Economics in one Lesson: The Invisible Side of Policies

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The curse of machinery: the rise of automation is reducing the job opportunities. Software and machines are performing more of the starter jobs which make it very hard to get started in the economy. The unemployment rate is much higher for minorities and young people and this bas bad long term consequences. If they are not given an opportunity to refine their skills, they will lag in opportunity and income. It seems reasonable that the government can invest in jobs.

Hazlitt makes points if a coat manufacture substitutes a machine for labor the manufacturer must use these extra profits in at least one of three ways, and possibly he will use part of them in all three. They will use the extra profits to expand his operations by buying more machines to make more coats; or invest the extra profits in some other industry; or spend the extra profits on increasing his own consumption. Whichever of these three courses he takes, he will increase employment.

2. Over time the cost of coats will go down as other companies come into the market to capture the new higher margin business.

3. Machines make the worker more productive and therefore will earn a higher wage.

4. He also makes note that “Every day each of us in his own activity is engaged in trying to reduce the effort it requires to accomplish a given result. Each of us is trying to save his own labor, to economize the means required to achieve his ends. Every employer, small as well as large, seeks constantly to gain his results more economically and efficiently— that is, by saving labor”.

Street sweepers in Panama

In small towns in Panama there occasionally make work jobs where many people are hired by the government to sweep the streets with a broom made out of straw. The broom falls apart as you sweep and barely picks up any dirt from the street. I’ve never heard much argument that its other than a great way to employ low skill people. With government make work. But a little estimating makes me rethink this idea:

1. Employment needed to make the sweeping machines.

2. Cost of 1000 workers ($600 per year month) = $7.2M

3. Cost of street sweeping truck $100K (ignore financing)

4. There are many manual labor jobs where factories have demand and are looking for workers. These same workers can offer their services at $400 per month, $4800 per year.

5. Now factory can produce $15,000 of new production with the increased labor.

6. $15M of new production at $4.8 M Labor cost.

7. Savings to government $7.1M

8. If you transfer $200 a month subsidy to match the original $600 a month salary ($2M) so the worker still gets the original $600/month salary of the make up work the government still gains $5.2 in taxpayer savings.

9. The new $15M of production flows through the economy and becomes new demand for other firms, products and generates new tax revenue.

10. So the net gain to the economy is incredibly positive, making the make up work program a lot more destructive than I thought.

Hazlitt notes “Why should freight be carried from Chicago to New York by railroad when we could employ enormously more men, for example, to carry it all on their backs”. Intuitively it seems reasonable that employing more people instead of a machine will help grow the economy and employee workers that are having a tough time getting a job. But after deeper thought, its probably better to subsidize the lower skilled worker with some of the gains and savings of the more productive policy.