Posted on 06/27/2003 8:03:39 AM PDT by Mad Dawgg
The Myth of "Exporting Jobs"
by William L. Anderson
[Posted June 27, 2003]
As U.S. trade deficits continue to pile up, and as the economy continues in its slow-growth patterns, a number of economic commentators have been accusing American corporations of causing the trouble by "exporting jobs." Now, given the bounty of economic myths that economists and media pundits seem to foist upon us, one should not be surprised at anything we read in the academic literature or popular press, but the newest set of fallacies that we are hearing is especially insidious.
In his path-breaking Principles of Economics, Carl Menger writes in the first chapter, "All things are subject to the law of cause and effect." While such a truth seems to be self-evident, one needs to be careful in separating cause and effect or determining the correct line of causality. Unfortunately, the modern pundits are guilty of convoluting the order of things; thus, we hear nonsensical things like trade deficits are the result of budget deficits or that free exchange creates an overall decrease in a country's standard of living. As usual, the "experts" blame business leaders while politicians and bureaucrats are given a free pass.
This is not a standard article on defense of free trade; writers in the Austrian tradition like Murray Rothbard, Henry Hazlitt, and Mark Brandly have eloquently explained the process and have painstakingly pointed out why attempts to throw sand in the gears of trading relations between individuals can only make matters worse, and I do not think I can improve on their work.
However, the "newest" set of challenges to free trade, some from the right and some from the left, need to be answered. Furthermore, we need to point out why U.S. businesses continue to look overseas for investment opportunities and give a reasonable explanation as to why trying to block such activity will only make things worse in this country.
The first and most important thing to point out here is that the phrase "exporting jobs" is a misnomer. A job is not a good, nor is it a service, so it cannot be imported or exported. Only goods can fit that terminology, and one can neither purchase nor sell a job, so to say that U.S. corporations are "exporting jobs" is at best to be using economic language in a sloppy and inaccurate way; at worst, it is yet another contribution to the Keynesian morass that pervades modern economic thinking. (One can exchange things like labor and capital, but neither of those are jobs. The term "job" is a formal designation we give to action associated with the creation of goods, but they are not goods themselves.)
That being said, there are serious problems for which advocates of free trade are being blamed—when, in reality, the failure of government to permit free trade within the borders of the United States is ground zero. Far from causing our standard of living to deteriorate, real free trade would permit new economic opportunities not only for people at home, but also for people abroad.
The first question one asks is why U.S. corporations choose to do more and more of their investing overseas, as opposed to investment being centered within our borders. To say that corporations simply are chasing after cheap labor is only partially correct, as there is more to successful capital investing than finding workers willing to toil for peanuts. If that were truly the case, as critics of the left and right are charging, then low-wage backwaters like Rwanda and Zimbabwe would receive the lion's share of investments from the West.
That individuals and corporations do not choose to invest simply where labor is cheapest should be obvious to people, since most capital development originating from western business owners is done either in other western countries or the more economically advanced regions in Asia. Moreover, the decision to invest apart from one's home country is a much more complicated affair than the critics may be saying.
Things like language and cultural barriers, as well as changes in the legal environment are important items for firm managers and owners to consider when they are deciding whether or not to invest huge sums of money into a place. Transportation facilities and costs, as well as proximity to a certain market also fall into the decision matrix.
I mention these things because overseas investing by American firms has been especially targeted by individuals on both the right and the left who see something sinister in a U.S. company shutting down some operations in this country to locate them where labor is cheaper. (If one recalls, the most repeated line from the 1992 U.S. presidential election was independent Ross Perot's "giant sucking sound" that would be heard if Mexico and this country were to liberalize trade.)
Economist Paul Craig Roberts, who has devoted a number of his syndicated columns to trade issues, writes that the relatively free flow of capital, technology, and information (what he calls "outsourcing") across international borders is not the same as the free flow of traded goods. He writes:
Trade implies reciprocity. It is a two-way street. There is no reciprocity in outsourcing, only the export of domestic jobs. That's why the United States is currently running a $125 billion trade deficit with China alone, a Third World country. . . . An economy can, of course, stand some outsourcing. But when goods and services in general are outsourced, where is the economy?[i]
Roberts has written elsewhere that production of goods creates wealth because of the "value added" process of manufacturing. For example, a tree is first cut down, then sent to the sawmill, then made into lumber, and finally into the finished product of a house, furniture, or whatever it may be. At each stage, there is "value added" to the raw material.
While no doubt there are changes at each stage of manufacturing and distribution, the "value added" concept has no place in economic thinking and clearly is at odds with Menger's emphasis that the value of the factors of production emanates from the value of the final product. In other words, value flows from the final product backwards (or downwards), not upwards, as Roberts suggests. To put it another way, the concept of "value added" is something used for accounting purposes, but is not a true form of economic measurement.
Beyond that, there are other problems with Robert's analysis—although I also need to add that the prospect of manufacturing more and more things overseas does have implications at home, things with which I will deal (and find that Roberts in this area has some important and insightful things to say). The first deals with the notion that if we "ship out" all jobs, we will somehow have nothing to do.
For many years, economics has been plagued with the "lump of jobs" fallacy in which it is believed there are only a limited amount of things to do and once they are done, people have no means of employment. The truth is the polar opposite; there literally are an infinite number of things that must be done. As Alchian and Allen have noted in their 1983 book Exchange and Production, the elimination of some tasks due to improved methods of productivity frees up scarce labor to do other things. That, they point out, is how an economy grows, a simple truth that seems to have escaped most of the economics profession.
However, while Roberts no doubt agrees with that assessment, his point cannot be ignored. Take my present home of Cumberland, Maryland, for example. During the latter half of the 19th Century and for much of the 20th Century, Cumberland was a manufacturing center and home to many firms. However, following World War II, firms closed down here and either have gone out of business or relocated.
That phenomenon has changed the face of employment here. In its manufacturing heyday, people in Cumberland (which had twice the population it has today) were relatively well off compared to people elsewhere in this country. Today, while most people enjoy a standard of living that is absolutely higher than people here enjoyed five decades ago, they are relatively poorer compared with people in other cities. Furthermore, the economic future here seems to be more of the same.
While the changes here have been somewhat tragic, there are reasons why they occurred. First, this area for many years has been strongly pro-union, and few manufacturers and investors want to deal with labor unions if they can avoid it. Second, the State of Maryland has a leftist government and over the years has proven itself to be extremely hostile to private enterprise and private property. Third, as Maryland's economic position has deteriorated, the state government has taken an even more active role in trying to make up the difference, which means high taxes, bureaucracy, and other such barriers to private investment.
Roberts himself points out that the relatively well-educated but low-earning laborers of many Asian countries gain an advantage to workers in this country because of our legal situation. He writes:
The advantage (of foreign workers) increases with the absence of tort lawyer extortions and harassing and fining IRS, EPA, OSHA, EEOC and other regulatory bureaucracies, whose budgets demand a never ending supply of wrongdoers to be penalized.[ii]
In one sense, the Law of Comparative Advantage still holds. If workers overseas own a comparative advantage to workers here because of the predations of U.S. national, state, and local governments, it still is a comparative advantage and one cannot fault people for taking advantage of that situation. However, we must add that such a situation is self-inflicted. If U.S. workers want to price themselves out of market after market, they are free to do so, but must pay the consequences.
(The current federal harassment of Martha Stewart is another example of this phenomenon in action. The economic meaning of this episode to other investors, entrepreneurs, and executives is that doing well in the United States will lead to one's being targeted by prosecutors and tort lawyers. The end result is less investment here, which ultimately means that Americans are wildly cheering themselves into a long-term condition of a lower standard of living.)
Without the regulatory burdens that American firms typically face, much more manufacturing would go on here. To restrict people from closing operations or investing overseas, as Patrick Buchanan has urged, would only make things worse, however. First, the imposition of even more restrictions, regulations, and legal burdens would simply discourage investment; such policies ultimately would have the effect of chilling the creation of new goods. Second, the low cost of overseas manufacturing at least means lower costs for goods here. Eliminate that possibility and we have the prospect of no jobs and fewer goods at home.
To put it another way, U.S. policies already in place lead to fewer economic opportunities. Choking off the possibility of overseas investment will not improve the situation here. In this case, Buchanan is presenting a false choice: he declares that if firms in this country are forbidden to invest in other firms, they will invest the same amounts of money here. That simply is not true.
On one last issue, Roberts also has written that the growth of U.S. agriculture sales abroad is proof that we are becoming a Third World economy. Given the nature of vast growing lands in this country, that is not an accurate assessment of things. Not only does this country enjoy the lands where agriculture can thrive, but also his picture of U.S. farming being a low-tech, peasant-like activity is also false.
Farming in this country is both capital intensive and extremely high-tech. A productive U.S. farm cannot be compared with a small plot of land worked by peasants in India. Granted, this leaves out the discussion of environmental regulations, farm subsidies, and the irresponsible government distribution of water in arid regions to agricultural entities located in the western states, but to say that the production of food somehow is a lowly thing is a bit silly and ignores the scientific advancements that have been made in this area.
In short, Roberts is partly correct. Policies pushed by politicians and bureaucrats in this country have eliminated many economic opportunities. The answer, however, is not to close off our borders, but to close off the government. We cannot have big, intrusive government and a healthy economy at the same time.
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William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him MAIL. See his Mises.org Articles Archive.
[i] Paul Craig Roberts, “Notes for Free Traders,” March 5, 2003.
[ii] Ibid.
Why isn't the same thing true about goods, since all goods wear out and have to be replaced?
Furthermore, if we exported services and imported goods, according to your "logic", that would indicate we were accumulating wealth at the expense of the countries we were importing them from.
But that is not what we're doing.
The trade balance is in deficit,
wealth is flowing OUT of the country.
I can give you some qualified examples if you want.
The moves so far haven't done $#^& to build a market. Producing goods in economies that don't consume what they make is an entirely stupid prospect. It might be cheaper, but thats all it is. A broke down Pinto is cheaper than a Benz, but since when does that mean its better?
The US should have a national strategy towards globalization as they had for 50 years up until the last decade. Again, I can qualify this statement to anyone willing to ask.
First of all, the MERCHANDISE trade balance is in deficit. That doesn't include services, which we are net exporters of. But never mind that. I'm trying to focus on your definition of wealth. Wealth, according to your "logic", consists of goods, so we are IMPORTING wealth according to your "logic". No wealth is flowing out of the country (according to your own logic).
These are two separate things.
1st thing - me, myself -- no. Even if it was absolutely free, no strings attached...I don't want that. Me, personally, if I was not married with kids I would be absolutely delighted to have nothing more than a 1 bedroom condo with quiet neighbors in a zero crime area, close to expressways, a major airport, lots of bookstores and libraries, and lots of jobs. That would do it for me. No cook, gardener, I only need one car and I sure don't need 10K sq. feet. I am probably not representative of the "people".
2nd thing - you use the concept of productivity, and that is a slippery concept. As I mentioned with the comparison of the dirt pies and the apple pies. If I built a factory to produce millions of dirt pies really cheaply, still very few would pay money for them. Yet this would generally be considered quite productive. You, on the other hand, are implying that productivity is related to, in your terms, *value created*. And you are defining value as "that which people wish to spend money on. I agree with that. So your argument with me is????
You say -- "We cannot and will not grow poor and unemployed 'exporting jobs' SO LONG AS WE REMAIN A PRODUCTIVE NATION AND PRODUCTIVE POPULACE" but you are directly tieing productivity to value, and value to "stuff we want to spend money on". Hey, I agree with that. The issues are these:
(a) When we export those jobs we may not remain a productive nation with a productive populace.
(b) The first problem is that when we export jobs, we have unemployed people. These people are not net producers.
(c) The second problem is that unemployed people have less money to spend and therefore are consuming less -- thus lowering the demand for goods and services.
(d) The third problem is that when these people are reemployed they may be working for a lower wage and thus have less ability to consume - the demand side of the equation is going down.
(e) This leads to a net drop in demand.
(f) Henry Ford paid his workers well because they formed a good chunk of the group that bought his cars. Peasants don't buy cars.
Well of course you want to say "never mind that" and quickly change the subject. The merchandise trade deficit dwarfs the piddly amount of services that are exchanged.
"Pay no attention to the man behind the curtain."
- The Wizard of Oz
Hey, you want to focus on the definition?
Fine by me, I'll post it again for reference:
WEALTH: The net ownership of material possessions and productive resources. In other words, the difference between physical and financial assets that you own and the liabilities that you owe. Wealth includes all of the tangible consumer stuff that you possess, like cars, houses, clothes, jewelry, etc.; any financial assets, like stocks, bonds, bank accounts, that you lay claim to; and your ownership of resources, including labor, capital, and natural resources. Of course, you must deduct any debts you owe.
You see that part about deducting any debts that you owe???
That's what the Trade Deficit is: DEBT!
Essentially, we've imported goods without exporting an equivalent amount of goods in return.
The paper money we send to them are nothing but IOUs.
That's how wealth is flowing out of the country, we are going into debt with our Trade Deficit.
No you're changing the subject. You keep maintaining that wealth is only in goods. I'm trying to address that issue. If we are net importers of goods, that means according to your "logic" that net wealth is flowing INTO the country. That's why I said never mind that. Because the amount of the services we export is not relevant to the question I'm asking you, which has to do with your "wealth" theory.
Of course, I am not saying that this is the actual plan, you understand. Just pointing out a scenario.
According to your wacko theory that wealth is only created by goods production, if we exported far more services than the value of goods that we imported, but we were still running merchandise trade deficits, than we would be exporting our wealth, even though net goods would be flowing into the country and we wouldn't have any trade deficit whatsoever.
IMHO, we'll likely have to go into Chapter 11 reorganization and dispose of some of our assets to satisfy our creditors.
Maybe China will accept a territorial exhange of Alaska in leiu of payment of our debt.
Just another possible nightmare scenario to consider.
No, then our wealth would be increasing.
Only it would be increasing through the mechanism of wealth transference, not wealth creation.
But that's not what's currently happening is it?
Wealth is being created offshore, and our wealth is diminishing as we accrue debt to import goods.
Just goes to show that being white easily compensates for any other disadvantage.(sarcasm)
And don't you know that no one is ugly... who makes a lot of money.
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