Fri, 20 Aug 2004

Gregory Mankiw

Poor Gregory Mankiw. He points out a fundamental theorem of modern economic science, and gets excoriated for it. I refer of course to his statement that outsourcing American jobs was good for the country in the long run.

He's right.

You can practically use people's reaction to his statement as a litmus test of economic understanding. Does somebody understand the least bit of economics? If so, then they agree with Gregory. If not, then they disagree with him, often vocally and vehemently. Economic flat-earthers, I call them.

America's strength is its willingness to lose jobs. Look at all the buggy-whip jobs which don't exist anymore. Or whaling jobs. Whole careers have been eliminated. Not just some jobs, but all of them. Gone. Not overseas, but gone from the face of the earth. Now, if we're willing to destroy jobs, why is it such a Big deal if somebody else in some other country gets that job? This whole outsourcing flap is like throwing something out, and then finding that somebody has garbage-picked it.

Okay, you can make the point that we weren't really done with those jobs. That people were still willing to do them. But here's the catch: for what wages? There is no such thing as "unemployment", and there is no such thing as "unemployment insurance". Something exists that has that name, but it is not insurance. You cannot insure against something over which you have full control. Insurance doesn't work that way. Insurance covers you against things that you cannot control.

The alternative to losing jobs is to keep jobs doing things that people don't want. Besides the morale problems with doing something that nobody wants, you also have a serious economic problem. You can't have everyone doing useless work. Somebody has to be productive to pay for those jobs that are no longer needed. What happens when people in the former group move into the latter group? There's no such thing as a perpetual motion machine.

You may question my assertion that "unemployment" does not exist, particularly since you hear unemployment figures quoted weekly. Very simply, yes, there are people who choose not to work for a particular wage. They are not simply unemployed; they cannot find work for a wage of their choosing. So, it doesn't make sense to talk about "unemployment" without knowing more about the jobs that aren't being taken. If a Wall Street stockbroker cannot find a job paying $200,000/year, is he unemployed? According to the Bureau of Labor Statistics, yes, he is.

Let's take a case which might be more obvious. Let's say that a laborer earning the minimum wage becomes unemployed. The stockbroker can probably find a job by offering to work for less money. The laborer doesn't have that option. He is not unemployed by choice, but instead by fiat (and no, I don't mean that the Italian car manufacturer refuses to hire him!). The source of minimum wage unemployment is the minimum wage.

Now any non-economists must be livid. "Ask people to work for less money!!! How can you do that?? You are cruel and heartless!!" Um, no. Consider the plight of the poor unfortunate Indian worker who gets paid far less to work in one of those Indian call centers we've heard so much about. Instead of answering the phone as Suskana, she has to answer the phone as Susan. Instead of working during the day, she has to work when most of her countrymen are asleep (IST == +1030, as opposed to an EST of -0500. Do the math). For this onerous duty, she gets paid $2 an hour, for which no American would work, could work. The thing is that her expenses are much lower. She can eat out every day for those wages, and afford a nice three-bedroom apartment in downtown Mumbai. Wages have no meaning unless you consider what they'll buy.

An efficient economy is constantly driving down prices and profits. This seems counterintuitive to anybody who lived through the inflation of the 70's. Inflation, though, is a monetary phenomenon. While it doesn't affect every price identically or immediately, it affects all prices because it's a change in the supply of money. What matters is the amount of time that you have to work to exchange for something of value to you. That amount of work has been dropping more or less steadily for the past five centuries. It may be that this year or this decade is one in which that trend shows a temporary reversal. As Mankiw said, in the long run, it's good for US jobs to be exported overseas. What he didn't say, but which is equally true, is that it may be painful in the short term when US jobs are exported overseas.

The good sense of "You do what you do best, I'll do what I do best, and we'll trade" cannot be denied ... except by people without a good sense of economics.

TM Lutas comments, making the point that social relations create pressure to assist transitions into new fields. Indeed yes, but if you try to restrict job loss or tie training to the ability to eliminate jobs, then that becomes an economic issue and worthy of criticism. Separately he points out that sometimes other countries make a gift of their wealth to us, and he claims that's a problem. Personally I think "Hey, thanks for the wealth" is an adequate response, and the louder we say it, the better.

TM Lutas comments again, saying that I just don't get it. I think I do get it.

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