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.
--------------------------------------------------------------------------------
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.
You are destroying a nice illusion. How cruel.
This system was a product of Christian worldview and it transformed the barbarian tribes into the highest civilisation in history.
Free marketeers are foolishly wasting the cultural and moral capital of centuries. They are like rich and spoiled inheritors looking down on their poorer, smarter, thriftier and nobler ancestors. They do not understand that they have higher position because they stand on the edifice erected in the past and so they are dismantling it.
Willie, I am really on your side but please do not be so obtuse on this secondary point. You give an excuse to the free market fundies to spin their lies.
I'm sure Marie Antoinette could better explain why you really don't want to be one of the only extremely wealthy around when the peasants get tired of being extremely poor. Especially don't tell them just to eat cake when they complain they have no bread to eat. A fairly happy and working middle class offers the best stability and also vast amounts of wealth for all.
Exactly. Sort of like Detroit without the automotive industry or El Paso without the garment industry. The real wealth is in the means of production, not so much the product itself.
As to the rest of what you said, I see the employer, employee relationship as being much like a partnership, where two parties with similar interests operate on a mutually agreed upon contract. As far as being a rich & spoiled inheritor, I inherited no more than you did.
America got industralised with the protective tariffs. It is you - free market fundies who want to bring buggies and subsistence farming back.
The point of this information is that the Toyota assembly plant represents an investment in this nation which contributes to the general good of the nation on a lot of levels. General Motors cannot be blamed as unpatriotic, because they are hamstrung to compete by the unwise concessions that they have given the unions over the last few decades. It is generally understood that GM's pension obligation to its labor force is staggering. Personally, I have bought Camrys made in America for several years. They are a quality product and represent a better value than most of the American name tag cars.
I do not view Japanese society as some kind of Utopia, but it does seem that they know how to manufacture and market a product. There is a prevailing notion that Japanese business practices are corrupt. That may be true but it seems to me that America is the most corrupt nation on the face of the earth. Taxpayers were bilked out of billions in the savings and loan scandal, most people who had money in the market run up were bilked out of trillions by out right Wall Street and corporate fraud. I have certainly digressed but the point that I would make is that the corporate fraud prevalent near around the beginning of the 20th century was mitigated by corporate and banking interests who understood that they could not kill the goose that laid the golden eggs. Now we are dependent upon to politicians and bureaucrats to correct the excesses. It was quite a joke to think that the bufoons in the Senate could have a hearing to help correct the fraudelent accounting abuses prevalent in corporate America. Arthur Andersen accounting is as pure as snow when compared to the accounting methods used in the Department of Agriculture.
The hard working American who toils to feed and clothe his family and who straightforwardly pays his tax and who volunteers to shed his blood on foreign soil to preserve this American way of life has no one in the high places of business or government to defend this way of life with the same toil and committment. I know many who share my nationalistic spirit, but alas my friends and I are little people who have little voice and are confronted in the voting booth by the same tired crowd from both parties who are private property of the special interests who in turn are mostly internationalists and globalists. We are not a sovereign nation anymore. A nation has borders, our only borders are the natural borders of the Atlantic and Pacific. A nation has purpose, the dedicated purpose of this nation as stated in our founding document was INDEPENDENCE. With the escalation of the social welfare state and with the rising clamor to cede our sovereignity to the UN and EU, how much independence do we have?
As this nation's most signifant holiday approaches, we must understand independence cannot be sustained without nationalism. There are those in high places who are committed to one worldism and would have us believe that our balance of trade deficit and our increasing unemployment rate is actually good for America because it is good for the world. But in an alliterate world where the media is merely a tool of commerce, the collective common sense to refute such an assertion is difficult to mount.
Yes there is. It is called restoring China to enemy nation status. It is called revoking MFN status. And kicking them out of the WTO. And restoring the proper protective tariffs to ensure the vitality of key U.S. industrial sectors. China's inducements are NOT replicable in the U.S. Slave labor was abolished in 1865 as you recall. And that slave labor IS the almost SOLE advantage the PRC has. The infrastructure is minimal. The language barriers are real. The 'political correctness' police are omnipresent and oppressive. 5 laborers are needed for every American needed to do the same job. The lack of pollution controls is also not replicable. The lack of worker-safety codes in not replicable. The Chinese strategy of employing a tax-limited oasis currently extant, is a temporary suck-the-stupid-capitalist-idiot-into-the-noose strategy long-familiar to communism's practitioners. Once the industry is 'captured' the nationalization...and expropriation will follow.
I get pretty tired hearing this. When those industries became obsolete, there were replacement industries for the workers to transfer to. Now, industries are not becoming obsolete, rather the jobs in those still viable industries are being sent overseas and there are no replacement industries for displaced workers to transfer to.
Oh yeah? Well why doesn't the SOB move his company to the country providing the labor? Why doesn't the SOB get out of the country providing his family security, safety, legal protection, excellent sanitation and health care and the best standard of living in the world?
I'll tell you why. The employer wants to have his cake and eat it too. He wants to profit from foreigners and cling to his own economic life raft while his fellow Americans who need a job can go straight to hell for all he cares.
History demonstrates a suffering people do not comfortably wear this kind of economic freefall. They will rise and destroy this kind of system when the suffering reaches a sufficient level. Those who wonder how communism can take over may get the chance to find out.
Purely business, you say? I say employers who hire their labor overseas can MOVE OVERSEAS and live in the squalor and filth of the third-world countries from which they profit. They are anti-American companies.
When you throw Americans on the street to hire Chinese and Indians, you are hurting the United States because you are participating in the destruction of its economic strength. You are turning America, the world's greatest economic engine, into a nation of panhandlers and dumpster divers.
What's that? Start my own business? Who is going to buy my product or service? My potential customers are ALL going to be unemployed.
My wish is for all you globalists to be thrown on the streets of America to suffer with your fellow jobless Americans.
When you cry about being evicted and penniless, I'll just say, "Hey, pal, it's just business. Get over it. Get used to eating out of dumpsters."
The very reason why the once great and powerful Polish state was carved up by its neighbors in XVIIIc was that Polish aristocracy prevented the development of middle class. See the map: The Partitions of Poland 1772 - 1795
Yes, my friend, you are correct. I am a working man who ran as a Republican for congress. Despite the tremendous effort in "shoe leather" I put forth in the campaign, I had little chance without the special interest money the primary winner used to get plenty of TV advertising.
Too many people won't vote, particularly in primaries, and those who do vote choose a face they've seen on TV without carefully examining all the choices.
I would point out that by importing guest workers here with no immigration status (the H and L visas) the government is interfering on one side of the contract to the detriment of the workers thus we do not have a free market via teh government intervention.
Tell that one to Jersey politicians...
Tell that to every United States Ambassador.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.
