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Art (sort of) imitates life

Posted By Russ Roberts On August 26, 2009 @ 1:09 pm In Subsidies,Trade | Comments Disabled

It turns out that in  the latest edition of my novel, The Choice: A Fable of Free Trade and Protectionism [1], 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. [2] It might have done even more damage.

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[1] The Choice: A Fable of Free Trade and Protectionism: http://www.amazon.com/Choice-Fable-Free-Trade-Protection/dp/0131433547%3FSubscriptionId%3D1YNZ339ZCHHAKYFSY702%26tag%3Dinvisiblehear-20%26linkCode%3Dxm2%26camp%3D2025%26creative%3D165953%26creativeASIN%3D0131433547/invisiblehear-20

[2] poorly administered.: http://cafehayek.com/2009/08/ious-for-suckers.html

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