Wednesday, February 11, 2004

Education is more than you think: Background for "America Resurgent"

NOTE: for all my faithful readers, you should know that I am almost done - less than 24 more hours - with dealing with my student midterms, etc. I am including this quickie piece now as background for a series I'm writing entitling it "America Resurgent" analyzing the trade and economic situation in this country and how the hemmorage of job reductions can be staunched. The oldman has already identified education as a key component of this situation, so I'll post this background piece so that I can refer back to it for the main series of articles.

Introduction: A Botched Education Reform
The Christian Science Monitor has a nice update piece out on "No Child Left Behind" (NCLB).

" From Utah to Virginia, a revolt is building in classrooms and legislatures against the biggest education reform in a quarter century. As elements of the federal No Child Left Behind Act take effect, state and local education officials, upset over the stringency of testing requirements and the cost of implementation, are openly criticizing the measure - and even threatening to defy it.
The rebellion, in some cases led by GOP lawmakers, could endanger a signature achievement of the Bush administration in an election year.
"

The oldman has written before about how Republicans are criticizing NCLB, and on how NCLB violates conservative ideals. The conservative blogger Andrew Sullivann has also criticized NCLB, saying "Where once education was the preserve of states, school principals and parents, this president has expanded the federal role in unprecedented ways. The No Child Left behind Act federalizes educational standards in a dramatic reversal of traditional Republican deference to localities and states."

The Role of Education in Prosperity

However, education is key to the continued prosperity of America and as the oldman has commented America is falling behind. In an environment where more and more there are growing wage inequities due to educational differences, it's clear that the only way to compete with China and India is to have a better education system. The United States of America cannot remain the wealthiest nation in the world if we are 19th or worse in science and math education.

As Brad Delong has written, ideally trade (when there is no trade deficit) only shifts jobs within an economy writing that:

" What trade does is to shift jobs, shift the composition of American employment: people in import-competing industries lose jobs, while people in export industries (or, with the capital inflow, construction and investment goods industries) gain jobs. Economists have lots of good reasons for believing that the jobs gained are better jobs than the jobs lost, and that there are more and bigger winners from expanded international trade than there are losers."

However this analysis assumes that countries remain competitive in offering trade goods to go back and forth. It says nothing about internal structural progress. For instance, suppose countries A and B trade back and forth. Suppose that country B starts falling behind in competitiveness because of deteriorating social investments and population education. What would happen is that imports would still occur to country B but its exports to country A would fall behind. So as jobs were "transferred" from the import indusries to the export part of the economy, you would have job losses but a lack of job growth (Oldman). Now doesn't that sound familiar? Could anything like that be happening in America, say like right now?

What about the role of Trade in Job Loss?

Trade by itself isn't the villian. Trade is not the cause of economic contraction. Trade however is the means of exposing a lack of structural reform or progress within an economy. It exposes that commercial creation of wealth and innovation is stangant. It's not that America is losing jobs overseas as the culprit that needs protectionist barriers to trade that don't really work anyway. But what is needed is an internal competitiveness reform to create jobs and not stop their loss. Trade is an easy target for accusations.

However, this doesn't mean that the oldman endorses current unfair "free" trade policies. This applies as equally as well to Americans as anyone else. Why is America still trying to maintain dominance in low margin agricultural commodity markets? Even if two countries have different absolute advantages in production efficiencies, they can still benefit if they trade by doing what each does best. The principle of comparative advantage states that given their resources (labor, innovation, and capital) nations should produce what each does best (or least worst) given their internal opportunity cost. That is if Country A can make a million dollars of socks for a thousand dollars of effort, but they can make two million dollars of shoes for the same thousand dollars of effort then they should make shoes instead of socks even if they're better at making socks than country B.

What to do about unfair trade policies

We should be writing our trade treaties not to encourage absolute advantage trade wars of low cost marginal production struggling for market share dominance. Instead we should be writing into our trade treaties bid-contract Ricardian comparative advantage trading markets. What does that mean? What that means is that two countries sit down and decide the bundles of goods they want to trade for another countries bundle of goods and services, and then negotiate a system where if buyers and sellers want to fill orders in another country they buy bid-fill contracts placed on an electronic market. This would expedite trade because buyers and sellers could meet in an informal marketplace that allowed them to offer their wares and their services. The marketplace would then according to treaty offer a regulatory body that would not mandate outcomes, but would be allowed to "buy" or "sell" bid-fill contracts according to the agreed trade ratios in order to influence (NOT mandate) the market outcomes.

Does that sound preposterous? The currency markets are run in a very similar way in fact, with countries setting targets and then intervening to meet goals set by Central Banks and Treasuries like at the recent G7 forum. This would allow a discretionary intervention mechanism in the marketsplace that could be negotiated directly by treaty without specifically mandating outcomes. If countries want to for instance open up certain markets, say 60% of American sugar purchasing they could then argue for instance 40% of Australian car purchasing.

To create this, the regulatory body would then offer a general negotiated number of bid-contracts that could be purchased and sold on the Ricardian market. Once a company bought this peice of paper, they could offer it to be filled by a bidder (low cost or other contractual stipulation terms) bidder who would sign the "fill" portion of the contract. As time went by, the regulatory body could influence the outcomes to try to manage targets by either releasing more bid contracts or buying them back from the marketplace participants. As I've mentioned currency markets already work something quite similar to this. Self-regulating marketplace functions like scarcity, demand, and supply factors would help keep the market within "negotiated" targets. For instance, a company C that wanted to fill more orders overseas could buy the contracts that D held - at a premium of course. This would work best with large quantity shipments (steel, rice, soybeans, etc.) or mixed product lump marketplaces ("all toy orders", etc.). In this way incremental marketshare shifts could be worked into agreements and could be made over a period of time, with currency floats and pegs negotiated into the overall deal regarding each countries "bundle" of goods and services.

This concept of a Ricardian comparative advantage trading markets is much more advanced in sophistication than the present trade treaties. But the oldman will be pleased to expound on that another time ... after more grading! Ack!!!

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