Naked Economics by Wheelan, Charles (best books to read .TXT) 📗

smart, motivated people with general skills. Many of these individuals would find jobs immediately. (Remember, human capital embodies not only classroom training but also perseverance, honesty, creativity—virtues that lend themselves to finding work.) Some of these highly skilled graduates would start their own businesses; entrepreneurial flair is certainly an important component of human capital. Some of them would leave for other places; highly skilled workers are more mobile than their low-skilled peers. In some cases, firms would relocate to Chicago or open up offices and plants in Chicago to take advantage of this temporary glut of talent. Economic pundits would later describe this freak unloading of buses as a boon for Chicago’s economic development, much as waves of immigration helped America to develop.

If this example sounds contrived, consider the case of the Naval Air Warfare Center (NAWC) in Indianapolis, a facility that produced advanced electronics for the navy until the late 1990s. NAWC, which employed roughly 2,600 workers, was slated to be closed as part of the military’s downsizing. We’re all familiar with these plant-closing stories. Hundreds or thousands of workers lose their jobs; businesses in the surrounding community begin to wither because so much purchasing power has been lost. Someone comes on camera and says, “When the plant closed back in [some year], this town just began to die.” But NAWC was a very different story.4 One of its most valuable assets was its workforce, some 40 percent of whom were scientists or engineers. Astute local leaders, led by Mayor Stephen Goldsmith, believed that the plant could be sold to a private buyer. Seven companies filed bids; Hughes Electronics was the winner.

On a Friday in January 1997, the NAWC employees went home as government employees; the following Monday, 98 percent of them came to work as Hughes employees. (And NAWC became HAWC.) The Hughes executives I interviewed said that the value of the acquisition lay in the people, not just the bricks and mortar. Hughes was buying a massive amount of human capital that it could not easily find anywhere else. This story contrasts sharply with the plant closings that Bruce Springsteen sings about, where workers with limited education find that their narrow sets of skills have no value once the mill/mine/factory/plant is gone. The difference is human capital. Indeed, economists can even provide empirical support for those Springsteen songs. Labor economist Robert Topel has estimated that experienced workers lose 25 percent of their earnings capacity in the long run when they are forced to change jobs by a plant closing.

Now is an appropriate time to dispatch one of the most pernicious notions in public policy: the lump of labor fallacy. This is the mistaken belief that there is a fixed amount of work to be done in the economy, and therefore every new job must come at the expense of a job lost somewhere else. If I am unemployed, the mistaken argument goes, then I will find work only if someone else works less, or not at all. This is how the French government used to believe the world worked, and it is wrong. Jobs are created anytime an individual provides a new good or service, or finds a better (or cheaper) way of providing an old one.

The numbers prove the point. The U.S. economy produced tens of millions of new jobs over the past three decades, including virtually the entire Internet sector. (Yes, the recession that began in 2007 destroyed lots of jobs, too.) Millions of women entered the labor force in the second half of the twentieth century, yet our unemployment rate was still extremely low by historical standards until the beginning of the recent downturn. Similarly, huge waves of immigrants have come to work in America throughout our history without any long-run increase in unemployment. Are there short-term displacements? Absolutely; some workers lose jobs or see their wages depressed when they are forced to compete with new entrants to the labor force. But more jobs are created than lost. Remember, new workers must spend their earnings elsewhere in the economy, creating new demand for other products. The economic pie gets bigger, not merely resliced.

Here is the intuition: Imagine a farming community in which numerous families own and farm their own land. Each family produces just enough to feed itself; there is no surplus harvest or unfarmed land. Everyone in this town has enough to eat; on the other hand, no one lives particularly well. Every family spends large amounts of time doing domestic chores. They make their own clothes, teach their own children, make and repair their own farm implements, etc. Suppose a guy wanders into town looking for work. In scenario one, this guy has no skills. There is no extra land to farm, so the community tells him to get back on the train. Maybe they even buy him a one-way ticket out of town. This town has “no jobs.”

Now consider scenario two: The guy who ambles into town has a Ph.D. in agronomy. He has designed a new kind of plow that improves corn yields. He trades his plow to farmers in exchange for a small share of their harvests. Everybody is better off. The agronomist can support himself; the farmers have more to eat, even after paying for their new plows (or else they wouldn’t buy the plows). And this community has just created one new job: plow salesman. Soon thereafter, a carpenter arrives at the train station. He offers to do all the odd jobs that limit the amount of time farmers can spend tending to their crops. Yields go up again because farmers are able to spend more time doing what they do best: farming. And another new job is created.

At this point, farmers are growing more than they can possibly eat themselves, so they “spend” their surplus to recruit a teacher to town. That’s another new job. She teaches the children in the town, making the next generation of farmers better educated and more productive than their parents.