Tag: innovation

Protecting Jobs

Protecting jobs sounds like a good thing to do (if you don’t think very carefully about what it means). Free markets protect jobs that are performing desired tasks better than someone else can. President Trump’s protection of steel workers’ jobs by imposing tariffs on competing sources of steel (mainly Canada) is protecting a relatively inefficient industry and thus “protecting” a lower standard of living for our country at large. “Protectionism” protects us from innovation and exciting technical changes that we eagerly embrace when offered in the market.

This week’s Economist magazine has an interesting article on the latest economic disruption (known to economists as “creative destruction”).  “Today the latest bonanza is in full swing, but instead of steel and sand it involves scripts, sounds, screens and celebrities.” https://www.economist.com/leaders/2019/11/14/who-will-win-the-media-wars

Movies (cinema or film for the more sophisticated) were only available in movie theaters when I was a kid more than half a century ago and yes they were already talkies (don’t be a smart ass). Then there was TV and we could watch movies there if we could stay up late enough. Cable TV packages greatly broadened the choice of channels.  Then video players and cassettes meant that we could choose what movies we wanted to watch and when.  We used to get CDs from Netflix in the mail.  I think I still have an unreturned diskette somewhere.  Maybe I will frame it so that my grandchildren can marvel at such historic relics.  In 1985 Blockbuster Video opened and we could skip the mail and browse thousands of films for rent.  They filed for bankruptcy in 2010 and the last two stores (in Alaska) closed last year.

“This week Disney launched a streaming service which offers “Star Wars” and other hits from its vast catalogue for $6.99 a month, less than the cost of a DVD. As the business model pioneered by Netflix is copied by dozens of rivals, over 700m subscribers are now streaming video across the planet. Roughly as much cash—over $100bn this year—is being invested in content as it is in America’s oil industry…. This binge is the culmination of 20 years of creative destruction (see Briefing). New technologies and ideas have shaken up music, gaming and now television.” The Economist

We can look at these amazing technical and business innovations in several ways:  1. A lot of jobs were destroyed as newer technologies replaced older ones and the jobs associated with them.  2. Fortunately no one succeeded in “protecting” them and we, the consumers–the targets of greedy profit seeking capitalists, enjoyed the greater benefit of more entertainment, more conveniently delivered and costing less.  3. New jobs were created to provide these new services.

“Disruption has created an economic windfall. Consider consumers, first. They have more to choose from at lower prices and can pick from a variety of streaming services that cost less than $15 each compared with $80 or more for a cable bundle. Last year 496 new shows were made, double the number in 2010. Quality has also risen, judged by the crop of Oscar and Emmy nominations for streamed shows and by the rising diversity of storytelling. Workers have done reasonably. The number of entertainment, media, arts and sports jobs in America has risen by 8% since 2008 and wages are up by a fifth. Investors, meanwhile, no longer enjoy abnormally fat profits, but those who backed the right firms have done well. A dollar invested in Viacom shares a decade ago is worth 95 cents today. For Netflix the figure is $37.” The Economist

Such dramatic disruptions can be painful for some–those whose jobs were lost or whose investments lost value. We need to adopt policies that minimize that pain. But thank God we didn’t try to protect those jobs and share values and the older ways they reflected.

A Basic Human Right

Hunter-gatherers freely traded what they produced (gathered) for what they needed but did not produce. The story is well known (except by Peter Navarro, an energy and environmental policy analyst masquerading as Trump’s trade expert). By specializing in what they did best (hunting) and trading their bounty with those better at producing the other things hunters needed, total output was greater and every one was better off. The right to sell what we produce for what we need/want but don’t produce is, or should be, a pretty fundamental right. It is called free trade.

Historically governments have interfered with this right to protect the markets of special groups otherwise unable to compete. These trade restrictions and tariffs reduced total output making everyone (except those protected) worse off. Recognizing the general harm done by trade restrictions, most countries have negotiated mutual reductions in these restrictions. These have taken the form of bilateral and regional and global multilateral trade agreements.

The Trans-Pacific Partnership (TPP) was one of the most recent efforts to expand trade and its income rising benefits. It was negotiated over an eight year period among 13 Pacific Rim countries and in addition to expanding trade would have deepened U.S. leadership in setting trade standards in the region. Steve Bannon rejoiced when President Trump withdrew the United States from the agreement, claiming that all future agreements would be bilateral. President Trump thereby potentially gave standard setting leadership in the area to China. Not very smart.

Candidate Trump had also promised to scrap the North American Free Trade Agreement (NAFTA) with Canada and Mexico, calling it the worst trade deal of all times (a rather crowded category). President Trump wisely decided to renegotiate it instead. It has been updated several times since it was originally signed and another round can potentially make it better still. In fact, many of the good features of the now discarded TPP are being incorporated.

If we remove existing restrictions on purchasing Canadian lumber and millwork products, for example, fewer trees will be cut down in Washington and Oregon. In exchange Canada will reduce its tariffs and other restrictions on American cars, equipment, and food product sales to Canada. Production will be more efficient and incomes will rise both here and there.

As competitive advantages shift with freer trade and product and manufacturing innovations, some workers will need to shift to new areas of work and may need new skills. Public policy should facilitate and ease the adjustment burdens of these shifts, but it is important to recognize that these shifts arise mainly from improving productivity and not from increases in cross border trade. Most of us export our labor to a domestic company (our employer) and import everything we need (paid for by our labor export). But most of those imports are from domestic companies and service providers not from so called foreign trade. The era of the self sufficient farm families ended long, long ago. https://wcoats.wordpress.com/2017/07/23/the-balance-of-trade/

President Trump may well oversee the negotiation of a better NAFTA (better for all three countries involved). Unfortunately his style of leadership in this area—baseless claims of great harm to American workers from existing trade agreements—provides a very misleading message to the American worker and public in general. He creates a negative atmosphere around the right of each of us to sell what we make to whom ever we choose and to buy what we need from whomever we choose. The world has benefited enormously from freer trade and the increases in worker productivity it has made posible. This is a huge understatement. President Trump does us all a great disservice by characterizing trade in negative terms.

Buy American, Hire American

President Trump continues to repeat his populist slogan “Buy American, hire American,” reflecting the way he and Steve Bannon appear to understand what is needed to make America Great Again. Thus, with apologies, I endeavor again to explain why this catchphrase is fundamentally wrong and would actually make America weak. “Trade and Globalization” “Save trade”

If buying an American made product or service (100% American, 90%, 51%?) or hiring an American worker is my best option, I would not need to be compelled to do so by the government. If it is not my best option, being compelled to do so forces me to accept an inferior option. It would make me worse off. The Trump family understands this as their hotels import and purchase foreign made products (from China, Philippines and India, to name a few) and Ivanka sells clothing made in China.

It is obvious that being forced to buy and hire American would make many of us worse off (not to mention diminish our freedom of choice), but are there compensating benefits or gains for others in the American economy that would justify making us worse off? “Teeing up Trump tariffs”

Buy American

If I must buy an American made Corvette rather than a German Porsche, does the American economy benefit? To simplify, leave aside the fact that a substantial part of the components making up a Corvette are imported from various countries. The fact that I had to be forced to buy the American car rather than the German one, i.e. that it was an inferior deal, means that the American workers who make it were reallocated from the production of export products at which the United States had a comparative advantage. Trading less as a result of buying American mean allocating American workers to producing things (Corvette) that they are not as productive at making. They would be moved from producing Boeing aircraft to sell to Germany (to pay for our imports of Porsches) to producing Corvettes. So in addition to my being made worse off as a result of having to buy American, the American economy as a whole would be worse off as a result of a less productive work force and thus lower overall income (lower GDP). This is Econ 101.

In addition, as noted by the Financial Times, “Attempts to restrict procurement to domestic companies tend to backfire. They induce retaliation from trading partners, harming US businesses trying to sell abroad. They raise input costs, ensuring less infrastructure is built and fewer construction workers are hired for each dollar of public spending.” “The Pitfalls of having to buy and hire American”

Hire American

The meaning and impact of a requirement to hire Americans is a bit more complex. If the terms to American companies of employing the workers needed, whether they are citizens, permanent residents, or temporary or permanent immigrants from abroad, are not competitive with importing the product or service, American companies will in effect hire foreigners abroad (i.e. they will import the goods and services produced abroad). Thus it is a bit unclear what “hire American” means. “The long, rough ride ahead for ‘Made in America'”

Presumably, “hire American” refers to our immigration policies. Indeed our immigration laws need fixing. This includes providing a solution to the status of the 10 or 11 million people living here illegally, and adjusting immigration quotas to better match the needs of American firms for workers without undercutting the status of existing American workers. “Illegal-aliens”

The decline in American manufacturing jobs is largely the result of automation, not foreign trade. Manufacturing employment has fallen almost everywhere in the world as manufacturing output has increased. Automation enables the work force to produce more and thus enjoy a higher living standard. It need not cause unemployment.

The wonderful film “Hidden Figures” tells the true story of the large number of human “computers” employed by NASA (the National Air and Space Administration) who cranked out the numbers needed to put Americans in space and bring them home again. The stars of the film are three black women whose mathematical skills were indispensible to NASA. At the end of the day and in time for the first American to orbit the earth in 1961, new IBM’s mainframe computers proved essential to crunch the critical data fast enough. Overnight the human computers were no longer needed. But rather than becoming unemployed, most of them retrained to program and run the IBM computers with an unbelievable boost in productivity. While other things also affected NASA’s workload, the employment data are interesting. In 1960 NASA had 13,500 in house employees, which increased to 41,100 by 1965 and gradually drifted down to 18,618 in 2010. The numbers for contract workers on the same dates were 33,200 in 1960, 369,900 in 1965 and zero in 2010.

The President’s appeal to Buy American and Hire American, in addition to restricting our freedom of choice, flies in the face of what made America Great in the first place. As proclaimed by the Financial Times: “The principle should remain to keep the US economy as open as possible to the inflow of good products and good workers from abroad. Slamming down the drawbridge is only likely to impoverish the residents of the citadel.”

 

Trade and Globalization

Specialization and the accompanying astounding development of productive technologies have lifted the standard of living around the world to unbelievable heights over the last three centuries. Trade—selling what we specialize in making and exchanging them for the wide range of things we need and want to consume—has made this possible. The pace of wealth creation and poverty reduction has accelerated in the last half century as the size of the markets in which we trade have expanded rapidly with falling costs and barriers to global trade. https://wcoats.wordpress.com/2014/12/18/free-markets-uber-alles/

But new technologies that displace older ways of doing things require workers and firms to adapt. New skills must be learned to replace the old, no longer needed, ones. Americans have been particularly adept at such flexible adjustments and thus have experienced greater increases in wealth and living standards than most other countries. No pain, no gain, as we might say.

Workers and firms have tried from time to time to defend their positions from the competition of other workers and from firms with newer and better technologies. Protectionist tariffs enacted to “protect” American jobs in 1930 deepened and prolonged the Great Depression. The closed shop autoworkers unions in Detroit seriously damaged the American auto industry. But generally Americans pushed aside these restraints on free markets and trade to the huge benefit of the population as a whole.

Nonetheless, such competitive advancements in our ability to produce more and more did require those with outmoded skills to acquire new ones. When the pace of innovation was measured, the required adjustments by workers and firms were easier to make. Younger workers would acquire the new skills from the outset while older ones would eventually retire. The turn over of firms, even very large and well established ones (Dell, Polaroid, Kodak, Motorola, Chrysler, Yahoo, etc.) has always been large in the U.S., continually making way for new and better ones.

The last half century has seen a rapid increase in the expansion of markets – globalization. While this increased competition and innovation has reduced poverty in the world at a never before seen rate, it has also increased the numbers of workers having to give up the skills they had refined and acquire new ones generally requiring a higher level of education. These adjustments have often been difficult for those having to make them, especially for middle aged and older workers. We seem to be experiencing a backlash from those forced to adjust.

“The experience of the past quarter century suggests strongly that the central factors of our era are not nationalism or militarism, but rather the two periods of radical change stimulated by technology and innovation during not one but two Industrial Revolutions. The first one began 175 years ago; the second, the information age, has now lasted about four decades.”[1]

Immigration is an aspect of globalization and the wealth creating impact of free trade. It raises similar but even more challenging tensions between freedom and progress and security and protection of the status quo. It also calls for careful management of the pace of immigration to soften the anxieties of potentially affected workers.

More liberal trade agreements facilitate globalization. Ironically President Obama, who opposed the trade agreements on the table when he first ran for the Presidency is now fighting for the adoption of the Trans-Pacific Partnership (TPP), while Hillary Clinton, never one to put the national interest above her own, who as Secretary of State helped start the TPP negotiations, now opposes it. And Donald Trump, who shouts out what ever passes through his mind at the moment, is currently strongly protectionist (i.e. protecting the status quo).

Rapidly increasing globalization has enabled an incredible lifting of living standards but has also increased the insecurity and costs to those displaced and needing to seek out new employment. We need to provide more effective assistance to these people. This should be the focus of our policy discussions, not closing off progress (protectionism).

[1] John Kornblum, “The Amerexit,” The American Interest, July 25, 2016