by Joe Miller
When I started working as a journalist almost two decades ago, I found myself writing a lot of articles about economics.
One of the biggest challenges in covering economics is that the entire dis- cipline is deeply counterintuitive.
Most of us default to thinking of the economy as a bigger version of a household budget. My personal expenses can’t exceed my income – at least not indefinitely. If I want to spend more money, I have to earn more, whether that’s by working more hours, asking my boss for a raise or finding a new job.
Economies don’t work like that. They can get bigger in a lot of ways that don’t really have a direct analogy to a household budget.
One of the ways they do that is by increasing productivity.
The Industrial Revolution created a massive leap in human productivity. A mechanical reaper could do the work of hundreds of field hands for a fraction of the cost. That allowed farmers to grow more food at a lower cost, and that, in turn, lowered food prices.
Meanwhile, some of the field hands became coal miners. Others became steelworkers. Still others took jobs on the assembly lines building reapers. As food got cheaper, workers had more income to spend on other things which of course also needed to be produced by workers whose money went further, too.
Industrialization allowed for rapid population growth – between 1840 and 1940, the U.S. population grew from 17 million to 132 million – while also making everyone considerably wealthier.
Some of that increase in wealth came from increased wages. But a lot of it happened as workers moved to new, better paid types of jobs.
In an industrialized economy, goods typically travel through several steps before they are sold to the public. Those goods get more valuable at each stage.
Silica sand, for example, sells for around $100 per ton. When you refine that sand into silicon, you have a product that sells for thousands of dollars per ton. A ton of silicon ingots becomes 100 million computer chips, which sell for around $300 each.
A computer built from those chips might sell for $1,000. You can then put those chips into a computer. That product is worth more than the chips. A car containing one of those computers sold for an average of $49,000 last year.
Economists call this sort of process a value chain.
It turns out that it’s not just goods that get more expensive as they travel up the value chain. The jobs tend to pay better, too.
Someone who mines sand generally makes a lot less money than the person who assembles computers, and the computer assembler probably earns less than the autoworker who assembles the car.
There are similar sorts of value chains in the service and knowledge industries, too. The more specialized your skills or knowledge, the more you tend to earn. That’s why plumbers (on average) earn more than carpenters who earn more than field hands, and it’s why physicians earn more than nurses who earn more than orderlies.
A country gets wealthier as its median worker moves higher up the value chain.
A country whose median worker is a farmer will be poorer than one whose median worker is a coal miner. Both will be poorer than one whose median worker is an autoworker. A country whose median worker was a physician would be incredibly wealthy.
On average, Americans are among the world’s highest-paid workers. That’s because the median worker in the US sits relatively high on the value chain; indeed, almost 58% of American workers are employed in a white-collar, professional or technical job.
Having a lot of jobs high in the value chain tends to improve wages for those lower in the value chain. American sand miners, for example, will be relatively well paid because a prospective sand miner in the U.S. has lots of other options available.
Now suppose that a much poorer country (call it Sandistan) comes along and offers to sell cheaper sand. Sandistan pays its miners lower wages because sand mining is one of the better jobs available to Sandistan workers.
That means two things happen. Average wages in Sandistan go up as more workers shift from subsistence farming (very low on the value chain) to better-paying sand mining jobs. Those workers now have more disposable income, which they can use to buy computers made with silicon from the sand they mined.
Meanwhile, chips made from imported sand get cheaper. American companies will be able to sell more chips, which means they’ll need more workers to produce them. Those workers will generally come from lower-paying jobs, meaning that average American wages will also go up.
Average wages in both countries go up, and we spend a slightly lower percentage of our incomes on products that use computer chips. Everybody wins, right?
Well, not quite. This new state of affairs is much worse for American sand miners, who are now out of work, with skills that are not particularly transferable to other types of jobs in the area.
America is more prosperous overall, but that increased prosperity isn’t distributed equally.
It’s possible to offset that with redistribution—taking some additional money from everyone and giving it to our out-of-work sand miners. Some of that extra should go toward retraining sand miners with new skills and some of it should go toward unemployment benefits while the former sand miners retrain and look for new jobs. Ideally, we could even make some serious efforts to establish new industries in the sandy parts of the country.
But there’s an important asymmetry here.
The case for trade is an economic one. The solution to the unequal distribution of benefits from trade is a political one. What has happened entirely too often in practice is that the trade happens, but the promised help for those displaced by trade fails to materialize.
Job training programs end up small, underfunded and focused on skills that require people to move to other parts of the country.
Meanwhile, no one wants to pay extra taxes. Republicans are loud about not wanting anyone to pay taxes and then evasive about the implication that lower taxes mean cutting existing benefits, not providing more.
Democrats are loud in their support of redistributive programs, but want billionaires to pay for all of it, never mind that confiscating the entire net worth of every billionaire in the United States would only cover about a year of existing federal spending.
Bringing sand mining back to the United States has the opposite problem. It will improve things for American sand miners while also increasing the cost of everything that uses computer chips. That means every industry that uses computer chips will sell fewer units, which in turn means fewer jobs in those sectors.
It sounds counterintuitive, I know. But in practice, bringing sand mining jobs back to the United States will actually lower average American wages.
Those costs end up being orders of magnitude larger than the cost of helping displaced sand miners directly.
That’s a wildly inefficient way to support workers.
