Bush pushes Congress to vote on Colombia trade pact. - Apr. 14, 2008

Click on the graphs for full-size versions

The benefits of trade, while visibly demonstrated by two basic economic models, the production possiblities curve and a simple supply/demand diagram, are not as straightforward when politics is involved. Case in point: the Bush administration has been trying to push through a free trade deal with Columbia, one of our key allies in a region ripe with anti-American sentiment. The White House views the trade deal as a win-win for the American economy:

The administration insisted the deal would be good for the United States economically because it would eliminate high barriers that U.S. exports to Colombia now face, while most Colombian products are already entering the United States duty-free under existing trade preference laws.

On the surface it appears the US has nothing to lose from extending trade relations with Columbia, since few if any American jobs will be lost by such a deal; so why are some Democrats resisting the trade deal?

In explaining their opposition, Democrats have cited the continued violence against organized labor in Colombia and differences with the administration over how to extend a program that helps U.S. workers displaced by foreign competition.

As is so often the case, what’s best for the economy does not seem to be what’s in the best interests of Americans. Our values extend, in some cases, beyond our pocketbooks. The White House argues that the US/Columbia free trade agreement only promises to increase demand for American products while doing little to affect domestic employment. The fact that most Columbian imports are already tariff-free probably confirms this. But the Democrats oppose this deal on the grounds that it would appear that America endorses the anti-labor activities of the Columbian governments.

Labor is a touchy political issue in America, where union membership among workers has fallen from around 40% in the 1950’s to around 13% today. As Columbia and other developing economies become integrated into the global economy, there is increasing pressure for governments to liberalize their domestic labor markets, weaken unions, lower wages in order to attract more investment from abroad, lower the costs of production, thus increase the quantity of their exports demanded abroad. Labor market flexibility and liberalization is certainly an important step in attracting investment and demand to developing countries, but if it comes at the expense of the well-being of the citizens of a poor country, then perhaps standing against such anti-labor actions is a just cause.

The free trade deal with Columbia poses more of a moral dilemma than an economic one. From America’s stand-point, it appears to be a win-win situation. But from the perspective of international labor standards, approving a trade deal with Columbia threatens to undermine another set of American values: those of human rights.

Discussion questions:

1. Why do you think the White House is so adamant about pushing through the trade deal with Columbia?
2. Are the Democrats correct to oppose a deal that could create jobs in America while at the same time make more goods available to Columbian consumers at lower prices?
3. Should America be trying to dictate the labor standards of its trading partners? Why or why not?

FT.com / World - American dream hit by dollar’s decline

Ever wonder if there was a connection between the strength of a country’s currency and the flow of immigrants into that country? No? Me neither… but interestingly it appears that there is a direct relationship between these variables. The weaker a country’s currency, the fewer immigrants cross its borders to find work. Here’s why:

Migrant workers are choosing to move to Europe, Australia or Canada instead of the US in order to protect the purchasing power of the money they send home to their families, according to one of the world’s leading experts on remittances.

The shift is a result of sharp falls in the value of the US dollar against other international currencies, many of which have been boosted by the rise in commodity prices.

This news may make some American’s happy, since it could mean more opportunities for the American workers who may have lost their jobs during the current recession. This, however, may not be the case. It turns out that much of the decline in immigrant workers is in high skilled fields for which demand for workers in the US remains high even in times of recession. According to the article, “the trend was especially notable among skilled workers, such as doctors, nurses and information technology specialists”.

A decline in the inflow of high skilled workers may actually make Americans worse off. I have blogged about the shortage of American workers in fields such as engineering, software design, and natural gas rig technicians,and I don’t think many Americans would argue that health care in America is already too cheap, so I suspect that more doctors and nurses would be desired.

A weak dollar has many effects on America. In some ways, it makes the country better off. As I have blogged about here, a weak dollar should lead to more balanced trade, a boom for US manufacturers, and an increase in exports, all related, of course, to the relative decline in prices of US goods to foreign consumers. But a weak dollar may in fact do more harm than good, one reason for which is explained here: skilled foreign workers whose talents are in strong demand in the US are moving more and more to European markets to find work.

Anti-immigration hawks may be cheering, but American consumers may start rearing as high-skilled labor shortages drive up wages and prices in the markets Americans most depend on today: health care, energy and technology.

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At Charter School, Higher Teacher Pay - New York Times

A New York charter school opening this year will start teachers’ pay at $125,000. The school’s creator and principal believes that quality teachers, not technology, are what will lead to results for students at his school.

The school’s creator and first principal, Zeke M. Vanderhoek, contends that high salaries will lure the best teachers. He says he wants to put into practice the conclusion reached by a growing body of research: that teacher quality — not star principals, laptop computers or abundant electives — is the crucial ingredient for success.

“I would much rather put a phenomenal, great teacher in a field with 30 kids and nothing else than take the mediocre teacher and give them half the number of students and give them all the technology in the world,” said Mr. Vanderhoek, 31, a Yale graduate and former middle school teacher who built a test preparation company that pays its tutors far more than the competition.

This is certainly an interesting experiment. American schools have struggled for decades to improve results through the implementation countless programs and policies. Lately, one emphasis has certainly been on technology; but this article makes an interesting point: all the technology in the world won’t make a difference if it’s not in the hands of an excellent teacher.

The best basketball players in the NBA make millions more than the average ones. The most skilled doctors are rewarded with the highest salaries. Top lawyers earn hundreds (if not thousands) of dollars an hour while one from a third rate law school toils for $65,000 a year in a county prosecutor’s office. So what’s different about teaching? Why do all teachers in a particular district with a particular number of years experience get paid the same salary? Could you ever imagine all the lawyers in a particular city making identical salaries? The idea is absurd. Clearly the top law firms will pay for the top lawyers, which in turn enables that law firm to achieve the best possible results for its clients.

Yet the vast majority of teachers in America find themselves stuck in a system rooted in an outdated belief in equity, egalitarianism, fairness, whatever you want to call it, where pay is based not on talent, ability, skill, expertise, and all the attributes that determine one’s pay in a competitive labor market like medicine, law, and professional sports; rather the older you are and the more time you’ve “served”, the greater your financial reward. Is it a coincidence that America is known for its cutting-edge medical field, its skilled litigators, and world-class professional athletes. Could someone describe to me the reputation of American public schools? No? I understand, it’s a depressing subject.

In economics we teach the importance of incentives, which when used properly encourage individuals to improve their human capital in as many ways as possible. In other words, if I am rewarded for excellence, I will strive for excellence in my profession. The only incentive in education, it seems, is to grow old and gray, because that’s how I will make more money. Easy for teachers whose only goal is to make it to retirement, right? Without a doubt. Effective for students in a society falling ever further behind other countries in academic achievement? Hardly.

Ironically, some of the teachers most skilled in the application of new technologies and versed in the latest pedagogies are those who grew up learning with those technologies in their own education in a constructivist, student-centered environment. In other words, the youngest, most tech-savvy, who just happen to earn the lowest salaries (practically subsistent in some parts of the country).

Mr. Vanderhoek may be proven wrong. Perhaps it is more technology, more standardized tests, more powerful teachers’ unions, that America’s children need to begin achieving the results that Indian, Chinese, Singaporean, Korean, Japanese, even European students are achieving in the maths, sciences, and other subjects. But if he’s right, then $125,000 (2.5 times the national average for public school teachers) may prove to be just what’s needed attract the kinds of teachers that can achieve results. What if this school does succeed? Will it matter? Or will America’s public schools forever reward teachers not for performance and qualifications, but simply for getting older?

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Irrational choices | Free exchange | Economist.com

The debate over the impact of immigration on American wages is a hot one. As seen in the video below of immigration opponent Lou Dobbs, many in America view the free-market, open boarders ideas of certain economists with outright disdain and hatred. Among these “anti-immigration hawks” is economist George Borjas:

“(Anti-) immigration hawks like George Borjas have estimated that wage competition from immigrant labour may reduce native, unskilled worker earnings by something like 7 percent.”

Among economists, however, such views are rare:

“Other researchers dispute such figures, arguing that immigrant impact on native, unskilled workers wages is minimal and is strongly positive for skilled labour. In either case, it’s clear that the gains enjoyed by the migrants themselves significantly exceed domestic worker losses.”

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Recently, in AP Economics, we have been learning about Labor markets; in IB Economics we’ve been focusing on the benefits and costs of international trade and global economic integration. As students of market economics, it is ingrained in us that economic liberalization, the freeing of markets, enabling resources to be allocated based on the price mechanism; these are all are good things. Removing barriers to the free movement of products and resources across national and political boundaries should eventually result in greater world output, and subsequently increases in living standards and wealth for the citizens of all free trading countries.

Nations will produce the products for which they have a comparative advantage, and trade with their neighbors for those products for which they don’t. Resources will flow from markets in which they are in low demand to those where they are in high demand. Prices in both product and resource markets will rise and fall, allocating scarce resources to the markets where they are needed most.

So why, in an era where the benefits of free trade and free flow of productive resources seem so visible around the world, do Americans seem so susceptible to views like those exhibited in the video below:

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Shanghai American School Employment - Available Positions

No article here, just some food for though about a meeting all SAS teachers attended today during lunch. Our director, Dennis Larkin, announced the changes being made to teachers’ salary and compensation packages for next school year. As anyone in international education knows, the market for teachers is a very competitive one these days. When I say competitive, I mean schools are forced to compete with one another for a rather scarce supply of teachers who are out there looking for work.

SAS has set as a goal to rank among the top five international schools in Asia with regards to compensation for teachers. It dawned on me during the meeting today that Dr. Larkin’s presentation illustrated a clear example of an imperfectly competitive labor market, the characteristics of which are a few large firms (in this cases schools) competing with one another to attract workers (teachers) to their firm, in order to meet a growing demand for the product being provided (students’ education). In East Asia, where schools all over China, Korea, and Japan continue to grow as more and more employees sent by foreign firms to oversee company operations in the region arrive with their families in tow, demand for more international school seats leads to demand for more international school teachers (remember, resource demand is derived demand). Rising tuition fees (price of the product) cause the marginal revenue product of teachers to increase (remember, MRP = PxMP), and since MRP is synonymous with demand, schools’ demand for labor also increases. Continue Reading »

New York Manhole Covers, Forged Barefoot in India - New York Times

In the revealing story above, the NYT reports on the manufacture of the New York’s thousands of manhole covers, which it turns out come primarily from a foundry in the Indian state of West Bengal. An NYT photographer discovered the Indian factory, and his photos prompted the report here:

Eight thousand miles from Manhattan, barefoot, shirtless, whip-thin men rippled with muscle were forging prosaic pieces of the urban jigsaw puzzle: manhole covers.

Seemingly impervious to the heat from the metal, the workers at one of West Bengal’s many foundries relied on strength and bare hands rather than machinery. Safety precautions were barely in evidence; just a few pairs of eye goggles were seen in use on a recent visit.

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Foreign Policy: Why We Trade

Professor Russ Roberts, host of the EconTalk podcast, has an essay in the latest issues of Foreign Policy journal titled “Why We Trade”. In this piece, Roberts defends the benefits of trade from a broad perspective, beyond the popular political view of trade, usually along the lines of “exports, good - imports, bad”. Roberts compares this line of thinking (characteristic of presidential candidates of both the Republican and Democratic parties), to the 14th century, pre-Adam Smith view of world trade, known as mercantilism.

Mercantilism was a view of global economic interaction that placed emphasis on the accumulation of gold and other precious metals from abroad in exchange for your country’s exports. The doctrine failed to recognize the importance of imports from abroad, as this was viewed as a loss of wealth to foreigners. Mercantilists viewed wealth in terms of bullion or the amount of precious metals a country owned. Today, of course, our understanding of wealth has evolved to account for the amount of output, or products (goods and services), we are able to consume. Herein lies the flaw in the rhetoric of modern politicians who, “are always talking about the necessity of other countries’ opening their markets to American products. They never mention the virtues of opening U.S. markets to foreign products.”

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Oil worker shortage could lead to supply squeeze - Nov. 2, 2007

Lately I’ve blogged about the impact of higher oil prices on the petrol market in China (here and here). As the main input in petroleum products such as gasoline and diesel, the price of oil affects the costs of fuel producers, such as China’’s SinoPec and PetroChina, the two large state-owned petroleum companies, as well as the scores of smaller competitors in that provide fuel to China’s thirsty economic machine.

As the price of oil has approached $100 per barrel, fuel manufacturers have had to cut back output as their costs have soared, putting upward pressure on the market price of fuel here in China. But what determines the price of a barrel of oil? Is the increase in the price of oil due to an outward shift of demand or an inward shift of supply? Actually, it’s probably both. This article helps answer part of our question, and it does so by discussing one of the determinants of supply of oil, resource costs. Continue Reading »

Thanks to Jeewon Oh, Shanghai American School AP Econ student, for posting the link to this excellent article about supply and demand for teachers in Mississippi. Jeewon posted this article and her below summary of it to our class’s “AP Econ in the News” page on the wiki. CLICK HERE to see the other articles and summaries posted by students relating to our current unit on Supply and Demand. Here’s Jeewon’s article:

Teachers: Shortages require pay hikes -The Clarion-Ledger- Real Mississippi

And here’s Jeewon’s summary from the wiki:

In Mississippi, there are not enough teachers in the classrooms. This teacher shortage is becoming a greater problem, as 50 percent of the teachers nationwide are estimated to leave the profession within five years. In August there were 1,270  requests for one-year education licenses, which would result in temporary and unqualified teachers in schools. Despite the fact that 1,400 education majors graduate from Mississippi colleges, only 900 become teachers. The State Superintendent of Education Hank Bounds realized that if wages increased, there would be more teachers willing to work. Bounds currently wants a 3 percent pay raise andaddition of 5 years to the pay schedule for teachers. This is asupply-and-demand issue, as the Legislative Budget Committee is planning to supply, or offer, higher wages, predicting that more teachers will be demanding and willing to take the job, due to the change in their income.

The reason this article jumped out at me is because it relates to so many of the topics we’ve studied in unit 2 of Microeconomics, particularly our last class where we learned about how free, competitive markets lead to an allocatively efficient outcome. In public schools in America, wages paid to teachers are essentially set by the state and local governments; in essence there is a price ceiling in the market for teachers. According to the article:

Mississippi has been on a plan to get pay competitive, but it still lags. Base pay for a starting teacher is about $30,000. The average salary is $40,594, short of the Southeastern average of $42,333. The national average is $47,674.

Given the severe shortage of teachers in Mississippi and the nation as a whole, what does this say about the average salaries being paid to teachers? What can we conclude about the allocation of resources towards education? Is the market for public education in the United States allocatively efficient? How does Jeewon’s article present a solid argument for the privatization of education in the US? How might taking some of the responsibility of providing education out of government hands result in a more efficient allocation of resources towards schools?

Great article, Jeewon, thanks for the link and the nice summary. From now on, when I see an excellent article like Jeewon’s accompanied by a fine summary such as the one above, I will plan to post it to this blog so others can benefit from the research and reading that our AP students are sharing through our class wiki. The AP Econ in the News page is a great place economics teachers and students to come find useful articles for their classes, as well, so I encourage you to bookmark it. A new page is added for each unit, and it can be found under each unit’s main page.

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Revenge of the Frosh-Seeking Robots — The American, A Magazine of Ideas

So this article jumped out at me for a couple of reasons. First, it makes this somewhat startling observation:

…elite schools are reporting that the number of economics majors is exploding. For the 2003–2004 academic year, the number of economics degrees granted by U.S. colleges and universities increased 40 percent from five years previously. Economics is seen by bright undergraduates as the path to a high-paying job on Wall Street or at a major corporation.

A 40% increase in the number of econ majors is incredible! I don’t know whether to be flattered that so many young people find the field interesting or frightened that in a few years there will be tens of thousands of fresh, eager economists out there on the job market, against whom I’m sure I’ll end up competing for jobs in economics education!

Besides the impact on the job market for economists, this article really focuses on the decline in numbers of computer science majors, and describes Microsoft’s plan to make the major more appealing to bright freshman once more.

The number of smart kids studying computer science peaked a few years ago and has dropped dramatically since. The number of new computer science majors today has fallen by half since 2000, according to the Higher Education Research Institute at UCLA.

Think of the market for computer scientists and the market for economists. What impact do the above data have on these two job markets? What do you think will happen to the wages paid to economists in the next four or five years? What about wages paid to computer scientists? In which market would you predict a shortage? A surplus?

In an attempt to make computer science more exciting for incoming freshman, the brains at Microsoft have piloted a program to give every freshman who studies comp sci their own pet robot:

Research formed a partnership with Bryn Mawr, the venerable liberal-arts women’s college near Philadelphia, and Georgia Tech, a traditional technical university. The three jump-started a $2 million pilot program called the Institute for Personal Robots in Education that is developing an easily programmable tabletop robotic device to introduce to first-year computer science students.

The prototype I saw in May looks like a miniature space-age chariot, with two wheels and a Bluetooth wireless receiver on top. The developers want to keep the cost under $200 and offer it in college bookstores with a first-year textbook.

Within the first weeks of a class, students will be able to write elementary code that prompts the robot to do simple tasks like drive forward or back. But even simple code-writing with immediate, physical results like this can have an impact that energizes students. Or so it is hoped. Eventually, students can write more complex code—programming their personal robots to emulate a moth.

Do you think this pet robot program will lead to more comp sci majors? What are you thinking of studying in college? Why might economics be a bad choice right now? (Did I just say that?!)

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