Knowledge Problem

Craig Newmark points out that Glenn Reynolds did not get the full picture in Econ 101 if he thinks that people donating for stuff they could get for free is irrational. And as Craig says so well, it’s about the exchange of value for value, not about money. Of course you want to get as much as you can for paying as little as possible, but humans understand the dynamic reality that if you don’t pay at all, the stuff may go away, and then you get no value in return.

Which reminds me, I’m off to Magnatune to buy those CDs I mentioned …

Chicago has historically been one of the biggest locales for the production of candy in the country. Brach’s had their factory here, as did Ferrara Pan, Fannie May, and of course the local Frango mints sold at Marshall Field’s (yum!) were made here too. One of the more delightful and tempting things about Chicago is walking downtown in the late afternoon and having the scent of chocolate waft over you.

This is changing. Frangos are now made elsewhere, Brach’s and Ferrara Pan have closed their factories and moved production to Mexico, and within the past month the new owner of the Fannie May factory has closed its doors. The scent of chocolate will still waft, though, because we have a couple of smaller chocolatiers that are still here. For now.

Walter Williams does a beautiful job in this Town Hall column of connecting this shift to the sugar lobby and the subsidies paid to domestic sugar producers.

Chicago has been home to many of America’s candy manufacturers, but today they’ve fallen on hard times. In 1970, employment by Chicago’s candy manufacturers totaled 15,000, and now it’s 8,000 and falling. Brach used to employ about 2,300 people; now most of its jobs are in Mexico. Ferrara Pan Candy has also moved much of its production to Mexico. Yes, wages are lower in Mexico, but wages aren’t the only factor in candy manufacturers’ flight from America. After all, Life Savers, which for 90 years manufactured in America, has moved to Canada, where wages are comparable to ours.

One of the ignored stories in the clamor and demagoguery over job losses, not only in the candy industry but in others as well, is the devastating impact of congressionally created “miracles” on our industries. American sugar producers fight tooth and nail to keep foreign sugar imports out of our country. They’ve spent $722,000 in campaign contributions to both Democratic and Republican congressmen to enact sugar import tariffs and quotas.

Williams goes on to describe the cost in terms of US jobs from these protectionist sugar policies:

According to the Sugar Users’ Association, an organization that represents companies who use sugar as an input, such as candy manufacturers, the protectionist miracle that Congress has created for the sugar industry has cost anywhere from 7,500 to 10,000 jobs in sugar-using industries due to higher sugar costs. Higher sugar costs make U.S. candy manufacturers less competitive in both domestic and world markets. Life Savers became more competitive simply by moving to Canada — it saved itself a whopping $10 million dollars a year in sugar costs.

By moving to Canada! Appalling.

Another facet of the sugar protection racket that Williams does not address is the environmental impact of subsidized sugar protection. A few years ago a group in my Environmental Economics class did a research project, and found that the sugar industry is one of the prime contributors to the degradation of the Everglades in Florida. They are also blocking efforts to reclaim some of the wetlands and the ability of the wetlands to serve as a nutrient filter for the local ecosystem. And it’s not even land that they own, and they are degrading it. If we had a proper system of property rights in environmental quality, then a common law tort suit would do the trick. Grrrr.

Arnold Kling does a nice job of connecting this article with the jobs issue and asking for some intellectual consistency from the “jobs outsourcing should be stopped” camp. Simply asking

What might be the secondary consequences of legislation that discourages American companies from using overseas software programmers?

points out the hypocrisy of supporting sugar subsidies while wanting to keep existing American jobs. The secondary consequences, if the sugar and candy industries are any indication, would be to drive the production of software itself offshore, not just the work of some of the inputs. Software companies would leave the US so that they could have access to labor at a wage that better matches the value of the marginal product of their labor. Or, as Walter Williams points out, there may be other factors in determining whether a company stays in the US beyond labor costs. In the case of software I’d imagine it being costs of patenting/IP protection. But software is more labor-intensive, in the sense that labor costs are a higher share of the budget, than candy.

Hmmmm ….

Russ Roberts has a typically clear and lucid commentary on jobs and “outsourcing” in Business Week. Short of jumping into the fray on this issue, let me simply suggest that you read this, circulate it, and consider his conclusion:

The hardship that results from economic change always tempts politicians to limit individuals’ freedom to buy what they want and businesses to hire whom they desire. Such political restraints will make life more secure — but poorer and less dynamic. Ultimately, it will have no effect on the number of jobs in the U.S. but only make the ones that survive pay less.

Well said.

While we’re talking jobs, I have a couple of observations that are consistent with Virginial Postrel’s NY Times article from Sunday about new non-tech jobs. Her observations about the establishment of spa service jobs, and the number of women performing these jobs in a free-lance and more difficult to measure way, ring true in Chicago. In the past six months I’ve seen four new nail salons open, and that’s just within about a 20-square-block area in Lakeview. Virginia points to manicurists as one of the most overlooked professions in the Bureau of Labor Statistics surveys, and it is one that has been growing fast recently:

Similarly, the bureau has missed more than 300,000 manicurists. It puts the total at around 30,000, compared with the count of 372,000 — up from 189,000 a decade ago — by Nails magazine, using private survey and state licensing data. Even if not all licensed manicurists are practicing, the bureau number is off by an order of magnitude. There are 53,000 nail salons in the country, most of them with more than one manicurist. The industry supports two major trade magazines, each with about 60,000 subscribers.

Compared with stone crafters, gardeners or graphic designers, manicurists should be easy to track. ”This is not a gray market business,” says Cyndy Drummey, the editor of Nails. ”It is licensed and regulated.” Yet because this business is wildly decentralized and doesn’t fit traditional categories of what constitutes a job — most manicurists are independent contractors or shop owners — it can add tens of thousands of jobs without catching the government’s notice. And behind each manicurist are people making the tools of the trade.

And the esthetician who used to share the chiropractor’s office downstairs from us went out and got her own space, after having gone freelance from working at a spa about 3 years ago. I also see the same phenomenon happening with personal trainers, particularly given the current trend for exercises that don’t necessarily require lots of heavy and expensive gym equipment.

The nature of the economy, and the highest value uses of resources (including labor), is dynamic. What was valuable yesterday may be less so tomorrow. And as Russ’s piece suggests, protecting what was valuable yesterday may rob us of the ability to create what will be valuable tomorrow. Or worse, when inevitably someone does create what will be more valuable tomorrow, we won’t be the creators, and our status quo jobs won’t provide us with enough income to afford to buy into it. We will be made even worse off than if we had let the things go that weren’t our comparative advantage.

Thanks to Kevin Brancato for the pointer to the Russ Roberts article, and for his forceful conclusion to his own discussion of the matter:

So some of the lowest-skilled service industry workers today are making as much or more than the best technically-skilled assembly line workers of Henry Ford’s day. And that’s because of outsourcing.