Lou Dobbs's Disciples (Why America is Growing Richer, Not poorer from Free Trade)

Tech Central Station ^ | 04/17/2006 | Donald Boudreaux

[SirLinksalot]

Dobbs's Disciples

By Donald Boudreaux | 17 Apr 2006

Economist Paul Craig Roberts has joined recently with the likes of Lou Dobbs and Sen. Charles Schumer to denounce so-called "outsourcing" -- that is, the importation of services.

Roberts is aware that, throughout history, free trade has raised the living standards of ordinary people. But, he says, this historical record is irrelevant to today's world. He explained the reasons in a January 6, 2004, New York Times op-ed written with Sen. Schumer and entitled "Second Thoughts on Free Trade":

"First, new political stability is allowing capital and technology to flow far more freely around the world. Second, strong educational systems are producing tens of millions of intelligent, motivated workers in the developing world, particularly in India and China, who are as capable as the most highly educated workers in the developed world but available to work at a tiny fraction of the cost. Last, inexpensive, high-bandwidth communications make it feasible for large work forces to be located and effectively managed anywhere."

In short, Roberts alleges that the American standard of living is threatened by the world's growing prosperity, improved education, better governance, and greater fluidity of capital and resources to move in search of higher returns.

Roberts' argument is deeply flawed. Its most fundamental defect is his implicit assumption that the world's stock of non-human capital is fixed.

Suppose for the moment that the world does possess only a fixed amount of capital goods -- a fixed amount of factories, robots, machine tools, industrial chemicals, and R&D labs. In this case, Americans would indeed suffer from improvements in foreigners' work ethic, education, and emancipation from their governments' misguided regulations. Some capital goods that today are here, raising the productivity of workers in America, would relocate tomorrow to other countries whose citizens can now use much of this capital more effectively than they could in past. As capital flees America, the productivity of U.S. workers falls because these workers will be partnered with fewer efficiency-enhancing capital goods. Americans' only hope of keeping much of this capital from fleeing would be to accept lower wages. Workers suffer. Capitalists get filthy rich.

But one of the defining features of the modern world is capital's expansiveness, its non-fixity. Capitalists the world over know that in every place governed by a rule of law and marked by a reasonably free market, a strong work ethic, and a spirit of commerce, profits can be made by employing workers there. And this employing of workers is done by creating capital in those places.

As people in China and India become freer, and as advanced technology enables them better to serve customers in America, some jobs currently done in America will indeed be 'outsourced' to these distant lands. But America's loss of some capital to foreign countries creates opportunities for other investments in America.

The reason is that as some capital and jobs leave America, workers -- along with some supply routes and capital equipment remaining in America -- are freed up to work at other tasks that in the past were insufficiently profitable. By freeing up this labor and capital, outsourcing increases the profitability of new investment opportunities. These diligent and honest workers, along with some capital equipment, remain in place, willing to work, all in an economy and culture friendly to enterprise. Perceiving these profit opportunities, entrepreneurs sweep in and create new capital, capital that never before existed and that would not be created were it not for the fresh opportunities opened by outsourcing.

And this new capital creates not only new products for consumers to enjoy but also new jobs for domestic workers.

Don't think me Pollyannaish for predicting that new capital and jobs eventually will be created to replace the capital and jobs attracted abroad by outsourcing. My prediction is based not on fanciful wishes, but on the fact that the capital drawn away from America by outsourcing was profitably invested in America before new foreign opportunities attracted it away.

Why was this capital invested here in the first place? The reason is that property rights in the U.S. are secure, taxes are reasonably low and predictable, corruption is minimal, and American workers are well trained and hard-working. Also, producers and consumers in the U.S. have direct access to history's greatest legal, physical, and economic infrastructure. So when particular goods and services become more profitable to produce elsewhere -- because of the principle of comparative advantage -- these features of the American economy that prompted the initial investment don't disappear. They remain. And they prompt entrepreneurs to create new capital and jobs in place of the departed capital and jobs.

America grows richer, not poorer, as we trade openly with a freer and more prosperous world.

-------------------------------------

Don Boudreaux is Chairman of Economics Department at George Mason University.

[RFT1]

How many times do I have to tell you "people", Tariffs are not socialistic, unless you think pre FDR America was socialistic. Are you "people" so brainwashed?

[LibertarianInExile]

Funny, I have a Fed article right here that says problem loan rates are UP. And right here on the second page are two charts which don't give page after page of numbers, but instead take those numbers you provide and graphically demonstrate other than you assert (see Figure 2, in particular), that is, that household debt-to-asset ratios are going UP drastically.

Second, I take issue with your Greenspan-esque analysis of the debt-to-asset bare ratio as some sort of excuse for borrowing. First of all, in most cases it is very different households that have huge assets and high indebtedness, so for many households leverage is very high despite overall debt to asset ratios that only seem to be gradually rising, even if quickly. That's a stat game that isn't relevant here since much debt involved in bankruptcy and our national budget debacle is purely unsecured anyway. Is China going to foreclose on Texas? Mastercard sure isn't going to take your house (though they might lien it, perhaps).

Second, I find it pretty scary that given the fact that even secured debt is at a record high level and given very low average household savings, if average housing prices fall back to their historical mean at slightly above 140% of disposable income, then (purely going by the averages, what's good for the goose, etc.) one-fourth of all home owners could have their home equity wiped out. You may rely on the flat debt-to-asset ratio, but I prefer this figure that shows all national debt relative to all national income.

I think it's horrifying, personally, not just for me, but for my kids.

[LibertarianInExile]

"How does this respond to my post?"

I thought the same thing. But you are simply wasting your time if you expect rational discourse from the target of your post. Party line 100%, no principle. "No, no, Commissar, I don't see Trotsky in that picture any more..."

[LowCountryJoe]

In order to come up with a tariff rate on goods, some bureaucrat (or a collection of them) have to determine tariff rates, and, which goods the rates will apply to. By limiting the natural movement of a free(er) market even further, the bureaucrat(s) job is never completely finished and they cannot react fast enough to counter the billions of preferences that go into the purchasing and selling decisions of many millions of people that will inevitably throw the tariff rate out of whack. The many millions of people - all acting in their own and, presumably, best self interests - have more collective wisdom in determining a market clearing price than does one person (or group of people like him/her) with nothing riding on the line.

There's two words that properly describe the bureaucrats meddling into the affairs of which should have been left to the many millions who actually had a stake in the exchange process...central planning! Cetral planning is the hallmark of socialism in all of its forms.

Besides, a tariff is considered a tax no matter how much you may adore them. And, as you should know, all taxes create dead-weight losses. Plus, you have to pay the bureaucrats.

[LowCountryJoe]

Are you saying that the tax provisions, in the interest deduction case, are a natural interference into what the market would have normally decided to allocate on its own. Just curious, are you one who the protectionists on the forum who supports tariffs? If so, then isn't this a little bit of double speak coming from you?

[LowCountryJoe]

There are three pointing right back at you. You get my drift?

[LowCountryJoe]

You should know that the two words "critical" and "thinking", when strung together, is code for "political correctness" and "Leftist thinking". Anyone who uses the two together is playing their hand face-up on the table; it's as distinguisable as spelling the word "color" with the additional "u".

Are you showing your true colour and is it red? Green, maybe? Not that radical? Perhaps just blue, then?

[Toddsterpatriot]

That chart really cracks me up. Can you explain why it's dishonest to include trust fund "debt" in a chart comparing debt to national income?

[expat_panama]

139 all they want to do is use govrenmnet power to line their pockets.   146  There are three pointing right back at you.

Hey guys, let's just agree that big government with high taxes is bad, and that freedom with private enterprise is good.  How about we make import taxes low and tell big government to stay our of how we spend our money.

[oceanview]

yes, I support tariffs. they work. the reason so many foreign car and light truck companies build in the US is because of them.

but that aside - the government regulates banking practices. interest only mortgages should have been outlawed, but they weren't, because the RE bubble is essential in the current economy. also consider how many wealthy americans derive their passive incomes and wealth - from the real estate market. as such, its untouchable as an area for reform.

[expat_panama]

what was happening in 2000? market mania, stock market bubble peaking, the peak of tech job..   ...In 2000, $150K bought a nice 3bd 2ba in a nice pHilly suburb.

The Census Bur. has nationwide housing numbers here, and when you match it with BEA income numbers (table here) we still get a square foot of housing taking a smaller bite out of a family's income.

I hated to be the bearer of good news like that, but sometimes we just have deal with things as the come.

[oceanview]

incomes since 2001 haven't even kept pace with inflation - there are dozens of references on it. its just now in 2006 that some numbers are starting to show a turn in wage growth.

you've also got alot of people retiring - moving to low cost parts of the country, where there are no real job markets (the retirees don't need them) except for low level service jobs that serve the retirees. that shift in domiciles impacts the "lower average sq foot" numbers.

when you look at housing costs in metro and suburban areas where you actually have middle aged working people, your "smaller bite" comment just doesn't hold water.

remember the first rules of statistics - "you can make the numbers show anything you want".

[oceanview]

http://www.usatoday.com/money/economy/employment/2006-03-22-snow-usat_x.htm

"Several measures of compensation, including hourly wage growth, have lagged behind inflation during much of the recovery from the 2001 recession."

"..higher-paid workers are pulling up the average. Wages for lower-income earners still trail inflation."

As I have said many times - take these wage figures, pull government workers out of the stats (since they get automatic wage increases contractually), pull private sector wage earners above $200K out, and the stats for those who remain - what I call the private sector middle class - have taken a real beating since 2001. This is why the president has a 39% approval rating on the economy - not that's it all his fault mind you, but this is the reality.

[Toddsterpatriot]

remember the first rules of statistics - "you can make the numbers show anything you want".

If that were true, how come you can't show any stats that prove your doom and gloom is true?

[esoteric]

Adaptability is a key concept in a free market scenario. With the "experience" on your resume it might be time to move to a new career field, if money is your passion.

[oceanview]

see post 153 - when Snow himself says he expects wage growth to increase - that is a tacit acknowledgement that it hasn't been doing too well looking backwards.

and its pretty easy to see that if you take the already below par stats since 2001 - and remove from those stats two pools of wage earners - government workers who get mandated salary increases, and higher income people (to remove the concentration of wealth effects from the stats) - that the wages of the broad private sector middle class is doing even worse then the overall statistic shows.

[oceanview]

yes, I will ditch my 3 technical degrees and become a cook.

thanks for your help.

[Clemenza]

Great post!

Then again, every job I have ever had has been created by free trade.

Better a Hyundai that runs than a Ford thats in the shop every week. To say nothing of the fact that the latter company now builds Sonatas in Kentucky.

[esoteric]

I know some highly paid cooks. Its all in finding a niche.
Become a highly paid consultant...in China. Embrace your perceived enemy and overcome.

[Toddsterpatriot]

Average hourly wages rose 3.2% in 2005, while the consumer inflation rate was up 3.4%.

This is doom and gloom?

How about some doom and gloom stats that show how unaffordable housing is? Or can't you refute expat_panama's post #151?