TAG | economy
Greg Mankiw writes, and I wholeheartedly agree:
The AIG bonuses now being debated in Congress and everywhere else represent about .001 percent of annual GDP. If a typical Congressman spent that fraction of a 2000 hour work year on the topic, it would consume only about 1 minute of his or her time.
Yes, I know, that calculation is silly in many ways, but here is my point: Regardless of how outraged you are about the AIG bonuses, it is probably not an optimal allocation of resources for our elected leaders to spend large amounts of time and energy on the topic. The economy has bigger problems right now, and it would be better to focus attention on those.
One of the greatest lessons I learned so far in my life is that you should not miss the forest for the trees. Although the lesson sounds simple – not to get lost in details while missing the big picture – it is very easy to fall into such a trap. In some of my economics classes in college, for example, we learned many specific details about how to calculate different measures of economic growth, how to use regression analysis to tease causation effects out of many variables, and other interesting topics. However, the most important lessons I learned about economics were from Econ 101. The rest – the details – are worthless without understanding the essence of economics, which all econ 101 students learn: that the economy is about trying to allocate scarce resources to their highest valued users.
In plain English, this means that the economy is about me exchanging money or my time as a worker for things I want, like money, food, or clothing. In the most basic terms, consider a barter economy, where no money exists and individuals exchange one good or service for another good or service. If I am good at producing fur coats, I will only produce fur coats if I know I can get something back from producing that fur coat that I value more than the fur coat. Otherwise, producing that fur coat is a net loss for me. In a money economy, I will buy a good only if I think it is more valuable than the money I exchange for that good. I will not hand $10 to someone for a $5 bill, nor will I hand $10 to someone for a good I value at $5. That would result in a net loss, and would not be rational.
Furthermore, when you exchange money for something you value more highly than money, you are better off. If you buy something with $10 that you value at $15, you are better off by $5. On the other hand, if you buy something for $10 that you value at only $5, you are worse off by $5. Likewise, if someone agreed to sell you that good, he or she is better off. If they sold you the good for $10 and they only valued it at $5, they are better off by $5.
You can also exchange your services as a worker for money. If I work somewhere for $5 an hour, and I value my time at $10 an hour, I lose $5 per hour by working (assuming I get no benefit other than money from the job). Likewise, if an employer’s only benefit from employing me is that I produce $1 per hour in goods for the employer, then the employer is out $4 per hour while I work. If we go back to the basics of Economics, that a net gain in the word of Economics is about me exchanging my time for something I value more highly and an employer exchanging its time for something it values more highly, then this is not a net gain. In other words, this is a situation where it is bad for the economy for the employer to employ me. To make a broader point: employment is not per se good; employment is only good when it yields a net benefit to the economy.
Suppose X works at Tablemaker, Inc. Tablemaker makes tables, and X is a professional Table sander. One day, Tablemaker receives a free robot that can do X’s job for $3 per hour less than X, and at the same level of quality. If Tablemaker continues to employ X, Tablemaker is effectively out $3 per hour. Employing X, in other words, is not good for the economy, it is bad. While this might be unfortunate for X, who must find a new job, arguing that X should be allowed to work as a table sander because unemployment is “bad” is preposterous. That is like arguing that someone that used to make slide rules should keep his job even though calculators have replaced the slide rule.
So where does this leave us today? Well, right now the Bush administration has decided to throw money at the American automakers purportedly to preserve jobs. Allegedly, if the American automakers fail, then they will not be able to employ workers who previously had jobs, and the suppliers who supply the American automakers with parts will be unable to employ workers, and so on, and so forth, and lots of people will lose their jobs. However, the American automakers make an inferior product that has not been selling, which has led to their horrible financial status. They have been over-producing, and thus over-employing (and perhaps overpaying) workers who are producing goods worth less than the amount that the American automakers have been paying them. Thus, continuing to employ these workers is draining the economy – a firm is paying for something that it values less than the dollar amount it is paying. Moreover, the suppliers who supply the goods to the American automakers are supplying goods that are not being used for a more valuable use – they are sitting on lots in unsold cars. Thus, these suppliers who are employing people to supply extra goods to American automakers are wasting supplies, and the people they are employing to waste these supplies are not helping the economy, they are hurting it. People are not getting something we prefer for their employment – we are getting something less valuable.
So if the government steps in and pays to keep people employed for the sake of employing them, and we do not receive something we value more in return, then essentially, we are exchanging a $10 bill for a $5 bill. Although it sounds fun to talk about all of these unemployment figures, and look at graphs of GDP and GNP and unemployment and whatnot, the underlying notion of a job is that an employer is paying someone to produce a good or service that is more valuable to the employer than the amount the employer pays. We cannot get lost in the trees and miss the forest. If jobs are not worthwhile, they should not exist.
I just cannot wrap my head around the idea of an auto industry buyout. The “logic” behind it seems to be that if GM, Ford, and Chrysler fail, people will lose jobs. Thus, the US government should pony up to pay these American automakers so that people don’t lose their jobs.
The obvious assumption here is that jobs are per se good. The truth is, they are not. Therefore, the only principle reason I can see behind an auto bailout – to keep people employed – stands on shaky ground.
This can best be explained with an example. Assume that 1,000 people are very talented at making spoons, and this is what they do for a living. Next, assume that a robot is invented that can make all the spoons these people can make for 1/1000th the price and twice the quality. Should the United States government prevent the robot from coming into existence to “preserve jobs?” Or should the government subsidize spoon-makers to keep these people employed even though they are effectively doing nothing good for society?
I hope that your answer to the above two questions is no. We live in a world of progress. Sometimes, certain employment becomes obsolete. Although it is truly unfortunate that some people will lose their jobs because their jobs are unworthy of continuance, that is just the way capitalism works. If people in the US don’t like that, perhaps we should give up on capitalism.
Like this example, the US auto industry is hideously inefficient and produces an inferior quality product as compared to foreign automakers. Foreign automakers have much larger profit margins, and have been willing to adapt to consumer demand to sell fuel efficient cars. US automakers have been poorly managed, have buried themselves in union obligations, and have refused to adapt to consumer demand. Fuel efficiency is the biggest indicator. People have repeatedly made it clear that they want more fuel efficient cars by their purchases in the market over the past five years or so. Yet American automakers have not provided cars that are nearly as fuel efficient as foreign automakers; instead, they have run a lot of commercials claiming that ~20 miles per gallon is fuel efficient for a mid-sized sedan, or low 30s is fuel efficient for a small car. [And let’s not forget about how American automakers consistently rank behind foreign automakers in reliability rankings…]
The whole idea of an auto bailout totally perverts the idea of comparative advantage. The US does not have a comparative advantage in producing cars. The USA should be focusing its economy on things that it is good at producing, rather than trying to preserve the US auto industry for old time’s sake or because we want to preserve an certain number of worthless jobs.
P.S. Why are we thinking about bailing out all three automakers? Why not just one? If we let two fail, there will be less market competition, and automakers will do better in general?
P.P.S. Look at this amusing graphic about the bailout.
… not that gimme-five is not worth reading. But, for a good, but very sad read, check out Shinyung Oh’s blog, entitled “Because You Never Know.” Shinyung Oh was a lawyer who worked at Paul Hastings who had a miscarriage and was laid off about a week later and told that it was for performance reasons even though she consistently received great performance reviews in the past. The blog, which on has eight posts as of this writing, discusses her miscarriage, her career choice, her layoff, and more. It’s extremely sad to read, but worth your time. I don’t necessarily fault the firm for layoffs, per se, but honesty about the reasons for a layoff is essential in my view. And regardless, Oh is certainly going through a difficult time right now. I wish her the best.
Bloomberg.com reports that while economists have overwhelmingly ridiculed the idea of suspending the gas tax over the summer, Hillary Clinton has continued to stick to her guns. Clinton, after hearing that the economists thought the idea was ridiculous, stated:
I’m not going to put my lot in with economists
Ya know, it’s perfectly fine to say that you’re not going to listen to a consensus of football players giving you advice on filling out your taxes. Or a large group of lawyers giving you advice on how to paint your house. But generally, if you’re untrained in a subject, and practically an entire professional field gives you advice on the subject they specialize in, you should probably listen. And if you’re not going to listen, you’d better have a darned good explanation beyond “I know where you’re coming from, small folk,” for why you’re deviating from trained professionals. So Hillary (and Mr. McCain): if it makes sense to suspend gas taxes, please come forward and explain why rather than giving the same old pandering political speeches about how you’re trying to help “the little guy.” Call me an elitist, but I would rather that economic decisions follow the advice of trained professionals than “the little guy,” who hasn’t learned a thing about economics in his entire life.
But this isn’t even about elitists versus “the common folk.” This is about whether we want to help the country or hurt it. If I had a choice between having a mechanic fix my car or a random neighbor, why the heck would I pick the neighbor? And if I have a choice between having Hillary Clinton or John McCain making economic policy based on hunches or someone who is going to defer to a trained professional, I’m surely going to pick the person who defers to the trained professional.
This proposal to suspend the gas tax sickens me. This is why I hate politics so much.
Please note that this is not an endorsement of Barack Obama. He’s got plenty of problems, too, the gas tax is just an area where he pseudo-shines.
Update 5/6/2008: Greg Mankiw writes:
Why, then, are candidates proposing the holiday? I can think of three hypotheses:
Ignorance: They don’t know that the consensus of experts is opposed.
Hubris: They know the experts are opposed, but they think they know better.
Mendacity with a dash of condescension: They know the experts are opposed, and they secretly agree, but they think they can win some votes by pulling the wool over the eyes of an ill-informed electorate.
So which of these three hypotheses is right? I don’t know, but whichever it is, it says a lot about the character of the candidates.
Update 5/7/2008: From The Wall Street Journal
John McCain and Hillary Clinton want to send cash-strapped consumers on holidays from the federal gasoline tax. But the law they can’t rewrite — the law of supply and demand — suggests it would backfire. Lower taxes would encourage people to drive more, meaning more demand that would push prices higher again.