Greg Mankiw is looking for a new car for his teenage daugther.  He described the most recent findings of Consumer Reports:

Dead last was Chrysler. CU recommended zero percent of the Chrysler vehicles they tested. That’s right–zero. Second to last was General Motors. CU recommended 17 percent of GM models. By contrast, most other companies had half or more of their models get the thumbs up. Honda was the top ranked brand; CU recommended 95 percent of its models.

Is it any surprise that Chrysler and GM are now in the process of going out of business? From the perspective of the Consumer Reports advice, it looks like their business model was to count on the ignorance of the buying public about the quality of their products. Their bankruptcy should perhaps be viewed as a success of the market system. (emphasis added).

bankruptcy, car, chrysler, consumer reports, gm

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.

auto, auto industry bailout, automakers, bailout, chrysler, economics, economy, ford, gm