Art (sort of) imitates life

by Russ Roberts on August 26, 2009

in Subsidies, Trade

It turns out that in  the latest edition of my novel, The Choice: A Fable of Free Trade and Protectionism, I imagined a weird version of the Cash for Clunkers program. I was trying to explain why getting low cost computer services from overseas is good for most Americans even though it can be challenging in the short run for some types of computer jobs. The dialogue is between the ghost of David Ricardo (who likes trade) and Ed Johnson, a fictional head of a factory producing televisions in 1960, worried (rightfully) about Japanese competition. Ricardo is the first speaker:

“Suppose one day a brand-new car appeared in the driveway of every American with the keys in the ignition and a card on the front seat guaranteeing free gasoline for life. And there’s a note in the glove compartment saying that after five years, the car will be replaced by another free one. Would you drive that car? Would it matter whether it was a gift from an American or a foreign supplier?”
“Sure it would. If it were made by a foreign supplier it would mean the end of the American auto industry. You’ve told me that it has gotten smaller over the years. But free cars from foreigners would kill it.”
“So if you were president of the United States you’d go on TV and the radio and warn the American people of the dangers of accepting the gift. You’d tell them it was a Trojan horse that would destroy the economy from within. You’d collect all those cars for a giant scrap drive in order to preserve the U.S. auto industry and American prosperity.”
Ed hesitated. I could see there was something bothering him.
“What’s wrong?” I asked.
“That does seem a little bizarre, destroying all those cars.”
“Let’s flip it around. Suppose you wake up in the morning, and there’s no new car in the driveway—just the same one that you’ve been driving. But the president makes a similar speech. A government official will be coming to get your car and drive it off a cliff where the remains would be buried. Sure you’re going to have to buy a new car, but employment in the U.S. auto industry will increase, and prosperity will follow, won’t it? Or will it? Would that policy make America richer or poorer?”
“It would make Detroit richer.”
“That’s right. The auto industry would expand. But the country as a whole would be the poorer for it. You don’t get rich destroying things. You get poorer. And the opposite is the road to prosperity. Free cars—or merely less expensive cars—make the country richer. Bad for Detroit. Good for everyone else. And the harm to Detroit would be offset not just by your happiness because you’d never have to pay for a new car again. The other effect would be what you’d do with the money you didn’t have to spend on cars. And all the extra traveling you’d be doing with that free gasoline. A whole new set of activities would spring up. Some of those activities would use the workers from those abandoned auto factories. But there’d be new opportunities for young people just entering the labor market as well.”
“I see that.”
“That’s the part of the story that was missing when people complained about foreigners providing computer services at a lower cost than Americans. It did put some Americans in some industries out of work at first. But it let companies pay a lot less for computer services. Companies that couldn’t afford computers before were now able to. Companies that already were using computers expanded their use of technology. The worriers ignored all those benefits and all the new things that became possible because Americans didn’t have to spend as much as they did before to get computer technology. And as it turned out, only the lowest-paying computer jobs became less numerous. Those were the jobs that foreigners could do at a distance much more cheaply than Americans. Between 1999 and 2004, when the worries about outsourcing were at their peak, the number of computer programmers in America fell by 25 percent. But the number of software engineers rose by 50 percent, more than making up for the lost jobs in computer programming. Overall, the number of high-paying computer jobs rose by 17 percent, and the real wages of American workers in the computer industry increased as well. Outsourcing made most workers in the high-tech sector better off as demand for those skills increased.”

Cash for Clunkers has ended for now. It was an intellectual travesty. I am grateful that it was poorly administered. It might have done even more damage.

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{ 13 comments }

Justin P August 26, 2009 at 8:25 pm

Russ you do a great job explaining opportunity costs. On that note, your post and the recent post on Kennedy made me think of opportunity costs in health care and CARS.
UNICEF says that over a million children worldwide could be saved each year for $1 billion dollars. Considering we (taxpayers) just spend $3 billion for who knows how many cars, the next time you talk to a supporter of propping up the Auto industry on the grounds of saving jobs, flip it on them. Saving children’s lives or saving union jobs, it should be an easy choice.

Anonymous August 27, 2009 at 2:52 am

Unfortunately the average shlub doesn’t understand what “opportunity cost” or ROI means. Possibly the most important concepts in business.

Anonymous August 27, 2009 at 5:12 am

Easy…

opportunity cost = what you must pay a congressman to get favorable legislation.

ROI = what you get for your tax dollars.

Anonymous August 27, 2009 at 12:08 pm

Falling into that argument would serve at least somewhat to justify its perennial abuse by the left. Keep to the (intellectual) high road.

Carl Pham August 26, 2009 at 8:34 pm

I think Victor Hanson’s comment in “The Corner” has it right. These people actually don’t give a damn on what the government spends its money. “Cash for Clunkers” was just some silly idea from some earnest twenty-something economic naif somewhere that sounded nice. The important point was to spend $3 billion, to drive up the debt as fast as possible.

That debt will have two salubrious effects for the Obamacrats: (1) the resulting inflation will destroy the power of private capital, and (2) the necessity to service it will centralize greater power in Washington, just as Madison argued in 1790.

Anonymous August 27, 2009 at 12:11 pm

Sure, it will have those effects. Still, as far as direct motivation, never underestimate the degree to which Democrats are beholden to the UAW (SEIU, NEA, Trial Lawyers Association, etc.)

MarkOnMarkets August 26, 2009 at 8:38 pm

Very insightful story. It is sad though, that our reality is now what was previously only imaginable in a work of fiction.

Anonymous August 27, 2009 at 12:13 pm

Exactly. No doubt Russ wrote that passage thinking it was too outlandish to actually find expression in history.

Jesse Johnson August 26, 2009 at 9:15 pm

How depressing is it that “history” will “remember” the cash for clunkers program as “a great success that spurred economic recovery!”

Anonymous August 26, 2009 at 10:33 pm

Nah – history is smarter than we give it credit for. These dumb ideas will, for the most part, eventually be sorted out. There’s a lot of disagreement over the stimulus. But cash for clunkers seems to me to mostly be supported by pure, plain and simple politicos. History will sort it out.

Anonymous August 27, 2009 at 12:15 pm

Nice that you are so optimistic. Then how do you explain the myths surrounding the “success” of the New Deal? History is written and remembered primarily by the same people who believe this program was successful. It will continue to be a small minority who know better.

Anonymous August 27, 2009 at 4:11 pm

so this was your idea

Anonymous August 28, 2009 at 12:43 pm

I have always been in favor of foreign governments subsidising production of goods that are exported to the US while people complain to end “dumping.” It’s a way of injecting foreign tax money into our economy. Likewise, I’ve always not been in favor of our subsidizing of grain to export. It takes my tax dollar and gives it to a foreigner.

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