Now is that time of year when thousands of high school and college students across the world, from Fairfax to Frankfurt, will be taking their very first economics course. Perhaps it will be a basic, high school introductory economics’ course, or perhaps an even more challenging AP or IB economics’ course. Or perhaps you are a freshman or sophomore in college taking an introductory macroeconomics or microeconomics course.
Whatever your situation, you will soon read that all introductory economic text book authors make the point, usually in their respective text’s first chapter, that a primary benefit of studying economics is that it aims to transform one into a more effective and influential citizen by enabling one to better understand and conclude on the economic positions and promises of those running for public office. The underlying logic is that a citizen or voter that is well-versed in basic economic principles will be a smarter citizen and more likely to vote for the political candidate or referendum that will deliver the greatest economic gain for the citizens of the locality, state, and/or nation. In fact, this “economics for citizenship” reason is why a growing number of states now require completion of a basic economics course as a requirement for high school graduation.
In my classroom, I informally call the study of economics “the 180-degree science” because as the student studies this social science for the very first time they often develop conclusions that are precisely the opposite (hence, the “180 degrees”) of what they had originally believed before taking their first economics course.
For example, here are two “180 degree moments”, which are applicable to the United States’ economy, that you may well learn in your first year economics’ course:
1. Pre-Econ Course or Misinformed View: “We don’t make anything anymore in America. America’s manufacturing prowess is in a state of constant decline. It seems like almost everything bought and used in the U.S. is made in China”
Post-Econ Course and 180 Degree View: The dollar value of manufactured goods in the United States, restated for price level changes so the comparison is accurate, is up over 50% for the last 15 years and has doubled since 1990! Yes, it is true that the U.S. has lost several million jobs in manufacturing over that same time period, but that is primarily due to rising manufacturing productivity (think machines and technology replacing humans), where the U.S. can now produce more higher value manufactured products than ever before freeing up those displaced manufacturing workers who now have found or must find employment in other growth industries such as technology or health care.
Moreover, believe it or not the US manufacturers more than both Japan and Germany combined, although China passed the US and moved into the number 1 spot in 2011 as it employs more than 5x that of the US in the manufacturing sector. Although manufacturing output is at its highest level ever in the US and will continue to rise into the foreseeable future, it will also continue to decline as a percentage of overall economic activity as the United States is growing faster in services than in manufacturing.
Whatever your situation, you will soon read that all introductory economic text book authors make the point, usually in their respective text’s first chapter, that a primary benefit of studying economics is that it aims to transform one into a more effective and influential citizen by enabling one to better understand and conclude on the economic positions and promises of those running for public office. The underlying logic is that a citizen or voter that is well-versed in basic economic principles will be a smarter citizen and more likely to vote for the political candidate or referendum that will deliver the greatest economic gain for the citizens of the locality, state, and/or nation. In fact, this “economics for citizenship” reason is why a growing number of states now require completion of a basic economics course as a requirement for high school graduation.
In my classroom, I informally call the study of economics “the 180-degree science” because as the student studies this social science for the very first time they often develop conclusions that are precisely the opposite (hence, the “180 degrees”) of what they had originally believed before taking their first economics course.
For example, here are two “180 degree moments”, which are applicable to the United States’ economy, that you may well learn in your first year economics’ course:
1. Pre-Econ Course or Misinformed View: “We don’t make anything anymore in America. America’s manufacturing prowess is in a state of constant decline. It seems like almost everything bought and used in the U.S. is made in China”
Post-Econ Course and 180 Degree View: The dollar value of manufactured goods in the United States, restated for price level changes so the comparison is accurate, is up over 50% for the last 15 years and has doubled since 1990! Yes, it is true that the U.S. has lost several million jobs in manufacturing over that same time period, but that is primarily due to rising manufacturing productivity (think machines and technology replacing humans), where the U.S. can now produce more higher value manufactured products than ever before freeing up those displaced manufacturing workers who now have found or must find employment in other growth industries such as technology or health care.
Moreover, believe it or not the US manufacturers more than both Japan and Germany combined, although China passed the US and moved into the number 1 spot in 2011 as it employs more than 5x that of the US in the manufacturing sector. Although manufacturing output is at its highest level ever in the US and will continue to rise into the foreseeable future, it will also continue to decline as a percentage of overall economic activity as the United States is growing faster in services than in manufacturing.
2. Pre-Econ Course or Misinformed View: “It is patriotic for U.S. citizens to “buy American” so that we can help our own economy. When we buy foreign products (i.e., imports), in lieu of American products, we hurt our U.S. economy as we lose American jobs and incomes".
Post-Econ Course and 180 Degree View: The U.S. will benefit the most economically if Americans buy what they consider to be the very best product, in terms of price and quality, regardless of whether it is a foreign-produced product or an American-produced product. One of the greatest “ah-ha” moments in all of economics is when an economics’ student or citizen learns for the first time that every time a U.S. buyer purchases a foreign product (i.e., an “import”) that those same U.S. dollars spent on the foreign product circle back to a U.S.- based company, not a foreign company. Yes, I am telling you that when you (or Wal-Mart, for example) buy Chinese shirts, those same U.S. dollars spent on the Chinese shirts return into the bank accounts of, say, Apple, Microsoft, IBM, or Garmin as the Chinese must use those same U.S. dollars to buy U.S. products!
Let me try to explain this concept in more detail so that I may actually be able to convince you of this amazing “180 degree” revelation. I always say the more accurate slogan should be “Buying American is Un-American” if it is not the best product as it will create a weaker America and harm our economy!
Let’s say that the United States (we’ll say Wal-Mart) decides to buy some shirts costing $400 from a Chinese shirt manufacturer, in lieu of buying similar shirts from, say, a shirt manufacturer in Elon, North Carolina (USA). The first key point is that when Wal-Mart buys the shirts from China for $400, Wal-Mart can only pay China with US dollars. Why? Because Wal-Mart has only US dollars! Wal-Mart has no Chinese currency (Yuan). Wal-Mart literally drains its bank account of US dollars and pays them to the Chinese shirt vendor, who immediately exchanges the $400 with a Chinese foreign currency trader for the equivalent amount of Chinese Yuan! The Chinese foreign currency trader only purchased the $400 from the Chinese shirt vendor because he knows that he will immediately be able to sell the $400 to a different Chinese business or consumer who wants to buy the amazing products from the U.S. Said another way, the reason the $400 returns to the U.S. is that no one in China can spend any of the $400 in its own economy since only the Yuan is accepted as a medium of exchange in China! China is thus forced to either throw the U.S. currency away (not advised!), or spend the money back to the USA (advised!). Yes, the economic “punch line” is that all spending by the domestic nation on foreign products (imports), in turn, are spent immediately back to the domestic nation increasing or maintaining that domestic nation’s employment, income, and standard of living.
And, yes, let’s not forget about that Elon, North Carolina shirt maker that did not, in this example, get the original $400 from Wal-Mart. Any good economy promotes competition and, in this example, that North Carolina shirt manufacturer must “raise their game” by figuring out how to produce a better shirt in terms of either quality and/or price, and hopefully get the next shirt contract from Wal-Mart! If they are unable to compete, well, that North Carolina firm may just have to close down. But remember the key point is that the $400 spent for the Chinese shirts went to another more deserving U.S. company, in lieu of the North Carolina shirt manufacturer. If Wal-Mart would have “bought American” by buying from the Elon shirt manufacturer, even though the Chinese shirts were preferable, Wal-Mart would have prevented the more effective and deserving U.S. business from getting those same U.S. dollars by giving them to the less efficient North Carolina manufacturer. In short, Wal-Mart would have contributed to American inefficiency and mediocrity by subsidizing the less efficient and removing the incentive for them to perform better, thus hurting our country's ability to strive for producing the very best products! And that is un-American!
Now, you may be thinking the following if you have a little economics’ background: “But the US has a growing trade deficit with China, so the Chinese may not immediately buy those products from a U.S. economy immediately. And, you are correct, but that is also not a problem for either the United States or China. What China is really doing when they don't immediately buy U.S. products with the U.S. dollars paid to them for their products is to temporarily save or invest those same U.S. dollars in the U.S. Said another way, China is not currently buying as many US products as the US is buying Chinese products and, of course, we call that situation the US trade deficit which immediately seems to speak “problem”. But it is really not as big a problem as most people think! China is still spending their US dollars back into the US economy, but in different ways. China is saving and investing some of those US dollars directly into the United States economy by building plants in America, buying US stock to fund American companies’ expansions, and temporarily saving some of their dollars, for future US purchases, by buying US bonds to help the US government pay for other US government initiatives necessitating borrowing. Eventually, China will sell these US bonds for US dollars and be forced to use those same U.S. dollars to buy US products or build more plants in America, each of which will employ more Americans!
Yes, it is an economic principle that if U.S. citizens “buy American” driven solely by patriotism (and not because they think the product is superior) the American economy actually becomes weaker as the U.S. dollars spent out of patriotism on that American company are, therefore, unintentionally withheld from another more efficient and deserving American company.
In summary, when citizens of any country in the world buy the product that is best for them based on a combination of quality and price, they will be taking the most patriotic action possible to help their own country they love so much! If a domestic citizen sees the foreign product as a better alternative to the domestic product, buy it! Your money spent will immediately find its way back through the “trade loop” to another business within your country!
Of course, this is why all economists from around the world know that international trade, and not protectionism, helps a country’s standard of living and promotes efficiency and rising standard of livings!
Well enough for now. I could go on and on with more 180 degree moments relating to areas such as standard of living, unemployment, the minimum wage, gasoline taxes, and many others. But we’ll discuss some of those in class and I will cover others through this blog site. For now, I just really hope you look forward to and work hard in your economic course so that, you too, will become a more informed and influential citizen as you begin to see your nation’s economy, and our global economy, in a whole new light!
Discussion Questions:
1. What is the primary reason that employment in the U.S. manufacturing sector decreases over time, yet manufacturing output continues to rise? Why do most Americans believe that manufacturing is "in a state of decline" even though we are producing more than ever before?
2. Would you be surprised to know that manufacturing employment is also decreasing at the same rate in Germany and Japan as it is in the United States? Why do you think it is? Where do these displaced workers need to find jobs if it is not in manufacturing?
2. Would you be surprised to know that manufacturing employment is also decreasing at the same rate in Germany and Japan as it is in the United States? Why do you think it is? Where do these displaced workers need to find jobs if it is not in manufacturing?
3. What happens to the U.S. dollars that we send to Saudi Arabia to buy their oil? Can the Arabs use our U.S. dollars in their own economy? What are two logical choices that Saudi Arabia can do with the U.S. dollars that we send them for their oil?
4. When the U.S. buys a foreign product, how does an individual or business in that same foreign country get access to the U.S. dollars we just sent them?
5. Why do so many Americans think that "Buying American" is best for our country? What would happen to the U.S. standard of living if we could only buy American via a new law? Support your answer by describing how American firms might behave or progress because of this new law.
4. When the U.S. buys a foreign product, how does an individual or business in that same foreign country get access to the U.S. dollars we just sent them?
5. Why do so many Americans think that "Buying American" is best for our country? What would happen to the U.S. standard of living if we could only buy American via a new law? Support your answer by describing how American firms might behave or progress because of this new law.
