May 17 2008
Down is Often Up & Black is Often White (Why I Love Economics!)
Published by Steve Latter at 6:40 am under
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WikipediaOne of the many reasons that I find the study of economics so fascinating is that what so often appears to be a negative situation to the average citizen is actually a positive one. In other words: “down is often up” and “black is often white”. One of my favorite examples of this “180 degree moment”, and why I love to teach AP Macroeconomics, relates to the study of unemployment.
Candidates running for President in the United States often campaign to potential voters that “the United States has 7.5 million Americans out of work”, which is very true. But I say, “Wow, where does the U.S. pick up its’ first-place trophy for being so excellent at employment.” To me, having only 7.5 million out of work is like getting a 5 on yesterday’s AP Macro test! Of course, 7.5 million unemployed in the United States is only 5.0% of our 150 million labor force, and the unemployed workers consist almost entirely of “frictionally” and “structurally” unemployed workers. Frictionally unemployed workers are those workers who are transitioning between jobs or entering the job market. This transitional unemployment is a normal and desirable occurrence in any market-based economy as it evidences free choice. Structurally unemployed workers are also a by-product of a successful, market-based economy as workers are only temporarily unemployed, for the long-run benefit of the economy, as new automated technologies are replacing manual labor, and/or trade agreements are implemented allowing a country’s citizens to purchase less expensive, but still high-quality imported products. Let me be sarcastic for a moment: maybe we can get the U.S. Government to pass two new laws to lower their unemployment rate; one law to outlaw new technology so they can reduce their structural unemployment, and a second law to prevent their citizens from quitting their current jobs so the country can reduce the frictional portion of the unemployment rate as well. Maybe after that (I’m still being sarcastic if you hadn’t noticed!) the U.S. Government will then establish a new goal of 0% unemployment, which is what I hear the unemployment rate is in the US prison work camps!
Another specific example of this “180 degree moment” relating to unemployment is that manufacturing in the U.S. is somehow declining. This misperception has been created primarily on the large loss in U.S. manufacturing jobs and the declining share of manufacturing jobs as a percentage of total U.S. jobs over the last 20 years. It is widely believed that the U.S. global share of manufactured products has decreased which is an incorrect belief. Basically, the misperception has been created because: 1) employment in manufacturing is at an all time low, and 2) the U.S. has increased their share of imports from countries like Japan and China.
The reality, however, is that U.S. Manufactured real product has more than doubled over the last 20 years and they have accomplished this feat with an amazing increase in worker productivity via technology. U.S. manufacturing output per employee has increased markedly due to technology and the effective use of capital.
Yes, I believe “down often really is up”, and “black often really is white”!
About the author: Mr. Latter teaches various business courses at Paul VI Catholic High School in Fairfax, Virginia (USA) including AP Economics,
Accounting, Marketing, and Personal Finance.
Mr. Latter is a Certified Public Accountant (CPA) and former Chief Financial Officer with 10 years of high school business teaching experience. Prior to his career change to teaching in 2000, Mr. Latter spent 21 years in various auditing, accounting, and financial positions with Price Waterhouse, Sprint, and Teleglobe. Related posts:
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Thanks to Mr. Steven Latter of Paul VI Catholic High School of Fairfax, Virginia for his first contribution to Welker’s Wikinomics Blog!
Mr. Latter,
I might be biased because I am (was!) a student of yours, but your explanation only makes sense and can’t really be refuted- its pretty cool seeing it on this site since we learned it all year. I hope that more people figure out we actually have a pretty low unemployment rate and the goal should just be to avoid cyclical unemployment (the baaaad kind)! Structural and frictional are actually not so bad. So go, U.S.. Martha would be proud.
Ahhh, the old 180 moment. I always loved this aspect of econ because it is such a great tool in arguments. Anytime someone I know starts to moan about the job market, or trade being bad for us, I proceed to shove economics in their face like there is no tomorrow. I usually know that I’ve won when they stand there, mouth gaping, trying to comprehend everything I just said. You’re the man Mr Latter. You’ve helped me win a fair share of arguments this past year, including several with my government teacher, which led to a 98 on my mock senate project, so thanks alot!
Hey, if studying economics is about anything, it’s winning arguments with your friends, teachers and family! Here’s what I’ve found though, if you debate on purely economic grounds, people will accuse you of being a soulless, apathetic, amoral empiricists… so on occasion, you have to pretend not to be these things!
Just kidding! Economics is just one “lens” for looking at the world’s problems… it does not have all the answers, and what’s “good” to an economist can certainly be bad to someone else, and it is important that we recognize that.
I just started reading the excellent book “Economics in One Lesson” by Henry Hazlitt this morning, and he states the following assertion, which I tend to agree with:
“The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups”.
I think Hazlitt’s point is that economics does not always offer a one-off solution to the world’s problems. Bad economists may take our “ceteris paribus” assumptions and try to apply them in a world where “ceteris paribus” does not exist. A good economist, which is hopefully what we’re becoming in our AP and IB classes, will be able to evaluate the impact the actions of governments, individuals, and firms’ decision have on all of society, not only the a particular group.
Thanks for the comments, guys, and thanks for joining this blog community! – Mr. Welker
Hey you souless, apathetic, amoral empiricist –
Just wanted to let you know that I was reading your blog this morning.
I, can personally verify the point made about arguing economics with family members!!
The reference from Hazlitt’s book is good. It is difficult for any of us to see the long term value or benefit of $135/barrel oil and $5.00/gal gas but I’m sure that there is a golden nugget buried in there someplace.
Have a good day.
Dad
Hey CJ and Natalie,
Thanks for visiting and replying!
An economic nerd like me with nothing better to do loves when you visit and post!
I’ll have some new econ topic posts in the future. Thanks for keeping in touch. You guys are both true economic superstars!
Best Regards,
Mr. L
Hey Jason,
Great content and discussions as usual. I just wanted to comment on structural unemployment. You said:
“Structurally unemployed workers are also a by-product of a successful, market-based economy as workers are only temporarily unemployed, for the long-run benefit of the economy, as new automated technologies are replacing manual labor, and/or trade agreements are implemented allowing a country’s citizens to purchase less expensive, but still high-quality imported products.”
While I generally agree, I also hesitate to say that it is temporary. I think in the U.S. we have come to expect that new opportunities will present themselves. However, I’m wondering if all the defecit spending will lead to a new era that either lacks capital investment or we see lower levels of capital investment. This could create a structural unemployment scenario that may not be short term in nature.
Thanks for making me think about this stuff…more than I already do.
Hi Dave,
Thanks for commenting.
Of course, you are correct that past performance is no guarantee of future success (I sound like a Merrill Lynch stock fund advisor!).
I’m not concerned as much as you are about our deficit spending. Our national debt as a percentage of GDP is a very respectable 66% of GDP, lower than many European countries and Japan. Of course, the impending baby boom retirement will seriously challenge our nation’s ability to pay both retirement and medical benefits. I’m an optimist in these matters as I study history and see how we always solve these challenges.
Capital spending will continue to rise as it has done every year, as companies know there is no better way to improve productivity. I predict our “structural unemployment” pools will become larger as the rate of innovation and change will accelerate as you have seen it accelerate over the last 10 years. Today’s worker needs to be flexible, a life long learner, and have very good interpersonal skills. The days of a 30 year career doing the same job are all but gone!
Take care!
Steve
Of all of the topics we have covered so far this year, this concept is one of my favorites. I completely agree that some of the main thoughts of Americans are completely wrong. Before taking this class, I thought that unemployment is at an all high time at that we want our rate to be 0%. But like you said, we are not a prison camp. Instead we want it to be close to 4.5% and 5% of the 7.5 million unemployed is farely close. This factor completely diminishes the fact that many workers are in between jobs and transitioning into the workforce. I agree that the number of unemployed people in our country is desired and not at an all time high.
Another example that we talked about in class was foreign trade. The majority of Americans incorrecrly think we need to keep our jobs in America and that when we buy products fom countries such as China we are helping other countries and hurting our own. From my personal studies in macroeconomics, I understand this to be wrong. When we pay other countries in US dollars they must pay us back by investing in our jobs. This theory on opposites is fascinating to me and I feel there is a major contradiction with the realities of the economy and the opinions of the American people.
I found this article to be completely accurate in that one of the most dependable pattern in economics is the fact that black is white and down is up. I found the comments regarding being forced to keep your job and to never being able to have the choice to quit, quite similar to communist countries. I mean if i had to sell ice cream for the rest of my life but had absolutely no interest in selling ice cream. One i wouldn’t have nearly as much motivation or productivity as Ben & Jerry who get the giggles making Cherry Garcia. Second in a free market economy where I can choose my line of work, economics says that I am more likely to pick something I would excel in and be more productive in. Also regarding unemployment, the statements made were also completely accurate in that without unemployment you wouldn’t have the ability to free up that resource in the market and have the ability to allocate it to something new. If every single person was employed but we came up with the great new industry to produce some product that would benefit everyone but no one could quit their job well that would be a huge waste to the productivity that our economy could have as well as a greater marginal benefit.
Now to discuss the manufacturing part of the article. I personally believe that making other countries that could greatly use some form of business to stimulate their own economy is great. I mean if we can have the labor done over there for so much cheaper, which would lower whatever companies are using that labor force product costs. Well then there would be greater supply of that good, and the prices for that good would go down and stimulate competition in that area of the market which is excellent for the economy but even better for us the consumers. Because face it who doesn’t want cheaper toilet paper, i mean we don’t even think about where something like that is made. So I’m all for companies looking for the most efficient ways to lower resource cost in production. I know the average citiizen would say that it takes away from American jobs but really that just means we are freeing up our own market system and we can allocate those workers to a better service, good, or technology all the while benefiting us the consumers.
Mr. Latter
Prior to entering your class I would have classified myself as one of the “potential voters” who might have been swayed by this discussion of the “high” amount of unemployed people. I probably would have mentioned these statistics around the dinner table in a normative fashion declaring something needs to be done in order to change the downward spiral that our nation is in. However the “180 degree moment” has essentially opened my eyes to the small fact that I know nothing or very little, in relation to all that is out there and in order to stay objective one must be open to different sides of an issue and keep an open mind. Not taking a position on an issue until thoroughly understanding both sides of it is the best way to handle ones opinion.