Sunday, February 7, 2010

L.A.'s blueprint for job creation

LA Time's Opinion Editorial "L.A.'s blueprint for job creation" (February 7th, 2010) puts forth a "cost" figure for trade, without considering the incredible benefits of trade:
Buy local: In 2009, L.A. city government spent roughly $1.7 billion for various goods and services. Unfortunately, companies in L.A. received only 15% of it. More than half of the total went to firms outside the region, and some of it left the state entirely. The city's procurement guidelines should give preference to local manufacturers and service companies.
Economists have long known that trade benefits both trading partners. To analyze California's situation properly, we would need to know the benefits that Californian buyers receive from non-locally produced food and clothing purchases. "Buy local" may be the prescription of many, until they are faced with a price-tag of $50 per cup of coffee.

It is also worth noting that even if companies in L.A. received only 15% of total food purchases from L.A. city government, these companies could still be receiving a great deal of revenue from around the world. The discrepancy would be natural if the companies were specializing--making only what they make most efficiently. For example, if L.A. companies are only good at making carrots, then we would expect that they service very little of L.A.'s total food demand. However, these companies are still better off than they would be if forced to give up their natural advantage for carrot-growing to grow the coffee beans that the government now refuses to buy from Columbia.

Both the carrot farmers and L.A. consumers are better off if L.A. doesn't adopt a "Buy local" policy--all inefficiencies created by L.A. city government are passed on to consumers. Subsidizing production that food companies wouldn't make without such a subsidy only hurts the city.

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