While trying to write some of my memoirs, I thought of some of my experiences as young engineering project manager in the Natural Gas Liquids Division of a major integrated oil company. My first two projects had been building processing plants in Texas and Kansas. The products of these plants were commodities – propane and butane – used by many people in those areas for home heating and cooking, etc. Then our business development people came up with a plant project in south Louisiana. The project economics which formed the basis for project approval were based on plant construction costs in Texas, Oklahoma, Kansas, and other states where we had plants. This was our first project in Louisiana – at least for several years. When we started the project and started talking to engineering firms, we learned that we could not build the plant for the cost used in the estimate. It was going to cost about 50% more. The reason was that where we were in Louisiana we had to use Union Labor whose cost would be about double what we would pay for labor rate in other states where there was a free market. But the “free market” prices for the products would be the same as in other states. This made the project uneconomic and it was put on hold and faced cancellation.
Now this was prior to the time I was taking advanced college economic courses in doing work for an MBA. But on reflection now, it occurred to me to wonder if this was an example of micro or macro economics at work. I’ve decided that it could be a little bit of both. I have a good friend who was my Economics professor in Grad School. I had taken all the required courses, but as I was finishing I was going to take one more elective. He was teaching a micro-economics course that semester and I thought that might be a good alternative. When I told him I was thinking of taking his course, he told me OK, but that I should know he thought Micro-econ was not worth anything. Macro was what was worthwhile. I took his course anyway and in the next 30 years in Industry, I used it much more than macro. But I guess he got calls from the media reporters for interviews whenever there was a government proposal for some economic program. So he used macro a lot, but he never got called so far as I know on any micro issue. In reality, I think the Louisiana situation was a little of both – the plant economics and decision to cancel was a micro decision and the requirement to use Union labor at higher than market rates was a macro or government problem. Maybe this situation shows how the two can be connected.
Macro-economics was made important, I think, by John Maynard Keynes. It tries to connect government actions (laws, spending and taxes) with changes in the general economy. Micro attempts to explain how individual businesses react to the specific industry variables of supply, demand and price. In our Louisiana plant situation, elements of the State of Louisiana government were supporting union labor which was higher priced than labor in the surrounding states. From a political standpoint this no doubt sounds good, because one is trying to increase the wages of people who are not wealthy. From a micro standpoint, the individual company needed to make at least a small profit on its investment (we weren’t allowed to do deficit spending). There was a free market commodity price in Louisiana which was the same as that in surrounding states, but the cost of labor was twice as much. The high cost of labor made the project in Louisiana unprofitable. If the project was built the laborers in Louisiana would have made more money than those in Texas, but if the project was cancelled, the jobs would not be there so they would make nothing. The state could have fixed this by putting a tax on imports of these commodities from other states. This would have the effect of raising prices in Louisiana which could have made the project profitable and have avoided cancellation. The jobs would have been there and laborers would have received higher wages. Sound good? The problem would be that it would have raised prices on those commodities to every person who used them in Louisiana. And there are probably many more users than laborers, and many of those users need to continue to buy those commodities for every day needs. Maybe not so good? It might also be made worse because with higher prices, exports of those commodities to surrounding states like Mississippi and Arkansas that did not have the resources and needed the imports would end up being made from Texas or Oklahoma where there were resources to export at lower prices even though they were further away. In which case there might be fewer jobs because the plants in Louisiana would be fewer and smaller. On balance, Louisiana’s economy might be hurt significantly. and working class people could have worse off. How and who might have been affected might have depended on several things – such as how much of this product might have been exported; what the government did with the tax dollars from the import tax, the number of laborers who might have been helped vs. the number of customers hurt, etc. Not necessarily a simple issue to analyze.
Most of the above might not happen between states in the U.S. because it would probably be illegal between our states. But it isn’t illegal between international states. In the news these days there are a lot of people ranting about ending “free trade agreements”. It is said to be hurting U.S. job creation because things produced in other countries can be made more cheaply which hurts U.S. workers. This almost always makes “front page news”. But what is not always reported is that it also makes products less expensive for consumers. Politicians running for election who take the position of ending “free trade” agreements are going to stress the advantages of helping working people, without mentioning consuming people who may be hurt. But voters should be aware that this a two-sided coin. In some ways it may help and in some ways it may hurt and it will not always be clear what the best option might be. It may depend on the industry and the product. And it may not be possible to be very selective in negotiating agreements with other countries.
For voters to understand both sides the media needs to do a better job of reporting both sides. Most reporters majoring in journalism have not had economic courses (nor built plant projects like mine in Louisiana) so they may not really understand the trade-offs involved. They may not understand any better than the voting public. The media makes money by attracting readers and viewers, so they may not really care. I don’t really know the solution to this except if the public understands that there are two sides to this story, then maybe the media will do better at reporting all the facts. In the meantime, the popular vote may not get us to the best answer.