The Myth of "Exporting Jobs"

Ludwig von Mises Institute ^ | June 27, 2003 | William L. Anderson

[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.

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

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.

[L`enn]

I always find it interesting that in the same time period (the last five years) , job have increasingly been exported overseas (technically not a correct term but the author is playing with semantics), while productivity has incresed, high level executive pay has skyrocketed and the economy has tanked. Some wise economist ( a junk science on a par with psychology) surely can explain the correlation between the 4 events.

[L`enn]

Unemployed Americans can't buy goods and services regardless how efficient or cheaply they are made or offered. . The thing is it does not really matter. The money the unemployed do not have is held by someone else who is buying the goods and services. It matters not to the economy if 40000 people have 25000 dollars or 5 people have 1,000,000,000.

[ARCADIA]

"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."

I wonder if this number crunching jerk has ever held a real job. For investors this statement is true. Unfortunately labor is not, and never can be as liquid as capital. There are only a limited amount of things to do, because there are only a limited number of things that our existing pool of human resources can do productively. Until someone figues out a way to mindmeld decades of specific experience into a human skull that is not going to change.

[RipSawyer]

Really? Please explain why the USA standard of living is higher today then oh say 30 years ago or 20 or even 10!

"I don't think it is."

I don't think it is either.

[Cacophonous]

I should clarify a little. Of course Marx was all theory, and did not rule any countries. His followers - Lenin, Stalin, Mao, at alia - were the ones that played the West, and their sympathizers, for fools, just as Marx predicted.

[Cacophonous]

"Fair trade would set tariffs equal to the cost of our regulations and enviromental laws or fair trade would eliminate all our regulations equal to the regulations in Botswana. Then we would see fair trade. Until then, we are seeing unfair trade promoted and subsidized by our government. "

Well stated and beyond those whose speciality is name-calling to attract attention (Marxist, Socialist, Buchananite, etc).

The American business horse is handicapped with the costs imposed by government. Unless those costs are removed (not likely) then add this government cost handicap to imports (tariffs).

Yes, well stated, and incidentally, entirely in agreement with Adam Smith. And Buchanan.

[mdmathis6]

Start your own small businesses with your 30 software knowledgeable friends, and compete with IBM. You have the advantages of being in the US, you know the markets and the systems. If IBM is being an ASS, Microsoft them like Bill Gates did 20 years ago!

[mdmathis6]

I congratulate you for discovering the secret for surviving the machinations of the FAT CATS. You survived and prospered by "building a better mousetrap" and using your life skills in an innovative fashion. No Indian outsourcing firms to send your work to because the can't do what you do! I think if all these whining computer techs, electronics whizzes, and unemployed network managers could get together and form new companies(even if they start from basements and garages), the out sourciing offshore techno slide will be halted as, the miscreant companies would be forced to deal with the upstarts back home in the US, by keeping it's US employees...actually employed.
NON-DISCLOSURE AGREEMENTS BE DAMNED! If IBM or other tech firms doesn't want its layed off workers to reveal or use secrets in their future search for employment it needs to keep them employed...period!

[defeat_the_dem_igods]

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.

Without the regulatory burdens that American firms typically face, much more manufacturing would go on here.

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.

All fine points, but the author is preaching to the choir. The choir being those that will take the time to read the article....

We all know that our elected representatives have not the time, since they are too busy working towards staying in power (aka, vote buying) by passing ever expanding social programs.

[A. Pole]

"Pay no attention to the man behind the curtain."

- The Wizard of Oz

Pay no attention or invisible hand of the market will loose its magic.

[A. Pole]

I always find it interesting that in the same time period (the last five years) , job have increasingly been exported overseas (technically not a correct term but the author is playing with semantics), while productivity has incresed, high level executive pay has skyrocketed and the economy has tanked. Some wise economist ( a junk science on a par with psychology) surely can explain the correlation between the 4 events.

"Pay no attention to the man behind the curtain." It is invisible and infallible hand of the market.

[A. Pole]

His followers - Lenin, Stalin, Mao, at alia - were the ones that played the West, and their sympathizers, for fools, just as Marx predicted.

Do not forget Trotskyite roots of globalist neocons.

[harpseal]

I will pretend I didn't hear that. This time.

Please I have watched your posts on this subject for quite a while and you are too busy stating that the corporations that are raping the American taxpayer are noble and good for investing in places like China so that I stand by my statements. further you are the one who brought up Marxism. Internationalism is a standard part of Marxist doctrine and you are the one spouting that.

I'm calling for an end o the insane tax and regulatory policies that convince American businesses to leave.

If that were what you were doing I would have nbo argument with you whatsoever. However, your defense of the current GATT envirornment belies that stand. Your dismissal of government policies that encourage overseas private investment and your defense of H1B and L1 visas on other threads indicate a strong commitment to the economic development of nations other than the USA. You have continually dismissed the fact that the People's Republic of China is the most probable major military opponent of the USA over the next twenty years.

In short you are convicted by your own posts.

You, on the other hand, are demanding that American businesses say "THANK YOU SIR, MAY I HAVE ANOTHER!"

In no way at any time have I advocated anything remotely like this what i have advocated is getting rid of insane regulation. I have advocated enterprise zones with reduced regulations and no corporate income tax in return for a commitment from those corporations taking advantage of these zones to use the maximum ammount of domesticly produced materials in their operations. I have advocated enforcing our immigration laws and I have argued for eliminating corporate subsidies.

So kindly shut your f***ing mouth, a$$wipe.I do not shut my mouth because some MARXIST INTERNATIONALIST tells me too. This is still Free Republic and you are not the commisar.

[harpseal]

The U.S. was built on confiscatory taxes? That's a new one.

In the 19th century the tarriff issue was an important one. The US Coast Guard was originaly formed to collect tarriffs (revenue cutters). Early Supreme Court decisions showing Federal supremacy were involved with tarriffs. Protective tarriffs were a primary issue for such politicians as Daniel Webster and John C. Calhoun.

[Cacophonous]

Good point.

[Cacophonous]

Remember, rudeboy, the US had no income taxes until early 1900s...subsisted entirely on import tariffs. And it was not until the '60s, under Kennedy that the whole notion of "free trade" became popular. Before then, there were few "free traders".

[SauronOfMordor]

It depends on whether or not you made a physical alteration to the equipment. If you merely made an adjustment, there is no value added. Value is determined by supply and demand in the market.

There are lots of modifications that do not involve physical alteration -- for equiptment that uses an embedded processor, a software upgrade may increase the usefulness without any "physical" change.

The market value of a piece of land may rise, for example, by a service-worker discovering the existance of gold or oil on the property. In this case, there was no physical alteration, only an increase in knowledge about the land.

What I keep trying to communicate to you is that "value" is not intrinsic to an object. An object has value TO A PERSON based on its usefulness TO THAT PERSON in the achievement of one or more goals (whether that goal is more widgets made per hour, or a more aestheticly-pleasing living room), and an object's value to a person depends on its intrinsic properties PLUS things like its location and the person's knowledge on how to optimally use it

[SauronOfMordor]

We cannot and will not grow poor and unemployed 'exporting jobs' SO LONG AS WE REMAIN A PRODUCTIVE NATION AND PRODUCTIVE POPULACE.

The ideal would be us only exporting "excess jobs" in a full-employment environment. In other words, the affluence of the US would increase if we continually raised the skill levels of our people, created new higher-skill jobs, moved people from low-skill to high-skill jobs, and exported the low-skill jobs

[Cacophonous]

It's interesting that that those espousing the liberal/marxist ideology on here resorts to insults and name-calling. When their ideas have no merit...

Keep up the good work.

[harpseal]

Agreed on the history involved. Tarriffs had two uses, first the collection of revenue to fund the Federal government, second to protect the growth of American industry.

We have never had a global free market and while such a situation may be beneficial to the USA we really will not know until we try. However, the current trade envirornment is a raw deal for Americans and is decidedly not free trade.