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.
I totally agree with that statement. If providing this insurance is actuarially sound and profitable then the uS government has no business whatsover in this field of endeavor. It is socialism at its worst. My only question is why do not those who argue for deregulation and a tax structure beneficial to development not argue against this once they know?
I have never argued for all teh regulation and the conficatorey taxes on those who produce. I do admit I would consider possibly raising some tarriffs against those nations that have tarriffs on American produced goods and services. I, further recognize that our historical reality is that from our founding until the 1990's protective tarriffs were in place in the USA. It is during that time we went from being an economic backwater to the preminent economic and military power.
I do not deny that in theory free trade has benefits for the USA but we have yet to enter a free trade envirornment.
I'm all ears. Does it require one to work 70-90 hours a week? I've BTDT. The ex got the business in the divorce & I don't know if I have the energy to start over like that anymore.
They're probably majoring in economic theory and philosophy--
Distributism in the Chesterton-Belloc mode gives pride of place to yeoman farmers, but not exclusivity. What they were really advocating, I think, was a return to the medieval system of craft guilds -- essentially a syndicalist system in which chartered organizations would monopolize production in each craft, regulate prices, prevent the formation of monopolies, accumulate and lend capital, and in general protect the lives and livlihoods of their members.
Whaever faults it might have as a theory, the idea behind Distributism is noble: that men deserve better than to have to work at a job in order to survive. The dignity and nobility of being the owner of a family business -- however small!-- is far better suited to the divinely-created human spirit than being a disposable cog in someone else's monpoly capitalist machine could ever be.
I'm not enough of an economist to know if Distributism is practical. But I do know from experience that people are happier struggling along and working like dogs for their own or the family's business than they are with an "easy" job as a corporate flunky. In other words, I know that Distrubutism is more moral, more Christian, and better suited to the human spirit than straight capitalism is -- because it honors traditions, family, and property above all.
The American worker has been spoiled. Memories of the post-WWII world have conditioned Americans to believe in "job security" -- an entity that has existed only rarely in the real world. The days when a 22-year-old engineer could walk out of the college door and into a high-paying thirty-year job designing wiring harnesses for Convair or North American Rockwell are over! Today, more than ever before, American workers ae finding out that in the end they are just disposable cogs -- "human resources", not people -- to be used and then discarded when a cheaper alternative comes along.
Such a system -- no matter how much wealth it creates or how high a standard of living it allows -- is inherently immoral, for it reduces human beings to the status of mere things.
Thanks for your well-reasoned reply.
The Trade Deficit is debt?!?!? Since when is cash a liability? If it's a liability, how is it paid off and who owes it?
No, then our wealth would be increasing. Only it would be increasing through the mechanism of wealth transference, not wealth creation.
If someone produces food or fuel, such as oil, gas etc., is that adding to wealth?
Ever since it ceased being backed by gold and silver. The only thing backing the paper now is the "full faith and credit of the U.S. Government." Sure doesn't mean much considering how irresponsible Congress is at balancing the budget, does it? I suppose "We the People" (the taxpayers) are ultimately responsible.
Production is wealth creation.
Consumption is wealth depletion.
The ballyhooed "consumer economy" is just a sugar-coated phrase to describe how we're squandering our wealth.
I agree. That's actually another problem with his wealth creation theory. Virtually all manufactured goods disappear and have to be recreated. The value of manufactured goods is a tiny percentage of the accumulated wealth in the world. It's primarily intangible assets or a nonmanufactured tangible like land. See posts 244 and 246. He never answered my question. I was just applying his wealth theory to the trade deficit.
You've altered the physical arrangement of electrons in the processor and data storage media. There was indeed a physical change.
Recently it has suddenly become much easier to understand where the decline of the American Republic began.
"Treason" by Ann Coulter, contains extensive foot-noted details itemizing the actions of those who have sold out our system of government and economics to socialism and to what may ultimately become global communism.
Yes, wealth is a tricky subject at best and most folks think that wealth is piles of money! The piles-of-money/goods-owned = wealth theory is a very simplistic view of the capitalist world and gets many folks into trouble.
Yes ---because the value of the tv or whatever thing is now longer very high once it's been bought but the trade deficit remains. Also much of that trade deficit is from people who didn't buy with actual money but with credit so it contributes to our national debt.
Value isn't added until the gold is actually mined.
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