Thursday, January 20, 2011

Jobless Growth?

This term you'll learn about the national economy, and then we'll extend ourselves into what economists call the open economy: Considering the national economy in the global context.

We won't be able to go too much into Globalisation, but by implication you'll learn about the economic arguments for Globalisation - along with potentially some arguments against it. It will come too late to be covered in a tutorial unfortunately so later in term I'll provide some discussion questions for you to ponder anyhow.

Nancy Folbre is an economist at the University of Massachusetts, and she has written an article in the New York Times about jobless recoveries and jobless growth.

A jobless recovery is what it says on the tin: An economic recovery (GDP is growing again), but without unemployment falling, or even employment rising. Workers in jobs are becoming more productive, it would seem, instead of more hiring taking place.

The explanation given is Globalisation. The usual dirty word. Apparently this has affected the economic incentives US companies face, meaning that while still being patriotic American companies, they are now forced to locate abroad to produce cheaper to sell the goods back to Americans. Hence the jobs producing the goods go abroad. We get cheaper prices, but not the jobs.

Of course, this very simplistic view is just that, and it ignores most if not all economic theory. It is a protectionist view. We can't really compete with these productive workers elsewhere, and moreover we don't really want to - so we erect barriers and protect ourselves - tariffs, subsidies, etc. But then we end up producing what China could produce cheaper, instead of innovating and creating better jobs producing new and better things that people want to buy (entrepreneurship), and allowing China to produce the things they have a comparative advantage in producing.

Essentially this is populist stuff: Appeal to what people want to hear now, regardless of where it will leave us in the future (substandard goods, mediocre workers molly-coddled by the government, higher prices). The truth is painful: Other countries are able to compete and produce some things America currently produces much more cheaply. It's a hassle to keep on changing and be subject to the pressures of competition. But it's healthy too, since it keeps us on the ball, producing only things that people actually want.

If you are someone prone to economic nationalism like this, it is worth asking the question: What is the difference between thinking about production here vs China, and production in the south of England vs Northern Ireland? Should we stop trading with folk in other parts of the UK? What about other parts of our city? It would be perverse. As Don Boudreaux writes:

This note is inspired by DG Lesvic’s objection to Art Carden’s use of the reductio ad absurdum – an objection that, I confess, I do not share.

Reductios work so well when arguing against proponents of economic nationalism (that is, “protectionists”) because, economically and morally speaking, there is absolutely no difference between Suzy trading with Joe her next-door neighbor and Suzy trading with Jose in Mexico, Josef in Austria, or Javu in China. None.

So when any protectionist argues, based on reason X, for restrictions on trade drawn along national political borders, it’s always enlightening to apply the same argument X to trade restrictions drawn more locally – even as locally as the individual.

Fritz Machlup said in class at NYU back in 1981 that arguments for protectionism, when followed through to their logical conclusion, always ‘prove’ that a person’s right hand should not trade with that person’s left hand.

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