From: depken@rigel.econ.uga.edu (Craig Depken)
Subject: More thoughts on economic illiteracy (d)
Summary: Economic illiteracy is campaign fodder 
Keywords: economics, illiteracy, Clinton, Perot, NAFTA 
Organization: University of Georgia Economics Department
Date: Sat, 19 Dec 1992 06:30:33 GMT

More thoughts...no flames please...see part (a) for disclaimers

craig.


d) NAFTA is bad for the economy (Bill Clinton/Ross Perot):

	They both displayed such thinking in the second debate. The
	fact is that there is no profit maximizing firm that will
	move out of this country if it does not pay. To say that firms
	are being paid to go out of this country is simply not the entire
	truth. The fact is that firms are paid a certain amount of money
	by the Federal Government for retraining the labor that is being
	displaced by the move. The firm must match these funds and see
	that the workers are retrained. Now, why would we want to do 
	that. Simple economics, yet no one understands this.


	The fact is that if a firm is profit maximizing, which is what
	we want all private corporations and small businesses to be,
	else we would have socialism, firms must be able to cut costs
	if it is profitable for them. If a person is doing a job that
	he gets paid $8.00 an hour for, and someone else is willing
	to do that same job for $1.00 an hour, then the job is only
	worth one dollar an hour.

	Wages in a labor force are not like an auction, it is exactly
	the opposite. The reservation wage (the wage at which the
	labor decides to work, anything less than that they will not
	work) can be higher in this country, but that is not the fault
	of the firm. Since the firm supposedly has share holders, and
	they receive dividends from the firm's profits, if the firm
	can find some other labor with a lower reservation wage at 
	which they are willing to work, then there is no reason to
	deny the firm to do that. 

	The problem with our system at the moment, is that organized
	labor, amidst doing a lot of good, has driven up the reservation
	wage that labor holds out for. The problem is that the job simply
	may not be worth the higher reservation wage, and thus it is 
	profitable to go elsewhere. This can come from two different
	sources: The labor in this country may be over-skilled for the
	job that it is doing, and thus demands higher wages, when someone
	with less education/training can do the job just as well. Then
	the firm moving is not such a bad thing. In fact it STIMULATES
	economic growth in the fact that the production possibilities
	have been increased due to the fact that the overskilled worker
	is no longer wasting his time and production capabilities at the
	(truly) low wage job. 

	Therefore, the governemnt could do most good by subsidizing
	in some form (again not too specific here) the development of
	higher skilled production capabilities. This subsidy would move
	us to a higher production possibility set (see below), and thus
	the firm's move is better for the overall economy.

	Note that this is a general result. It says nothing about what
	the labor is supposed to do between jobs, but then that is what
	unemployment insurance was meant for, right?

   
	So, originally, let's say we have only two goods that the U.S.
	makes...cars and butter (overly simplified for the economic
	illiterate). Now, the u.s. can produce anywhere along the 
	PPFo, which describes all possible combinations of cars and
	butter that we can produce.

	Now, if we increase our production technology, the value of the
	product of labor (i.e. put them in a job that is more valuable
 	than the 1.00 an hour job they were in before), then our 
	production possibility frontier will move out and we can 
	produce MORE of BOTH cars and butter. This idea is easily 
	generalized to the huge economy of the u.s. and we see that
	NAFTA, if it moves low value jobs out of the country may 
	actually be an improvement on the economy of the u.s.

	|
cars Ci	|
	|\
	| \
	|  \
	|   \
     Co	|    \
	|\    \
	| \    \  PPFi
	|  \    \
	|   \    \ 
	|    \    \
	|     \    \
	|      \ PPFo
	|       \    \
	|-------------------------------
                Bo    Bi	

				butter


Note that Bi > Bo AND Ci > Co.


	So NAFTA may not be such a bad thing after all. They only want
	to make it sound bad because it is easier than trying to explain
	economic theory to people.

	Another way to combat jobs going elsewhere is to raise the 
	reservation wage of the other labor forces that we are supposedly
	going to loose jobs to. Methods would be organizing labor,
	restructuring tax regulations so as to make the costs of moving
	to another labor source prohibitive. No one should think that
	firms making more money is bad, because that money is injected
	into the economy through the shareholders, however it is: e.g
	consumer goods, capital investment, government bonds, whatever,
	it is all positive in the economy.

	Guaranteed that if the costs of moving are the same as staying
	then the firms will stay. REmember that firms are owned by
	shareholders whom we can assume are Americans for the most
	part. So, firms will show a bit of national loyalty, as well
	as logistic simplicity, by staying here.

	Bush passed it, now Congress has to also. Chances are that it
	will not go through as it is intended to, but we will see on
	that one. It is most likely going to be made worse, i.e. it
	will limit our possible gains from this. Our economy has the
	most to gain from the NAFTA because we have the highest
	productive workforce in the world and they are being wasted
	on putting shirts together. There is nothing WRONG with putting
	shirts together, it is very valuable in its own right, but if
	people elsewhere will do it for cheaper, then let them. Our
	labor force is better put to use building computers, steel,
	prefab concrete, whatever, that is more valuable.


	Merry X-Mas!!

More to follow.....


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