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C00002 00002	∂08-Nov-77  2206	SGK  	Economy  
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∂08-Nov-77  2206	SGK  	Economy  
To:   JMC, BH
What, in your opinion, causes unemployment?
Is welfare desirable?  Justify your answer.
I am thinking about an alternative economics and think
reflecting on your answers will help me avoid pitfalls.
Thank you

	Unemployment is a complex phenomenon, and a correct
explanation of its causes, which I don't claim to have, will
be complex.

	Let's begin with how people become unemployed:

	1. Zenith closed a TV plant a few weeks ago, because they said
they couldn't meet foreign competition, and laid off 5,000 people.
According to the theory of comparative economic advantage, there is
nothing wrong with a transition from American manufacture of TV
sets to foreign manufacture.  We will buy TV sets from them, and
export to them something we produce cheaper, e.g. wheat or airplanes.
(The biggest American exports are often things foreign countries
can't yet produce at all.  They have to buy them from us in spite
of our high wage costs, and by the time they get around to manufacturing
the item, we have something yet newer.  This enables us to have higher
wages even when they produce something with fewer man-hours, but it
makes it very hard for those American industries that have no
innovation.  To take a new example, hobby computers are only available
from  the U.S.  Therefore, the hobby computer industry can afford
to pay wages that TV manufacturers cannot.  Once we can't produce
things others can't, our currency wlll fall in value till trade
balances again.

	This is a theory of equilibrium, and it gives an argument
to show that it leads to the most productive world.  However, the
argument says little about the process of change, and the system
is driven by technological, demographic, resource and political
changes at a rate such that equilibrium is never reached.  On the
other hand, the system doesn't diverge farther and farther from
the economic optimum either.

	Now what about the 5,000 laid off workers?  A lot depends
on the size of the community, but my impression is that their city
is relatively small, and the Zenith plant is one of the major
employers.  Maynard, Mass. lost its woollen mill in the 1950s,
but it was replaced by D.E.C. which occupied the mill building.
Win for Maynard, since D.E.C pays more, but luck was involved,
since the city fathers of Maynard were not competent to invent
Digital.  If an expanding company like D.E.C. buys the Zenith
plant as D.E.C. bought a computer plant from losing R.C.A., the
city will win, and the workers will win if it happens promptly.

	Now look at the matter from the proper functioning of
the American TV industry.  Other companies bet that they would
be better off manufacturing overseas, while Zenith bet that
manufacturing in Ohio would win.  For many years Zenith did
well, but finally they lost.  No doubt hindsight tells them that
they would have done better to have given up sooner.  However,
we have the satisfaction that both alternatives were tried
by companies that staked their profitability on the outcome.
Therefore, the present mix that involves making integrated
circuits here and other parts overseas is probably close to optimal -
given the general economic conditions including wage distribution,
tariff laws, etc.  When companies or government agencies don't
or universities don't face competition, they drift far from
optimum behavior, because it is usually bureaucratically more
comfortable.  Thus the Russians require three times the manpower
to operate a factory bought from America, and their wages are
one-third those of the American workers (approximately).

	Consider the layoff from the point of view of the employee.
The event has causes not at all under his control; he wasn't laid
off because he worked badly, and Zenith did not claim that
restrictive union practices or some such thing made the plant
unable to compete.  Now he has to find another job, and some
people will find that harder than others.  Of course, he has
unemployment compensation to help him.  Perhaps more should
be done to help him.  Here are some possibilities with their
advantages and disadvantages:

1. Perhaps with lower wages the plant wouldn't have to close.
This is not a good solution if high wage jobs can be found,
and unions usually are right in not agreeing to it.  The argument
is that if a company can't pay prevailing wages, let it go out
of business.  Some other companies will expand to take up the
slack sooner or later, they believe.

Remark: The evidence indicates that technological advance doesn't
increase the rate of unemployment.  Increases and decreases in
unemployment are not historically correlated with changes in
technology, and the amount of unemployment in a country is
unrelated to its technological level.  The amount of unemployment
in the U.S. since 1900 has fluctuated around values similar to
those of today even though productivity has increased by a factor
of five or more.  This suggests that the amount of unemployment
is regulated by an economic servo-mechanism, and technology
is not in the control part of the mechanism.

2. Zenith as a whole could be forced to subsidize this plant.
Assume Zenith is large enough and profitable enough to afford it.
This would not be a bad solution for these workers, but if it
were to be done by law, it would damage the economy as a whole
as the number of uneconomic plants increased.  Italy and England
are in this situation.

3. The government could subsidize the plant.  This is common in
England.  The first step is easy, because only a small subsidy is
required.  The situation gets worse and worse with time.

4. The company could have been required, say as part of a union
contract, to provide severance pay or increased unemployment
benefits.  This would have made the plant uneconomic sooner
unless wages were to have been lower.  When the question of
wages now versus increased unemployment benefits are put to
the workers, they generally prefer to take the wages now, although
social thinkers and union officials often think they should choose
otherwise.  Which is better depends on how long a worker expects
it would take him to find a new job.

5. A new plant making an entirely different product could be
put up - say under the sponsorship of the city.  This loses.
Each person has his own skills and his own way of figuring
what makes one job preferable to another.  In general, people
are better off finding their own jobs.  What is important is that
there should be a wide variety to choose from.


a004  2204  08 Nov 77
PM-Advance Advisory,
    The following moved in advance for Wednesday PMs:
    WASHINGTON - It looked like a good deal when Mayor G. William Gross
and the City Council decided to save the residents of Sioux City,
Iowa, $289 by buying two escalators made in Japan rather than
American-built models. But he had second thoughts two weeks later when
Zenith announced it would close its local television plant and lay
off 800 workers because of alleged unfair comeptition from lower
priced television imports. First of a three-part series on foreign
trade and its effect on U.S. industry and workers. a079-a080, a088 of
Nov. 3. Laserphoto SXC1 of Nov. 4.