To address this Discussion, please read the blog post included here from two friends (Becker and Posner) who debated economic policies. It is below these instructions.

Topic 1 - The textbook introduced the idea of consumer and production surpluses. Describe what these terms mean personally and explain how they relate to "market equilibrium." How would an increase in retail sales taxes (for example increase from 7% to 9%) effect "consumer surplus" and market equilibrium?

Topic 2 - After reading the blog post below, comment on the following questions:

• Do you believe tariffs are a good ideas to protect manufacturing jobs?
• Are you aware of tariffs in the news in the last couple of years and what do you think the effect has been?
• Do tariffs increase consumer and producer surpluses or reduce them?
• What are situations where tariffs may be appropriate?

Read This -

This is from a great blog with many economics oriented posts, but sadly Gary Becker has passed away. This particular pair of posts is focused whether or not trade restrictions to support US manufacturing employment are a good idea. This topic has often been in the news, so it's a great topic to think about.

Concern About The Decline in Manufacturing in the United States? Becker

Manufacturing employment as a fraction of total employment has been declining for the past half century in the United States and the great majority of other developed countries. A 1968 book about developments in the American economy by Victor Fuchs was already entitled The Service Economy. Although the absolute number of jobs in American manufacturing was rather constant at about 17 million from 1969 to 2002, manufacturing's share of jobs continued to decline from about 28% in 1962 to only 9% in 2011.

Concern about manufacturing jobs has become magnified as a result of the sharp drop in the absolute number of jobs since 2002. Much of this decline occurred prior to the start of the Great Recession in 2008, but many more manufacturing jobs disappeared rapidly during the recession. Employment in manufacturing has already picked up some from its trough as the American economy experiences modest economic growth, and this employment will pick up more when growth accelerates.

Still, if past trends continue, the share of American jobs in manufacturing will probably be lower in the future than it was even as late as 2007. New and exciting technologies, like 3D printing, may bring back some manufacturing output to the United States since labor costs will be a lower fraction of the total cost of manufactured products based on these new technologies. However, these technologies are unlikely to offer many jobs since they are generally labor-saving, not labor-using, but the jobs will require skilled and better paid workers.

Commentators have always lamented a sizable fall in jobs in any large sector of an economy. A prominent example is the huge decline in farm employment during the twentieth century in all developed countries. In 1900, about 40% of American jobs were in agriculture. This fraction continued to drop during that century, despite a host of special subsidies and tax breaks to the farm sector. Only 2.5% of the American labor force has worked on farms during the past couple of decades. The enormous advances in farm productivity are a major reason behind the disappearance of farm jobs. With about 2% of the labor force currently on farm, the US manages not only to provide the vast majority of food consumed by 300 million Americans, but American farmers have enough production left over to export large quantities to the rest of the world.

Big productivity gains in manufacturing are also a major cause behind the decrease in manufacturing employment in the US. Higher productivity lowered prices of manufactured goods relative to prices of services. Yet employment in manufacturing fell because the lower manufacturing prices did not stimulate a large enough increase in the demand for manufactured goods to offset the productivity increases of the manufacturing workforce.

A second obvious force reducing jobs in American manufacturing has been the growth in China's economy and its exports of a large variety of cheap manufactured goods (which are a great boon to American and other consumers). Since China did not become a major player in world markets until after 1990, exports from China cannot explain the downward trend in manufacturing employment prior to that year, but Chinese exports were important in the declining trends in manufacturing during the past 20 years. Finally, the recession cut jobs in all sectors of the American economy, but especially in factories and construction.

President Obama, in his State of the Union address, advocated special tax breaks and support for the manufacturing sector. I do not see any more convincing case for subsidies to manufacturing than there was for the special treatment of agriculture during the long decline in farm employment. Most of the arguments made in support of privileges for manufacturing could be made for services and other sectors of the economy. For example, although certain manufacturing industries have had high rates of productivity advance, so too has mining, such as through the development of fracking techniques. The most important technological advance of the past several decades has been the computer and the Internet, for these gave birth to email, word processing, apps, online sales, and social networks like Facebook and Twitter.

Instead of singling out manufacturing for special privileges, the government should get behind certain general policies. High on the list would be raising the rate of growth of the American economy, for this will tend to create jobs in most sectors of the economy. More government support may be justified for basic research in science and other areas that would also benefit all sectors, not just manufacturing. Local and state governments, along perhaps with the federal governments, could try to reduce the dismally high dropout rates from American high schools. Dropouts have trouble finding good jobs even in the best of times, and they suffer the most during recessions.

Many other steps can be taken to help the American economy, especially by limiting the growth of entitlements and the federal budget. None of the steps to improve the economy involve favoring manufacturing employment and the manufacturing sector. The call by many for special treatment of manufacturing jobs is basically misguided.

Decline of U.S. ManufacturingPosner

The only secure ground for the government's subsidizing a producer is that the goods or services that he sells are likely to confer external benefits, which is to say benefits that, because they are not paid for by the buyers, do not contribute to covering the producer's costs. The total social benefits, private as well as public, that his production creates may exceed his costs, but he will not produce if the private benefits (the payment he receives from customers) do not cover those costs.

Some manufactured products, vaccines for example, confer external benefits: when most of the population is vaccinated against some disease, the risk to the rest of the population may be so slight that they stop buying the vaccine: they are benefiting from it but not paying for it. Another example is intellectual property that, in the absence of patent or copyright protection, could easily be copied: the original producer of the intellectual property would be conferring benefits on the copiers for which he would not be paid.

External benefits are actually rather pervasive in manufacturing as in other sectors of the economy. For example, consumers who value a product much more than its market value derive an external benefit, because (by definition) the manufacturer does not capture this "consumer surplus [value]." But there is no reason to think that manufacturing confers greater external benefits than other sectors.

There is a general anxiety about becoming dependent on foreign nations for products that are vital to our nation. That is a legitimate concern when one is talking about products that are essential for national security or economic welfare, such as military aircraft; and obviously our military production is heavily and justifiably paid for largely by the government, although some is paid for by foreign buyers. The foreign "products" that might be thought essential to our security and welfare are not manufactured goods at all, but commodities such as oil and rare earth metals. The United States is still the world's largest manufacturing country, accounting for a fifth of total world industrial output.

Becker points to the analogy of agriculture. Employment in agriculture has plummeted, leading to anxieties spurred by agricultural companiesabout the decline of the "family farm" and the loss of the imagined virtues of the independent farmer, to combat which agriculture continues to be heavily subsidized. The subsidies are widely recognized to be a pure social waste, and the same would be true of subsidizing manufacturing. Like manufacturing, American agriculture is thriving with its historically small labor force.

The decline in agricultural employment is a product of technological advance, and likewise the decline in manufacturing employment. Subsidizing manufacturing will no more increase employment in manufacturing than subsidizing agriculture has prevented the precipitous decline of agricultural employment, for a manufacturing subsidy will be used to speed the automation of manufacturing tasks and so accelerate the decline of manufacturing employment--unless the subsidy is conditioned on increased employment, which would would mean diverting workers from more to less productive work. We would not be better off if 40 percent of the labor force were in farming rather than 2.5 percent, or if 28 percent of the labor force were in manufacturing rather than 9 percent.

Some concern has been expressed that we need to boost manufacturing in order to reduce our trade imbalance, because many manufactured goods are exported. But a recent article in theNew York Times(April 10) points out that the United States is the world's largest exporter of servicesand would be larger still if we took steps, such as loosening visa restrictions that impede international provisions of services and making the same efforts to pry open foreign markets to American services as we do to pry open foreign markets to American goods.

The politicians know all these things. The push to promote manufacturing is political in origin and may (one hopes will) be abandoned after the election. Its political appeal is related partly to the fact that unions still have a foothold in manufacturing, and partly to the fact that America's prowess in manufacturing (think of the vast output of munitions in World War II) is associated in the public mind with the epoch of greatest American world power.

I have no objection to efforts to negotiate with foreign countries trade agreements that facilitate U.S. exports (they also of course facilitate importsand that's fine too). Such efforts are the centerpiece of the Administration's program of stimulating employment in manufacturing. But the efforts should be extended to services. I can think of no rational basis for putting manufacturing ahead of services.