Traders Are Not Traitors (Outsourcing is good for America--and the world.)

The Weekly Standard ^ | March 29, 2004 | Cesar Conda and Stuart Anderson

[ETERNAL WARMING]

The Harsh Truth About Outsourcing
S BusinessWeek
Uhttp://www.businessweekasia.com/magazine/content/04_12/b3875614.htm
Published: Mar 22, 2004
Author: Paul Craig Roberts



It's not a mutually beneficial trade practice -- it's outright labor arbitrage

Economists are blind to the loss of American industries and occupations because they believe these results reflect the beneficial workings of free trade. Whatever is being lost, they think, is being replaced by something as good or better. This thinking is rooted in the doctrine of comparative advantage put forth by economist David Ricardo in 1817.

It states that, even if a country is a high-cost producer of most things, it can still enjoy an advantage, since it will produce some goods at lower relative cost than its trading partners.

Today's economists can't identify what the new industries and occupations might be that will replace those that are lost, but they're certain that those jobs and sectors are out there somewhere. What does not occur to them is that the same incentive that causes the loss of one tradable good or service -- cheap, skilled foreign labor -- applies to all tradable goods and services. There is no reason that the "replacement" industry or job, if it exists, won't follow its predecessor offshore.

For comparative advantage to work, a country's labor, capital, and technology must not move offshore. This international immobility is necessary to prevent a business from seeking an absolute advantage by going abroad. The internal cost ratios that determine comparative advantage reflect the quantity and quality of the country's technology and capital. If these factors move abroad to where cheap labor makes them more productive, absolute advantage takes over from comparative advantage.

This is what is wrong with today's debate about outsourcing and offshore production. It's not really about trade but about labor arbitrage. Companies producing for U.S. markets are substituting cheap labor for expensive U.S. labor. The U.S. loses jobs and also the capital and technology that move offshore to employ the cheaper foreign labor. Economists argue that this loss of capital does not result in unemployment but rather a reduction in wages. The remaining capital is spread more thinly among workers, while the foreign workers whose country gains the money become more productive and are better paid.

Economists call this wrenching adjustment "short-run friction." But when the loss of jobs leaves people with less income but the same mortgages and debts, upward mobility collapses. Income distribution becomes more polarized, the tax base is lost, and the ability to maintain infrastructure, entitlements, and public commitments is reduced. Nor is this adjustment just short-run. The huge excess supplies of labor in India and China mean that American wages will fall a lot faster than Asian wages will rise for a long time.

Until recently, First World countries retained their capital, labor, and technology. Foreign investment occurred, but it worked differently from outsourcing. Foreign investment was confined mainly to the First World. Its purpose was to avoid shipping costs, tariffs, and quotas, and thus sell more cheaply in the foreign market. The purpose of foreign investment was not offshore production with cheap foreign labor for the home market.

When Ricardo developed the doctrine of comparative advantage, climate and geography were important variables in the economy. The assumption that factors of production were immobile internationally was realistic. Since there were inherent differences in climate and geography, the assumption that different countries would have different relative costs of producing tradable goods was also realistic.

Today, acquired knowledge is the basis for most tradable goods and services, making the Ricardian assumptions unrealistic. Indeed, it is not clear where there is a basis for comparative advantage when production rests on acquired knowledge. Modern production functions operate the same way regardless of their locations. There is no necessary reason for the relative costs of producing manufactured goods to vary from one country to another. Yet without different internal cost ratios, there is no basis for comparative advantage.

Outsourcing is driven by absolute advantage. Asia has an absolute advantage because of its vast excess supply of skilled and educated labor. With First World capital, technology, and business knowhow, this labor can be just as productive as First World labor, but workers can be hired for much less money. Thus, the capitalist incentive to seek the lowest cost and most profit will seek to substitute cheap labor for expensive labor. India and China are gaining, and the First World is losing.

Paul Craig Roberts is a former Assistant Treasury Secretary in the Reagan Administration and a former BusinessWeek columnist.

[ETERNAL WARMING]

Again, I want to ask Cesar what technical career should we study for to ensure a good income in the future?

Exactly. What should we train our children for? What job won't be "beneficially outsourced" so that the $200,000 college education I spend per child won't ensure they work in McDonalds?

[yankeedame]

Apparently the names Smoot and Hawley are lost in ancient history to some Freepers.

Ditto:

[ETERNAL WARMING]

Don't you think the country you slap it on will respond in kind?

Who cares? The USA is the world's marketplace. I'd rather see livable wages and jobs return to America. We'll buy American goods.

[bvw]

That Smoot Hawley argumeent is overburdened, it was NOT the source of the crash and depression.

Tariffs are an art and science. Levels of tariif need adjustment for all sorts of reasons. And politically -- better that the politicians moxie comes in tariffs than in the damnable income tax code than makes serfs and peons of all of us.

[Lael]

Apparently the names Smoot and Hawley are lost in ancient history to some Freepers.

Sad, ain't it.

I think most informed Freepers ask the Question...How did a relatively minor change in the Fordney-McCumber Tariff precipitate the Great Depression...why are Smoot and Hawley being "scapegoated"???

Answer...to deflect attention from the Institution that really turned a minor downturn into a full fleged Depression, namely, the Federal Reserve through its manipulation of bank Reserve Requirements.

The commercial banks called in the business loans to such an extent, that tens of thousands of businesses went insolvent, fired their employees, and closed their doors.

[neutrino]

Darn toot'n! Doggone profiteering corporations! Ought to be a law against it. Down with capitalism! Yankee Go Home! mutter sputter pfft!

With all due respect, sir, the United States is in a grossly unequal trade situation. China, India, and other nations restrict trade, whereas we do not. The long term detrimental effects of this state of affair, coupled with the burgeoning trade deficit is, in my opinion, cause for concern.

I would also point out, as I did earlier, that the current paradigm does in fact transfer wealth from the US to the third world. This does not seem to be capitalism, but rather another form of transfer payment. Friedman said as much, from the article.

[Euro-American Scum]

What job won't be "beneficially outsourced" so that the $200,000 college education I spend per child won't ensure they work in McDonalds?

Answer: You won't be spending $200,000 for a college education for your child. At least not in the technical disciplines. That area of expertise will be reserved for the foreign students now flooding into our universities, whose education is underwritten by their own government and ours.

If you don't send your child to law school, they will indeed end up at McDonalds. Oh, excuse me! No they won't. Those jobs will be reserved for illegals.

Suing the remaining wealth right out of the country is the last growth industry we've got.

[ARCADIA]

...just tell me what technical job I should train for in order to generate a good income...

You could always be the half-coherent scion from a well-to-do aristocratic family. The job entails drifting through the first half of your life in an intoxicated state; while generating enough gaffs to provide a multitude of embarassing evidence for all of your family's favored friends and contacts. At around age 40, someone hands you a cup of coffee and sends you ambling down a red carpet, while your daddy's friends blow your horn. Then you take up a comfy executive office in a corporate or public field; where you will spend the rest of your life either leaking insider trading tips, or channeling public graft. Unfortunately, it is very hard to shop around for the right parents. :-)

There are some other respectable fields out there; but, none of those are protected from the export of our manufacturing base, the outsourcing of our service sector, or, from the ever growing uncontrolled flood of immigration. Besides, we seem to like these people for senior leadership positions (they are easier to manipulate).

[CrucifiedTruth]

plumber, electrician, auto mechanic, generally any type of repair, retail sales, surgeon, dentist, corporate law...

Just hilarious! The road to global leadership: "cleaning each others sh*t, exhaust pipes and colons" or yes and I forgot "then suing each other over the results".

There's also geopolitics...but a safer world for our own 20-year-olds

The geopolitics is all there is to it. Once a country is hooked on the drugs of debt and import it's then sucked dry and enslaved. It happened in Argentina, where they lived a happy, careless, borrowed life and are now owned by the One-Worlders. What is happening now can be described only as a sell out.
Contrary to Friedman, being dependent on heavy trade only encourages terrorists. They can cause major problems by attacking the transportation system, or by destabilizing fringe countries along the trade routes. As the foreign trade grew so did terrorism. The terrorists saw their chance.

[dennisw]

VI Lenin said the capitalists would sell the rope to their executioner to hang them with. No too far off base for what's going on right now with outsourcing and technology transfers to China and India. Hyper capitalism plus a ruptured social contract = national suicide

[LibertarianInExile]

But I'm not from an aristocratic family! Damn Episcopal priests and their pro-birth-control attitudes!

[Poohbah]

So you're saying that choosing your profession should have the same high degree of uncertainty?

It always has. That's life. Whining about it does not help.

[Poohbah]

I think most informed Freepers ask the Question...How did a relatively minor change in the Fordney-McCumber Tariff precipitate the Great Depression...why are Smoot and Hawley being "scapegoated"???

Raising any tax at the beginning of an economic downturn is cosmically stupid...and tariffs are, like it or not, taxes. Once the retaliatory tariffs went into place, they turned a severe market correction into a global depression. Smoot-Hawley gets the blame because it started the stampede.

[WhiteyAppleseed]

With millions of unemployed Islamic fundameentalists worldwide, do we export virtual reality games to alleviate boredom, or wait for reality to implode virtually on the television screen?

[Ronzo]

My nomination for the most idiotic statement of the year:

"There is more to outsourcing than just economics. There's also geopolitics. It is inevitable in a networked world that our economy is going to shed certain low-wage, low-prestige jobs. To the extent that they go to places like India or Pakistan--where they are viewed as high-wage, high-prestige jobs--we make not only a more prosperous world, but a safer world for our own 20-year-olds."

Yep, all those mere $50K - $75K annual "low-wage" jobs are flying over to Inida & Pakistan. Shoot, can't even find an illegal alien who would work for such a paltry fee...

All of us "low-wage" programmers and engineers here in the Midwest are just so glad the Indians are now doing our jobs so we can enjoy those great "high wage" jobs being offered by the local Mickey D's and the Wally World's...

If there's anything else we can do for the great ideal of "geopolotics" just let us know...

[Choose Ye This Day]

Darn toot'n! Doggone profiteering corporations! Ought to be a law against it. Down with capitalism! Yankee Go Home! mutter sputter pfft!

LOL!!!

Thanks for cheering us up.

[Choose Ye This Day]

I would also point out, as I did earlier, that the current paradigm does in fact transfer wealth from the US to the third world.

Whoops! That's a $10 penalty for invoking the overused term "paradigm."

(Call the $10 fine a tariff, if it makes you feel better.) :o)

[bvw]

It is likely that those claimed-to-be "retaliatory" tariffs would have been laid by the foreign trading partners, no matter what we did -- even if we lowered our tariffs. The blame on Smoot-Hawley is a spin, and false in most regards.

Face it, tariffs worked for most of our Nations's history, prior to it becoming a defacto socialist state. Tariffs are the preferred mechanism of financing Federal activites -- according to the wisdom of founders and the generations in our first two-hundred years.