The great hollowing-out myth

From The Economist print edition ^ | Feb 19th 2004 | From The Economist print edition

[palmer]

If you were the CEO of Acme widgits, you WOULD -- get this -- YOU WOULD OUTSOURCE YOUR LABOR.

There are many CEO's who have not. The dichotomy between outsourcing and protectionism is false. The main reason to hire and buy American is patrioitism which does not require protectionism or pure profit motive. You may decide that it is more patriotic to outsource and reinvest the savings in America. That is fine and your choice. But it is certainly not partriotic to buy cheap crap from China and squander the savings on more cheap crap.

[Taliesan]

I don't know how to break this to you, but if you are the CEO you are judged on your ROI, not on your "patriotism".

Anybody who thinks this will ever change is beyond naive.

[palmer]

ROI is just one measure. Private companies often don't outsource even when it becomes economically painful to keep domestic employment. My own investment decisions are driven by technical and macroeconomic factors much more than company fundamentals. But mostly I was referring to consumption decisions. Those have a much greater potential for patriotism than investment.

[Taliesan]

Human nature.

People will "buy American" in the short run, but will not in any significant numbers, continue to do so when the dollars reach a certain threshold. Small private companies will pay higher wages to loyal employees for awhile, till their profit margin drops to a certain threshold. Both employment and consumption decisions will allow some room for salving the patriotic conscience UNTIL THE NUMBERS GET BIG ENOUGH, then your loyalty to your own family's budget supercedes your loyalty to what is relatively an abstraction.

Liberals build programs in their heads using denatured symbols of people, like pieces on a chessboard. Then, in practice, the symbols come to life like werewolves of self-interest.

Protectionists build "solutions" in their heads using denatured symbols ("executives" "consumers") then, in real life, the symbols stubbornly morph into selfish actors.

Nothing is more fundamental to economics than the assumption that all actors will pursue their rational self-interest.

Any other value injected into the system, unless it is a vivid and dramatic moral prohibition, is a local and transient island, soon to be overwhelmed by the profit motive.

Labor will be moved offshore to cheap markets. An apple, released from the tree, will drop to the ground.

[palmer]

Nothing is more fundamental to economics than the assumption that all actors will pursue their rational self-interest.

A much more pertinent corollary is that all actors must not be protected from the consequences of pursuing policies other than rational self-interest otherwise the economic system will break down. That's why I am against protectionism because it distorts and ultimately weakens the economy. On the other hand, self-interest is a broad measurement and depends on time scales. The short run Buy American policy will translate into economic growth in the longer run from the ripple effect of those purchases. Unless as you say, the numbers get big enough and foreign purchases result in more significant savings. But that same actor must then invest those savings and not be protected from lack of savings and debt by our government weakening the dollar.

So in my it boils down to a few simple principles: the government must stay out of the market (I wish!) and people need to take a broad and long-term view of their economic self-interest which means taking a serious look at how their (non-abstract) neighbors will make a living.

[azhenfud]

"So the shift of labor to cheap markets produces two deflationary pressures: one on American wages, the other on American prices. How these two will net out in the short run no-one knows."

You've essentially said the same as I, but in much better terms.

As I see it, when we're all forced to become biotechnicians, the demand for biotechnicians diminish along with the price of wages (probably much truer that wage price increases won't keep up with the normal pace of economic growth/inflation)...

[John Valentine]

John, Your ad hominems are significantly outnumbering your reasoned refutations. I suggest that you try again.

Whoaaa!!!!

I never claimed to be making a reasoned refutation. Why should I? It has already been done ad infinitum by far more able people than I.

Instead I just had a bit of a laugh. Lighten up. And, get that copy of Sowell's book I recommended.

[John Jorsett]

bttt

[John Jorsett]

What I find interesting are the people who say "sending our jobs to other countries is evil" and then argue that "illegal aliens are just doing work Americans won't." Illegals are just our way of outsourcing by bringing the foreigners to the jobs instead of sending the jobs to them. Same effect, except that when they're here we also get to educate their kids, and deal with their health problems.

[beckett]

As Papa Bush used to like to say, "if it's your job that's lost, the unemployment rate is 100%."

That being said, the argument presented in the article is persuasive. Americans overall benefit from globalisation trends.

[Sabertooth]

As usual, the protectionist vision sees part of the economic system and thinks it is the whole picture.

Aren't the income tax and state and federal regulations essentially tariffs on American labor?

Doesn't the combination of these tariffs on American labor and international free trade amount to protectionism for foreign jobs?

Why aren't self-styled "free traders" interested in the free trade of American labor?

[Torie]

About half of the income tax is really a sales tax. The rest is a tax on capital, although nobody knows the precentages, because the issue is too complicated to parse. Revenue needs to be raised somehow. To suggest protectionism to offset some preceived tax benefit for imports is way off the mark in my opinion.

[raloxk]

what's wrong with Wal-Mart? you know they have jobs at the corporate office that pay a bit more than $6 per hour.

[Sabertooth]

Revenue needs to be raised somehow. To suggest protectionism to offset some preceived tax benefit for imports is way off the mark in my opinion.

Raise the revenue through taxes, tariffs, and levies on the fruits of foreign labor, and abolish the income tax. As it stands, the tax disparity amounts to protectionism against American interests in favor of international ones, as it places an uncompetitive burden on American workers against their less taxed and less regulated foreign competitors.

[Torie]

Fair enough. You favor protectionism, through the use of the tax code, which of course is how protectionism is effected. It would be a total disaster long term, and of course would trigger trade wars. It won't happen as a result. Nobody in power is really going to go down that route, because the consequences are just too negative for America's economy, and its ability to finance a robust defence and foreign policy.

I will not vote for any Pubbie who supports a protectionist agenda, assuming the Dem is not worse, and maybe not even then. I will cross over, not to waste my vote on a third party, but to support the Dem. Well maybe not for the Senate, with the judge thingie.

[Sabertooth]

Fair enough. You favor protectionism, through the use of the tax code, which of course is how protectionism is effected

You've begged the question, which is:

"Why aren't self-styled "free traders" interested in the free trade of American labor?"

How is it that free traders are not concerned about the lack of free trade in American labor, due to the anticompetitive burdens of excessive domestic taxation and regulations?

If anticompetitive burdens on foreign labor equal protectionism for American jobs, how is the corollary not also true?

If raising revenues on the fruits of foreign labor is economically destructive, why is that not also true of the raising revenue on the fruits of domestic labor?

That "revenue needs to be raised somehow" doesn't argue for a tax system that penalizes American labor at the expense of foreign labor.

[Torie]

Well tariffs discriminate against imports. Sales taxes apply equally to imported and domestic goods. Taxes on capital are not a tax on labor. Your thesis that the tax code favors imports is wrong in my view. Indeed, until recently, complex tax provisions in the US subsidized exports, until GATT told the US to cut it out.

[Torie]

Regarding regulations, they need to be taken one at a time. An overall traducing of them really doesn't move the ball.

[Ohioan]

If raising revenues on the fruits of foreign labor is economically destructive, why is that not also true of the raising revenue on the fruits of domestic labor?

An excellent point! As a lifelong believer in Free Trade, I find myself forced to make some exceptions today. First, we need to make certain that we have the means at home to sustain a possible war effort in the future--I mean a real war, with a formidable foe, not hit and run bandit fanatics, as are those with whom we are presently engaged. Second, there is a terrible social cost in this present farming out of jobs overseas. This was not possible in this form, historically, so it really is outside the human experience, and suggests all sorts of problems, not even yet addressed here.

We need a debate on just what are worthwhile personal choices, family goals and all sorts of other subjects, that usually have little role in debates on world trade. This is not just another business cycle, which can be expected to correct itself. Not where people who had to train for many years to obtain a highly skilled position, can be put out of business overnight, by companies willing to transfer information on the internet, 11,000 miles, to obtain the same service. That sort of change does not self-adjust in any manner of which we have any past experience. There are totally new factors thrown in, which might take generations, rather than months or years, to sort out.

William Flax Return Of The Gods Web Site

[TomasUSMC]

Whenever apologist for outsourcing start trying to impress with hi-speed flapping of the gums they never touch on the H1B and L1 visas which the republicans and democrats legislatively encourage and which take hundreds of thousands of Hitech jobs not outsourced.

They then say that the bulk of these exports will not be the high-flying jobs of IT consultants, but the mind-numbing functions of code-writing. Of course they fail to say that without the code-writing there is nothing. Like the engine of a car.
They claim proudly that - some firms wither—Reynolds Tobacco's workforce shrank by nine-tenths between 1980 and 2002—but others grow: Wal-Mart's by 4,700%. WALMART! So we are bragging about a supermarket now? Boy that is really cutting edge pushing the envelope stuff. A supermarket on steroids.

It is then said that some service sectors, such as construction and health care, are ripe for gains, because their efficient use of IT is low. Will this trend lead to jobs going overseas? You bet, but that is not a disaster. I tell you what it is though, it is a disaster for the election of 2004 because Bush 2 is making the exact same mistake Bush 1 made, trying to tell the American people that the economy is OK. Disaster is a democratic victory.

Some say trade protection will not save such jobs: if they do not go overseas, they are still at risk from automation.
True so let them be automated here in America. Let the automation industry grow here. Let the knowledge grow here.

Mr. President don't make the mistake your father made.