There Is No Correct Answer

On this Cafe Hayek post, commentor Chris Killingsworth asks:

What is the correct free market solution, then, for workers in towns around the country who are left jobless en masse when a major local employer packs up and moves overseas?  Go back to school with the money they have hopefully saved up, then move to ‘where the jobs are’?

This question represents a fundamental misunderstanding of what a free market (or market-based economy) is.  Free market is a term used to describe the voluntary interaction of peoples.  As such, each person, using his unique knowledge of time and place, will map out the best way for him/her to respond to different situations.  In short, there is no “correct free market solution,” for any given situation.  For any given situation, there can be millions or billions of “correct” solutions, each one just as valid as the next for differentiating individuals.

In short, Mr Killingsworth’s question is unanswerable because there is no one answer.  His second sentence may work for some, but not all.  Others may make different choices.  It is impossible to know, irresponsible to guess, and unbecoming as an economist to offer “one size fits all solutions.”

Traffic Jam Economics

I-495 (AKA the Beltway) is the interstate that runs around Washington DC from Maryland to Virginia.  Heading toward Northern Virginia, there is a tolled express lane; for a price, you can use this express lane to try to avoid the massive amounts of traffic I-495 gets any given day.  What’s neat about this toll is it is dynamic, that is the pricing reflects the volume of traffic.  Yesterday, I was driving from Fairfax, VA to Silver Spring, MD.  In the middle of the day, the traffic was light.  The toll to drive express from I-66 to the MD border was around $2 (sorry, I don’t remember the exact price).  However, on my way back during rush hour, the toll was around $20 for the same distance!  Why would this be?

Prices are a rationing system.  The higher price of the toll reflects higher demand for the express lane due to increased traffic on I-495.  Drivers on I-495 are faced with a choice: pay $20 and (possibly) get to their destination faster or sit in traffic on the main highway.  The higher the toll, the lower the relative cost of sitting in traffic.  This allows the express lane to be used for those to whom the $20 is the lower cost (those in a rush, for example).

Another interesting note is not everyone in the Express Lane were rich. There were a lot of Benz and BMWs and other luxury cars sitting in traffic, and there were a lot of middle-range cars in the express lane.  This is an example of the economic concept that value, not ability to pay, determines whether an action is taken.  For those sitting in the traffic, the $20 toll was high enough to discourage the use of the express lane, even though they likely could have afforded it.

The moral of the story: there are benefits to sitting in traffic.

Remember Thy Broken Windows

Taking credit for about 1,000 jobs “staying” in Indiana from a Carrier plant’s decision not to move to Mexico, President-elect Trump proclaimed “Companies are not going to leave the US anymore without consequences.  Leaving the country is going to be very very difficult.”  This statement should strike fear into the hearts of liberty-loving, crony-capitalist hating people everywhere. Unfortunately, many of praised it as a step in the right direction, that the $7m in tax breaks is a “good deal.”  However, this is anything but a good deal.  It sets dangerous expectations that will cost Americans jobs, investments, and wealth.

Let’s start with the explicit threat in Trump’s words.  Firms, that operate or expand into the US, will lose their freedom to make business-effective moves.  This will increase the relative cost of doing business in the US (since the cost of relocation outside the country is now higher), making operating outside the country, not expanding operations at all, or automating, more attractive options. Firms will be far more cautious about their operations, thus reducing the total number of potential jobs and investment in the US.  This is the “unseen” effects of Trump’s threats.  The 1,000 jobs “saved” could come at the cost of many more unseen jobs “lost.”

Another side effect (which flies in the face of one of Trump’s campaign promises to “drain the swamp”) is this move will increase lobbying.  As Justin Wolfers tweeted: “Every savvy CEO will now threaten to ship jobs to Mexico, and demand a payment to stay. Great economic policy.”  There is now an increased incentive for firms to lobby government for funds should they want to leave or relocate.  Given lobbying is certainly an arms race, firms will pour more money into lobbying and less into R&D or their employees.  To be sure, this is already a norm in the US, but Trump is merely perpetuating and expanding it, as opposed to ending it.

So, we have reduced investment into the US and increased interest in lobbying, both of which are economically inefficient activities.  Seems like quite a steep price to pay to give a temporary stay of execution for 1,000 jobs.