rectify the problems in the most efficient manner in the shortest period of time. Let’s imagine that you are a candidate for President and have been asked the question - what do you propose to solve the problems we face in this area? You’re expected to come out with point solutions that are clear and don’t beat around the bush. If we don’t find a way to reemploy out-of-work people, then it is inevitable that the taxes of people working will have to rise to make up the government losses.

I’ll throw a few ideas on the table:

  1. Retraining guaranteed by the government for ALL outsourced or displaced jobs, regardless of if they are in manufacturing or any other job area. This retraining be would monitored and assisted by counselors (perhaps tied to the SBA?) that would try to help people prepare for and fit into an area where job growth is anticipated. Retrained would be guaranteed to start out at a minimum of 70% of their last pay before being displaced.

  2. During retraining, the person would be supported at 50% of their last weekly salary for some reasonable period of time (up to two years?).

  3. Corporations would pay a tax to support the above retraining proposal.

  4. Corporations would pay the same payroll taxes they currently pay for all employees, whether they were onshore or off. Contractors external to the USA would be considered employees of the HQ state of the company. Employees/contractors employed through an aggregator such as Wipro, TaTa, etc. would again be counted as employees of the HQ state of the company to eliminate any corporate attempts at finding loopholes to slip through.

  5. As Andrew Cuomo said on Hardball last evening, the wealthy don’t need more tax breaks. They have more money than they know what to do with now and are unlikely to invest their savings in creating jobs. So the portion of the tax cuts related to wealthy people, say over 250k annual income, would be repealed. These monies would then be returned to the government and specifically applied to retraining (as above) and job growth programs.

Now admittedly, these ideas are presented in a very simplified manner. Every action has an equal and opposite reaction, to quote Newton’s 3rd law of physics. As always we will be taking from someone to (hopefully) make life better for everyone. Obviously corporations and wealthy people (as defined at greater than 250k annual income) might/would not be happy. In that case, I suggest they consider moving to India, China, Mexico, wherever.

Instead of tearing these ideas to shreds, which would prove and solve nothing, I’d like to see people add/subtract and/or modify them. Perhaps we could wind up with some consensus on how the problems we face could best be addressed and the final list could be forwarded onto Congress at some point…

92

CITE?

Also, you should note that you quoted text by kimstu that I had quoted. Although I agree with him that price advantages are had by outsourcing, the rest of the sentiments expressed are his and not mine.

93

I’d have to ask what guaranteed means. do you mean classes provided, or do you mean that they can take classes and classes forever until they get a job?

What does unemplyment cover? I forget.

This is the most problematic. What do you do if a company here simply buys goods from a company offshore? What if the job was replaced with automation? How do you determine how many emplyees that automation is worth? Imagine a company that hires 1000 workers to produce 1,000,000 shoes. 10 years later he is using 100 workers to produce 10,000,000 shoes. Should he still pay the same amounts of taxes as if he had 10,000 workers? For how long? How will he compete with other companies which built a shoe factory last year and never had those jobs to lose?

The problem is not merely of how we define job loses and what to do about them. I can heartily agree that improvements in our infrastructure regarding ongoing education are worthy goals. But I would concentrate on finding the best sorts of education rather than simply throwing money at any that come along.

This is the silliest thing I have ever heard. I’m sorry, but how exactly do you not invest money these days? Simply putting it into a savings account (which I doubt very much is what such rich people do) amounts to making it available for investment. The only thing you can do with money which does not involve investing or supporting investments in some way is to stuff it in a mattress or burry it. While I’m sure that some people do this, I hardly think that every dollar over 250k that is earned is disposed of in this way.

Just to be clear, I did not intend to do this. I simply raised a few problems.

I agree with this sentiment. First, however, we need to agree on the problem. That has been the argument from the begining. It seems unlikely to me that a government program can be formulated to “create jobs”. However, there are some actions the government might take.

I’d recommend a more objective effort to establish free trade between America and the rest of the world. This means pressing for reducing trade restrictions sometimes and reducing local subsidies. That is, require that other nations play fair, but require it of ourselves as well.

Also, we need more understandable (not necessarily more accurate althoug that certainly helps) economic models to explain why free trade is a good thing. Some sort of model which explains the positive aspects of a dynamic economy (local and global).

It also seems to me that the federal government could do a lot regarding retraining without necessarily going into the retraining business. They could provide far more useful data, for instance, on which institutions are successful in retraining various demographics to new industries. They could provide data to the institutions on which methods are more effective.

While I would object to a corporate only tax to pay for retraining, I might be interested in a social security type of thing. Where a new payroll tax is instituted and the funds can be drawn on for retraining if and when needed.

94

Why oh why have I suddenly begun spelling although as althoug? Sorry about that. I’ve caught myself doing it about eight time this week. That last one slipped through.

95

Before we go off proposing all sorts of new intrusive government solutions to this ‘problem’, could someone answer this question please?

Question: How do these two events differ:

  1. A bunch of programmers lose their jobs to lower-paid programmers in India.

  2. A bunch of draftsmen lose their jobs to Autocad.

Please be specific. Bear in mind that there were hundreds of thousands of draftsmen 20 years ago. When I went to college the drafting program was almost as big as the engineering program. Most large companies had entire drafting divisions. These were skilled, highly paid workers. Most of them lost their jobs, permanently.

Follow-up question: If you could go back in time and un-invent Autocad to protect the draftsmen’s jobs, would you?

96

No, we have to protect against the abuse of training, training strictly to be trained. I don’t know how to do that.

Unemployment generally doesn’t cover much and typically lasts for only 6 months. In CA, it is now $410/week at the highest level. And you have to pay both state and federal taxes on this money, which I think is foolish. In the SF Bay Area, $410/week minus taxes won’t even pay most people’s rent on a one bedroom apartment, let alone food, utilities, Cobra health and incidentals.

I’m sorry but I don’t understand why you think this silly. Take people who have millions/billions invested in various funds, real estate, whatever. They get a windfall tax cut, giving them even more dollars. What do you think they do with that extra money? The Bush administration says they will take that money, turn around and start a new business that will hire people. But reality over the years shows that this doesn’t happen. They could well use their existing money to start businesses if they so chose. So the new money just gets put into a hedge fund or something. They don’t need the extra money to live (it will make absolutely no difference to them whether they have it or not) and they aren’t using it to start new businesses. So what did the portion of the tax cut allocated to this group of people accomplish? Nothing much, I submit. Cuomo says it better than I could. Go here Hardball transcript and search for the string “MARIO CUOMO, FORMER GOVERNOR OF NEW YORK”, which will get you into the right section.

The problem is well-defined already and has been for many years. Trained and experienced people are being pushed out of jobs and careers do to technological change and outsourcing. Many are unable to find equal employment for a wide variety of reasons. We don’t need more study and arguments, we need action!

I agree, but we will not have any success in trying to tell other countries what they should do. They will do what they feel is in the best interests of their own economy, so we have to assume that they will not do anything that benefits the USA only.

There is nothing inherently wrong with freetrade as a concept or theory. However, we must address the problem of lost jobs created by freetrade. Outsourcing has been accelerating since the 1970"s. We have done precious little to anticipate the problems that are caused which is why we find ourselves in this mess now.

And what would that do? What do you do for someone who is past 40, has been working in their career for 20+ years, has a kid or two in college and has been displaced? Provide them with some data on what they should have done? Or use the data to tell them what they should do now? Neither is of much help when you have the stress of providing for your family as your primary focus.

People have already paid for their education and training through college. The average person in CA pays approximately 40-50% of their income in taxes right now (23-33% Federal, 10% State, 7% FICA). Why should they pay more? If the corporation is doing the displacement for their own enhancement, why shouldn’t they pay for this program? As I posted elsewhere here, Warren Buffet says that on average few corporations pay their fair share of taxes (supposed to be at a 35% rate).

The bottom line remains that out-of-work don’t pay taxes or consume much. Marginally employed people pay little or no taxes and also don’t consume much. To take off on Trump in the Apprentice (“someone’s going to get fired”), I say someone’s going to pay the cost of maintaining the government and the services we have grown used to. If it isn’t the wealthy and the corporations, then it’s going to be the middle-American’s with jobs.

97

Great thread, I must say.
Getting to the meat of the problem:

Answer to SS question: 1 is deflationary. Hang on to that, I’ll get back to it.
iamme99: for this problem, retraining doesn’t do a thing. The problem is a glut of well-trained, highly skilled workers. There is no particular barrier to someone in India learning the skills that a worker is retrained in, so that in a couple of years we’re back to square one.

The crux of this problem is stunningly simple: now that communism is dead (China) and more moderate socialist solutions combined with protectionism (India) has been shown to be a very poor generator of wealth, the countries that tried these solutions now have huge numbers of very poor people they need to provide for. Ironically, the US, which never fell for socialism, and doesn’t practice protectionism to nearly the extent that most poorer countries do, is finding itself in the position of being quite literally besieged by the citizens of the countries that did practice these demonstrably inferior solutions. Weird, but true.
Now, the difference with number 1, Sam, is that number one is a symptom of a deflationary development: a massive expansion of the number of workers available to do the existing number of jobs. Obviously, in the long run, the number of jobs to be done will expand and all that, but the timing could be problematic for today’s workers: they could, after all, be dead before anything like that happens.
The simplest solution is contained in the phrase that describes the condition we’re addressing here: global labor arbitrage. Generally, crazily imbalanced arbitrage positions like the one we’re looking at here attract arbitrageurs who make outsized profits from exploiting the situation, until the cost gap is closed and the profits shrink to something normal.
In the current situation, the gap would be closed by a combination of salary increases and a rise in the currencies of the countries on the low cost side of the arbitrage equation. The problem, as I tried to point out way back, is that the currency part of this is being blocked by massive intervention by those benefitting from the trend. The result is that at this point jobs are being lost in the West that have no business being lost, simply because the Asian governments in question are deliberately undercutting on a price basis by suppressing what should have been an inevitable rise in their currencies which would have accurately expressed the relative increase of the value of the work being done by the citizens of their countries in international trade.
Obviously, I think we would all agree that the work being done today by the workers of China and India is worth more today than it was five years ago. Given that China’s currency is pegged to the dollar, and the rupee has been suppressed, as Kimstu pointed out above, this is not being reflected accurately.
Bush should be jawboning the bejesus out of these governments, and their enabler in Japan, which makes their suppressing operation so much easier, but he can’t because he has placed the US in the position of owing them for financing the current account deficit and fiscal deficit he has allowed to fester on his watch. So the solution is to get a president who understands the root of the problem and is willing to do what is necessary to attack it and solve it.
Quite frankly, I don’t think that even Kerry is up to the task, as he has shown zero awareness of the problem. Bush has already demonstrated quite unequivocally that in this as in everything else, he’s completely clueless. So I really don’t hold out much hope.
I expect the boom because it’s the path of least resistance at this point, since the suppressing operations have the side effect of allowing for a huge increase in the world’s money supply. That’s both inflationary and stimulative. It will make the problem worse rather than better, by allowing the current imbalances to continue, so when the boom is over, the imbalances will still be there, only worse.

98

One, it’s a matter of scale. Two, this displacement didn’t occur in a short time-frame.

There are relatively few draftsman who lost their jobs to Autocad and like programs. Because of their lower numbers, there was time and opportunity for them to retrain and transition into other technical jobs at equal or better pay level. As a country, we’ve had plenty of time to anticipate that the rate of technological change and outsourcing would increase and that we should prepare a plan of action for reemploying displaced white-collar level people. We have not done so. And so we thrash and flounder about, watching the country fall into a black hole while scratching our arse (off topic but the same thing is happening with climate change. One day we’ll have floods or icebergs or whatever and everyone will say - but this wasn’t supposed to happen for another 150 years or whatever. WRONG!).

99

I don’t tend to thnk training as govt. program is all that promising unless you have some kind of clear grasp on what sort of jobs people will be holding down in the future. That’s why I advocate creating conditions so unemployed by educated people can start their own businesses – let the people figure out what kind of work they can make decent money at, don’t try to predict the market.

I also find the earlier response from xtisme to my question, “Where will all these wonderful Happy Jobs come from that the free marketers are so sure will miraculously appear?” quite revealing. He said, “We don’t know, does the fact that we don’t have a time machine and can see the future make us wrong?”

Consider that admission in light of the fact that the most consistent response of free traders to the problem of massive job loss due to uncontrolled free market disruption of social order is, “We need more training for the unemployed.”

So, what exactly are these unemployed to be trained for, if we don’t know where the jobs they’ll be trained for will come from? I mean, isn’t it kinda stupid to train people for jobs that may not exist?

The correct answer is, from the free marketers’ POV, it doesn’t matter. Job training has the virtue of not affecting their precious marketplace. It costs a little, but not as much as most other solutions. It’s a placebo, a palliative. It’s something that free marketers can use to hide their complete disinterest in the suffering of the unemployed. And that’s why they advocate it.

100

Because while Sam deserves props for standing out in a group of above average individuals, in this case he has erred in his understanding of why the so-called free market is a Good Thing.

Let’s begin by throwing out non-economic issues and speak strictly of the Invisible Hand. Let’s also note that I’m not dealing w/ calculus here and I’m making this up off the top of my head, so the numbers may seem a bit screwey—just tolerate that and try to get the point, you can do it properly on your own.

Suppose you and I live on a deserted island. Gilligan’s Island notwithstanding, we are probably going to be living at subsistence levels. That means that any wasted effort is going to be a critical loss to our well-being. It is imperative that we produce what we need to survive in the most efficient manner possible. Let’s suppose further that our best source of protein is our friend the rat, whom we chase, bludgeon, and eat. Let’s pick an easy measure of our cost of production: The number of calories we expend in getting a rat is the cost of that rat. Since we eat rats pretty much every day, the primary benefits are protein, calories, and nutrients. Taste is pretty much a non-issue. Indeed, for simplicity, let’s just count calories from the rats so that we don’t have to muck up the logic and pull in a bunch of superflous variables to get to the same essential point.

There is one final assumption to lay out. Not every rat is equally easy to catch. Some are faster, some are more out in the open, some are more conspicuous by color. Since competitive mosquito slapping pretty much exhausts our taste for sport, we are going to pick the lowest hanging fruit first, so to speak. The first rats we consume will be the easiest to catch: the slow, white ones near the water on the beach. As we hunt, each rat will become successively more difficult to kill.

So suppose that you and I are hunting more-or-less independently since we’ve cracked our skulls together enough times to figure that the lower productivity is offset by the lower risk of concussions. In your area of the beach you have captured the five easiest rats to get. The next rat, the marginal rat, is going to take you fifty calories to catch. In my area of the beach I have caught the eleven easiest rats to get. My next rat, my marginal rat, is going to cost me 175 calories to catch.

Since we can’t afford to waste any calories, we want to minimize the number of calories we expend. If you were to catch one more rat while I catch one less, you will add an additional 50 calories to our expenditure, while I subtract 175—normally we’d be dealing w/ calculus so don’t worry that 175 is the marginal cost for my next rat while I’m uncatching, so to speak, my last rat; I just don’t want to muck up the terminology—giving us a net gain of 125 calories. You expend and extra fifty, I save an extra 175, netting a 125 calorie gain. What’s neat, and important, is that we’ve cut our costs without cutting the number of rats we get to consume.

Now you are at six rats and I am at ten and our marginal costs are 70 and 125, respectively. To reduce costs even further, you can catch a seventh rat and I can cut back and only get nine rats, thus netting us a cost saving of 55: my 125 calorie decrease minus your 70 calorie increase nets us a gain of 55 calories. And we are still consuming the same number of rats.

For argument’s sake, lets say that at seven rats your marginal cost is now 95 and at nine rats my marginal cost is 97. So if you catch eight rats and I catch eight rats, we will be saving two calories. (I did say that I was making this up off the top of my head…)

But look at this: After these adjustments we are still catching sixteen rats as we were doing originally, but we are catching the same number rats at a cost savings of 182 calories! By adjusting our hunting to get our marginal expenditures equal (as they would be if I were better at this…), we quite literally are creating an extra 182 calories out of thin air!

This is HUGE! Instead of hunting pell mell all over the beach, we can coordinate out takes by making sure our marginal costs are equal and we create wealth out of nothing at all. That’s what it means to be efficient.

A competitive market—a free market is a Good Thing if and only if it is economically competitive—is marked by this most important feature: everybody in the market faces the same price. What this does is to force all the producers (consumers) to sell (buy) at the same price. Why does it make producers do this? Because they are profit maximizers.

While you and I are existing at subsistence, hunting rats isn’t the only thing we do. We have to maintain our shelter, keep the firewood stocked, groom for lice, etc. So we want our rat catching to be profit maximizing as well as cost minimizing. Suppose that each rat has 96 calories of meat on it. If I’m at a marginal cost of 175 calories, I’m netting a loss by hunting my marginal rat: I’m expending 175 calories for a 96 calorie benefit. I want to keep cutting back until my marginal calorie expenditure is equal (or as close as I can get) to calorie benefit of a rat. If your marginal calorie expenditure is 50, you definately want to catch one more rat because it will afford you 96 calories at a cost of 50. You’d be a fool not to catch it. And you will keep catching more until the cost of a marginal rat is equal to the value of a rat.

What this means is that even if you and I were completely self-interested, by both being stuck with the same caloric value of a rat, we will minimize cost and maximize profits! The welfare of the island economy is maximized because we are price takers. By being forced to share the same caloric value of rats, our island economy will squeeze out every last available iota of well-being to be had there. No welfare is wasted.

This is the essence of the Invisible Hand. Because it is the market that sets the price and not any individual actor, everybody is forced to take the same price and therefore self-interested profit maximizers will produce the maximum amount of possible well-being without even being aware they are doing so. This welfare maximization has nothing to do with weeding out the weak, the costly, the bad rat catchers; this welfare maximization is the result of the price-taking condition forcing the market to run efficiently—no welfare goes uncaptured.

In my example, I had our marginal cost schedules the same and we only had one production good. What you need to internalize is the fact that economic efficiency obtains even if our cost schedules are different, and even if we are producing myriad goods. This has been proven mathematically. It is a rock-solid result, and no appeal to class warfare or Austrian rigamarole is going to dislodge this fundamental result. This is the First Fundamental Theorem of Welfare Economics, and any person who does not understand it has no right to claim an opinion on the good or ill of the market.

That there is a First Fundamental Theorem is telling. Why be first if there is only one? Well, there isn’t only one; there is the Second Fundamental Theorem of Welfare Economics. This is just as important.

A competitive market produces maximal well-being, but there is not statement in the 1[sup]st[/sup] Fnd. Thm. that the outcome that obtains is a desirable outcome. You would probably not be happy with an island economy where you were wasting to nothing while I was living phat, even if it was efficient. What the 2[sup]nd[/sup] Fnd. Thm. tells us, indeed proves!, is that any efficient outcome can obtain if we redistribute wealth and let the competitive market run unfettered.

What does this mean? This means that if the “golden egg” is not an acceptable distribution of welfare, then the way to solve that problems is not to kill the goose. Killing the goose will only make things worse. Dropping the goose, if the market—because of real-world imperfections, bad luck, etc.—ends up distributing welfare in a manner that is morally or ethically objectionable, the way to solve the problem is to redistribute the wealth and then let the market do its thing. You will be getting the maximum amount of well-being possible with a distribution that is morally justified. Scrapping the market will not do that. Scrapping the market is a fool’s paradise.

When one says that the problem with free trade is political, whether one is aware of it or not, one is saying that politics is not fairly redistributing the gains from trade through transfers of wealth. If you see a sugar grower being put out of business by foreign competition and you find that morally objectionable, then what you need to do is to fight to have wealth redistributed and then let that sugar grower make her own decisions about how she wants to live her life. Creating distortions not only forces her into making decisions that probably aren’t in her best interest, it does so in an unjustifiably expensive way by creating inefficiencies and destroying well-being so that nobody gets to enjoy it.