Saturday, November 24, 2012

"Buy local" doesn't make economic sense

Today is "Small Business Saturday," which apparently is a day on which we are supposed to buy stuff from business establishments that are owned by people who reside "in our community." I have no problem with setting aside a day to applaud small business and entrepreneurship--a very worthwhile and commendable activity. But whatever "warm fuzzy" consequences this may have for shoppers, it doesn't carry a lot of economic logic. A few points:

  • A common argument is that buying locally keeps the money in the community, and this is somehow a good thing. Russ Roberts dispatches with this one here; basically, if we buy things locally simply because they are local and not because they make sense in terms of cost and quality, we are impoverishing ourselves and, ultimately, each other.
  • The "keep money local" argument is also a little silly because it relies on an arbitrary definition of "local." Local means close to me. If it's good to keep money close to me, why should I stop at the level of my town? Why not keep money in my neighborhood and only buy stuff from people who live on my street? But even that isn't as close-to-self as I can get. See where this is going? The logic behind "buy local" leads to the demand that we only buy stuff from people who live in our house. Or our bedroom. That's stupid. We don't enrich ourselves by "keeping money local." 
  • Rather, we enrich ourselves through trade--exchanging our own resources (which includes the product of our comparative advantage) for the resources of others at a price that makes sense to both buyer and seller (reflecting the costs of production and the benefits of consumption). Russ Roberts nails the trade concept here.
  • Buying local solely to buy local is inefficient and, therefore, wastes resources. This is bad for the environment and bad for the economy in general (that's right--your environmentally conscious friends who want you to be a locavore are probably harming the environment). Steve Landsburg explains this here.
  • Finally, there is a less-common argument about supporting small businesses that relies on old research about who creates jobs. Basically, there is a political conventional wisdom holding that small businesses are the most important business category for job creation; some people might see this as a reason to support small businesses. Better research has shown that this conventional wisdom is bogus.
If you get warm fuzzy feelings from shopping local, do it. Otherwise, stick to making consumption decisions according to the net value you get from the product you're buying. That will often mean buying local; when it doesn't, you can still feel good about encouraging non-wasteful use of resources.

Addendum: Discussion with some other people prompted me to add a caveat about costly information. It's possible that some local firms would provide better consumer value than chains (for example, in industries where economies of scale aren't substantial) but suffer from the fact that information is costly: brand recognition dominates when determining whether local firms are good. See here for evidence that this may matter. For these reasons, initiatives like "Small Business Saturday" may be worthwhile. In this respect, the catch phrase should be changed from "buy local" to "check Yelp first."

Friday, November 9, 2012

How conservatives should think about immigration

If conservatives were as serious about their preferred economic principles as they claim, they would embrace more immigration--and not just high-skill immigration. Here's why:

1. Freemarket principles: Labor is a market. It's like any other market. In most areas of the economy, conservatives see the value of preventing government interventions. When it comes to immigration, though, conservatives loudly support severe government interventions in the labor market. This particular intervention includes fences and armed border patrol agents and all sorts of other money drains. The benefits of nonintervention in other markets exist in labor too.

2. No more nanny statism: Current immigration law involves government telling businesses they cannot hire certain kinds of people. Why is that the government's business? In other areas, conservatives recognize that employment should be seen as a mutually voluntary transaction between employers and employees. Why do conservatives abandon this principle when they tell employers they cannot hire immigrants (and expect employers to enforce immigration law)?

3. Wealth creation: It is a simple truth that we do not make ourselves wealthier by producing things at higher costs than necessary. Preventing immigration--including low-skill immigration--obliges us to overpay for labor that immigrants could do for less. It is a waste of resources. It's like banning construction firms from using power tools. Hiring immigrants to do jobs for which they have a comparative advantage frees up resources for other uses, expanding our wealth. Conservatives should abandon their belief that only high-skilled immigration is good for the economy.

4. Most conservative excuses for opposing freer immigration either are bogus or can be fixed as part of immigration reform. See, for example, this discussion.

There are many other reasons to support looser immigration restrictions, but the ones I mentioned should appeal to market-minded conservatives.

Monday, November 5, 2012

Facts about jobs that may surprise you

A lot of attention is paid to net job flows in the economy--the net amount of jobs created in a given month, quarter, or year. Less attention is paid to gross job flows, but they tell a very interesting story about the US job market.

Gross job creation refers to employment gains at expanding and new establishments (plants or business locations); gross job destruction refers to employment losses at shrinking or closing establishments.* These numbers can tell us a story about job reallocation, or flows of jobs between business establishments (and between industries, states, or whatever).

To see why this is interesting, consider the following figure (click for larger image).**

Note that the chart records job flows in a given year as of March of that year; the Job Creation (blue) bar for 2010 refers to employment gains at expanding establishments between March 2009 and March 2010.

The depths of the Great Recession are captured by the bars for 2009 and 2010. Observe that in these years, businesses hired around 14 million new employees! In a private workforce of 110 to 120 million total employees, 14 million hires is significant. Many businesses opened or expanded during the depths of the recession. This probably surprises some people.

The problem, of course, is illustrated by the Job Destruction (red) bars. Between March of 2008 and March of 2009, shrinking or closing businesses destroyed almost 20 million jobs. That's almost one-fifth of the US economy.

Job recessions can be easily seen in this chart. When the blue line is taller than the red line, the economy has added jobs on net. When the opposite is true, national employment has declined.***

What should we learn from this chart? I can think of a few things:
  1. Even during recessions, the US economy is amazingly dynamic. Overall unemployment may be increasing, but many workers still move between businesses or from unemployment into employment. The majority of workers separated from their jobs can be absorbed by new or expanding businesses.
  2. Not all businesses are harmed by recessions. Some businesses expand significantly or are newly created during recessions, while other businesses shrink or close.
  3. Likewise, during periods of strong economic growth, many businesses are shrinking or closing. It's not always obvious what this means: businesses could be laying off workers while profits increase if productivity is increasing (but those workers can typically find jobs at expanding businesses). In other cases, though, businesses are shrinking or closing because they are unsuccessful--bad ideas, bad management, bad local conditions, or bad luck--even while the overall economy grows.
  4. The net jobs numbers hide a lot of labor market churning--reallocation and creative destruction.
  5. Discovering the nature of job flows is important. Are there strong net flows from some regions to others? From some industries to others? From small firms to large firms or vice versa? From young firms to old firms, or vice versa? How do flows relate to the business cycle? These questions matter for both policymaking and personal/business planning. There is a large economic literature on each of these.
  6. For economist readers, these data should illustrate some limitations of representative firm models.

*More precisely, these job flows definitions are discussed here and are defined as:
(Gross) job creation at time t equals employment gains summed over all business units that expand or start up between t-1 and t.
(Gross) job destruction at time t equals employment losses summed over all business units that contract or shut down between t-1 and t.
These measures are good for measuring flows between business establishments. They are useless for measuring within-establishment flows. 

**Data from Business Dynamics Statistics (BDS). These are aggregated from establishment-level administrative data and are subject to long release lags. 2010 is currently the most recent year available. Note that the BDS can be thought of roughly as the "population" for both the CES and JOLTS surveys, except that those surveys also include government.

***The difference between the blue and red bar for a given year should roughly equal the sum of the popular monthly private nonfarm payroll growth measure released by the BLS (summed over 12 months from March to February).