Wednesday, November 28, 2007

Globalization and Your Feet

I suspect you don't think much about your socks except when you need new ones, or more likely when one has disappeared in the laundry black hole. But as it turns out, there's a great economics lesson at the bottom of your legs.

Yesterday, there was a very good story on National Public Radio's "All Things Considered" The story was about the town of Fort Payne, Alabama. The town used to bill itself as the sock capital of the world. But things have changed in Fort Payne because of globalization. It seems the labor intensive part of making a sock (sewing the toe seam) can be done more cheaply elsewhere. Prior to 1984, there was a tariff to protect these jobs. The tariff was removed, but now there's a move afoot (sorry, couldn't help it) to reimpose the tariff.

The story goes on to describe how Fort Payne has changed since the tariff was removed - there are still some sock factories, but most of the factories and the jobs that went with them are gone. But wait, the factories have been replaced with new businesses with better paying jobs.

While I know anecdotes are not data, this is a classic example of how the dropping of trade barriers works. And it also provides a classic example of Schumpeter's idea of "creative destruction" - how dynamic economies destroy old industries, replacing them with new industries. The new industries generally provide better paying jobs, and may require higher skill levels.

So let's look at the possibilities. Using this story, you can illustrate benefits of trade, barriers to trade, creative destruction, economic growth and development, economic institutions (treaties and rules), role of government, and fiscal policy (tariffs are taxes, taxes are part of fiscal policy).

And I still need to provide you with the link to the second part of the story which will air today.

Listen to or read the story and share your thoughts.


april said...

"the factories have been replaced with new businesses with better paying jobs."
The factories have not been replaced with new businesses with better paying jobs. This town is a ghost town filled with huge empty buildings and no jobs. There's nothing to this town now but a ghastly monument of the Alabama Boys.

Tim Schilling said...

I would think the current condition might have more to do with the downturn than with the policy issue addressed on NPR. That story is almost two years old. Much has happened between then and now - much that has little to do with the trade policy.

Given that people reduce purchasing all sorts of necessities in a recession; Fort Payne may look the same today even if it was still the "sock capital of the world." That's something we'll never know.

I do trust NPR's reporting, for the most part. And I suspect their description then was truthful.