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.
OPIC dioes not help out the relentlessly taxed and regulated rather it is a subsidy for the nations that recieve the corporate investment. It was originally formed as part of the foreign aid bill (under Richard M. Nixon). It still is considered a form of foreign aid. it is aid of which the People's Republic od China is a recipient.
Now the corporations being somewhat rational are not going to invest in a higher risk investment without either risk mitigation or a vastly higher rate of return. Thus OPIC with the insurance it provides mitigates the risk. The corporation could make money no matter where they invested. The rate of return would be different based upon location but in the final analysis it would be balnced by risk.
You are the one advocating continued taxpayer support for the outflow of investment capital. You are the one arguing for MARXIST intervention. You are the one arguing for an internationalist viewpoint.
Besides tariffs, we also had excise taxes on things like alcohol (the cause of the Whiskey Rebellion in the late 1700's), but I get your point.
If we stripped the US govt back to its Constitutionally-appropriate level, it would be able to support itself on tariffs
It is important to define wealth. You can't measure your wealth by the things you buy -- for example if you buy 3 cheap Chinese television for $200 each and used a credit card, you don't have $600 ---for one those televisions are only worth maybe $50 each once they're used ---so you owe $600 for something that might be worth $150. Same with a car, if you buy a car that costs $25,000 and stretch payments out for 5 years, first the minute you drive that car off the lot, you've lost at least $5,000 and in a couple years you still owe more than half but the car has lost more than half it's "value". Everything you own is technically used and isn't worth much.
The US govt has no business subsidizing a company's relocation of jobs overseas (which is what insurance at below-market rates is). A company relocating its facilities overseas should either absorb the whole risk itself, get insurance on the private market, or stay here
It does matter. It does matter. If 5 people have 1,000,000,000 then only 5 people will have homes and the rest will live in shacks made from discarded wooden pallets. There would be only so many cars to sell that those 5 people could buy. If 40000 people have 25000, then they'll buy houses and cars and more. Wealth is jobs. The only way most of us have access to wealth is from working for money. That's what gets us a little wealth and then we contribute to the economy. It's all about jobs.
"If working people can be encouraged to look forward to obtaining a share in the land, the consequence will be that the gulf between vast wealth and sheer poverty will be bridged over, and the respective classes will be brought nearer to one another."Americans are currently encouraged to look forward to obtaining a "share of the land". It is called HOME OWNERSHIP.
"A further consequence will result in the greater abundance of the fruits of the earth."
If they choose to plant a garden...
"Men always work harder and more readily when they work on that which belongs to them, nay, they learn to love the very soil that yields in response to the labor of their hands, not only food to eat, but an abundance of good things for themselves and those that are dear to them."
Some "gardener types" learn to love the land. Most prefer to go to work so they have money to buy things from those who love to work the land.
Americans exercise their love of their property by working hard to maintain and improve their homes, boats or campers with an eye to future resale values.
"That such a spirit of willing labor would add to the produce of the earth and to the wealth of the community is self-evident."
Then, when everyone starts growing their own food, the government will buy surplus crops so that the market prices can be artificially sustained.
Good point, though, that home improvements add to the wealth of the community.
"And a third advantage would spring from this: men would cling to the country in which they were born; for no one would exchange his country for a foreign land if his own afforded him the means of living a decent and happy life. . ."
Land is a form of disposable income. Property ownership does not create a sense of nationalism unless there is an absolute guarantee that property will not be confiscated. Unfortunately, the government confiscates our property continuously by removing portions of it annually in the form of property taxes, and through the use of eminent domain seizures for "the public good". The government further confiscates property value and usefulness through zoning restrictions which include open space rules, through excessive building regulations and indirectly through the practice of taxing income.
Distributism is one step from agrarianism.
That is such a critical point, and I'm glad you said it.
Great point!!! When & why did the US political climate becomes negative to business?
Nationalism versus globalism is the issue which trumps mere economics.
As you pointed out later, most big companies are multi-national. Do you think foreign investors should be excluded from investing in US companies? If not, why should the businesses see a US nationalistic goal as important? If you think investing in the US should only be allowed by Americans, what affect would it have on the companies which are heaviliy invested in by foreigner interests?
In theory there is something called economic nationalism although I cannot point to anywhere in this country where it is practiced.
That's an interesting concept.
J.P. Morgan said a long time ago that what is good for General Motors is good for the country.
But our government says, what's good for the UAW is even better.
The problem with these discussions is you have different people operating off of different definitions.
For example, Willie Green defines wealth as "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". Unfortunately, his definition does not include intellectual property like patents and copyrights, nor does it include knowledge and skill (an intelligent man with specialized knowledge can realize a bigger cash flow than the average man with a piece of manufactoring equiptment he doesn't know how to use). It also doesn't include certain rights (like the transferrable rights to use someone else's property)
IMHO, a modification of Willie's definition of wealth should be something like "the net present resale value of property, or the net present value of cash-flow resulting from ownership of property". Thus, used (or consumed) property has less wealth-value than what it was bought for, while other investment property may be currently worth more than what was paid for it.
In short, a good definition of wealth is "stuff that can be used to acquire desired goods or services". So, owning a working business is "wealth", owning rentable land is "wealth", owning salable or licensable intellectual property is "wealth", but a used TV set is only "wealth" to the extent that it has resale value
I always think it's funny by people who look at wealth by the number of used cars (bought new maybe but now used) they have sitting in their driveway and the fact that they have 3 used television sets around their home. Everything else they count as wealth is their cable and cell-phone service and things like that.
Many people today owe more than what any of their things are worth, they have negative wealth.
Or put another way, the main productive facilities that most of us have, are our marketable skills, knowledge, and intelligence. For optimum wealth generation, the various factors need to be in balance: a machine without raw materials is just scrap metal, land without anybody needing it is just wilderness
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