The Myth of "Exporting Jobs"

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.

Ultimately, all private property is held under a government's domain.

Your response to me makes me wanna throw tea in the harbour before I climb up onto a crate in the public square to rant to anyone within hearing, both about the consent of the governed & the tyranny of mob rule. What difference does it make to an individual if a taking is done by his own government, than if it's done by a foreign power? What does your position say to any potential foreign investor?

I get your point, I truely do. Weighing the right to nationalize property over individual rights requires a delicate balance. The thumb is already on the scale.

It is in all of our interests to ensure that the economy remains stable and strong, so that our government remains to guarantee our property claims.

I totally agree. Thing is, my answer is to strenghten individual rights, rather than nationalizing property. There are plenty of models of nationalization & they all seem to end up dabbling in Marxism somehow. Can you think of any examples to prove me wrong? Without a USA your dollars are as valuable as Monopoly money.

But if the government owns & controls it all, what difference does it make to anyone?

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 [the equivalent wealth of} $600

You have happened upon the secret of maintaining and increasing wealth.

Consumers have four choices when they make a purchase:

They may purchase an item that is new and take the personal financial loss associated with depreciation (and possibly interest).
They may purchase a used item at an already partly-depreciated value, thereby sharing the depreciation loss.
They may purchase a used item at an already fully depreciated value, thus owning an item that is equal in worth to its cost.
They can invest in an antique item that may increase in value.

A regular habit of purchasing only new items will obviously result in less wealth accumulation than a carefully executed program that combines the four types of purchases.

But doesn't mining the gold then take away the value? I'd pay more for land that had gold on it than had the gold mined and taken off it.

If you want to restrict your vision to just ½ of the equation like the flying monkeys want you to do, then yes, the wealth that was contained in the land was consumed and depleted. But the overall change to the economy was that the gold was extracted from the rock and ore and refined into a finished good that has greater economic value in the market. For the economy as a whole, it is an increase in wealth, despite the decline in the land value.

Yet the antique's value can go to zero if there's no market for the item. IMO, the purchase of a useful tool is a far better choice. A fishing pole, whether new or used has the ability to catch fish & even if no one else wants to buy it, you can find a way to use it to fill your stomach, push comes to shove.

my answer is to strenghten individual rights, rather than nationalizing property.

It is not so much a question of individual rights as it is individual opportunity. You want people vested in the system. You might still end up living under a bridge, but, at least you believe that there are better alternative opened to you. The ideal is to keep the game interesting for as long as we can, and to make sure that those who want to contribute are given the opportunity to play. That means maintaining a vast inventory of jobs - unless you can come up with a better way of allocating goods.

Here is an experiment for you. Go out and buy a monopoly set. Invite three of your friends over and hand out the starting money. Then take 100% of the property and allocate it to yourself. If your friends are like mine they are either going to refuse to play along, or will ask for a more equitable distribution of property. Go ahead and argue with them. Tell them you were the one who went to the dime store to buy the game and hence you are the one entitled to all of the property. I am sure the discussion will prove interesting.

IMO, the purchase of a useful tool is a far better choice.

Like an example of a guy who works, supports himself and his family but saves a little money and starts buying up used machines to start a tool and die business. First the used machines sit their collecting dust ---not really losing money because they were used and don't devalue. They may sit for years doing nothing while enough other machines, land, and building get collected, then the shop opens and the investments get to work, money comes in, more machinists are hired and they're making money, more machines get bought and more money comes in. What gets produced has a certain value until it's sold, then usually loses most of it's value ---but the machine shop itself is still producing wealth, making more things.

For the economy as a whole, it is an increase in wealth, despite the decline in the land value.

But it depends on where the gold goes ---if it gets taken out of our country, then it's just gone. If the gold owner decides to invest it in some manufacturing country where it can increase its value, then it we're left with the land that declined in value.

Your scenario says players start out with an uneven playing field by law, where the one who started the game was given an unfair advantage, upfront. The game owner shelled out the money to purchase the game, but an outsider is needed to even the playing field?

Each of us has been given the right to own the game & if we're smart, we offer sufficient incentive to others to play with us or we play alone. By owning the game, all you can offer anyone is the chance to play the game & they can't play it without you. You can't stop them from choosing another game to play, one you don't own.

Meanwhile, off in another land, there are people who think the game where you own all of the property is better than the game they've played in their land before, cuz at least in your game they're given the starting money. Your friends might be ticked with you, cuz you found players willing to play by your uneven rules, but they weren't playing anyway. Tell me what your friends -lost- when you begin playing with others by your uneven rules.

You've altered the physical arrangement of electrons in the processor and data storage media. There was indeed a physical change.

And a lawyer emitting a document has also produced a physical change in the universe, which may result in money coming in. So, does that become a "product" by your ever-changing definition?

Value isn't added until the gold is actually mined.

And a mine is worthless if it is put where there is no useful ore to mine. The steps of added value in this case would therefore include:

Determining that there is something there worth mining
mining the ore
smelting the ore so as to turn it into useful metal
Turning the metal into a salable final product

Plus way back in post 154 that transporting something did not add value. What IS mining, except the transporting of ore from where it is not useful (deep under ground) to where it IS useful (above ground, in an ore car being transported to the smelter)

Exactly FITZ. If you pay as you go, all production gives you a gain. Our first buy was an engine lathe, built sometime around WWII, if not WWI. I used to say, I should invite people to sit around the shop so they could see how we were doing, cuz you sure couldn't tell by our cars, clothes or furniture.

Determining that there is something there worth mining

Yeah, I suppose extracting an assay sample technically qualifies as a physical change of the raw material.

What IS mining, except the transporting of ore from where it is not useful (deep under ground) to where it IS useful (above ground, in an ore car being transported to the smelter)

Can't just transport it up.
Gotta physically change it by busting it up into smaller pieces.

Pretty much explains why we need to manufacture at home rather than abroad. There's been many mining boomtowns turned into ghosttowns when the mines were tapped out.

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.

It looks that trickle UP approach is much better than trickle DOWN one. Even for the rich it is much better to be wealthy among prosperous middle class, than to be isolated and fearful maharajas living in the see of poverty.

Social order counts. Without it, contracts can't be enforced, legal redress can't be had, and protection rackets will impose their own "taxes". Lack of social order -- not high-mindedness -- keeps U.S. companies from exporting jobs to hellholes like Zimbabwe.

Unless the taxpayers insure safe profits for the companies exporting jobs.

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