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.
Yep rent an apartment and share it with 11 people. And do janitorial work until you have saved enough that with the help of a government grant you can open your own shop.
What's that? You can't get a goverment grant because you are not an immigrant?
Well then do like I did, get relatives and friends to loan you $500,000 so you can get started. Or do like Donald Trump game...start life with half a billion dollars.
Neither of those worked for you, huh? Well then move to Mexico where you won't be burdened with medical and unemployment insurance. At least you will have a job.
/Sarcasm off
But it's not just the cost imposed by the government. You could take all of the government imposed cost out of the government and you would still not be anywere close to competitive with some of these third world countries.
In Iraq they are willing to work for $20 a month. How can you compete against that? In China I think it's $1-$2 a day. In Egypt a Doctor on the internet told me she makes $20 a week.
Yet we have the largest market. Allowing the outsourcing of any but the lowest skilled jobs to these countries is insane. Training these countries to compete against us in the latest technologies is insane. We need to be very selective in what we are going to teach other countries. Especially countries like China where the government will simply soak up all the GDP and direct it towards the military aimed at us.
As usual in these discussions, nobody bothers mentioning the responsibility of Virginians to buy from other Virginians. Everybody wants to blame business or the government, but the fact is, by spending a few cents more for a domestic good, you are creating a ripple effect in domestic employment. That ripple effect helps Virginia far more than the few cents you "saved" buying lower quality imports.
Who knows what the grocery store owner might spend his money on? He might spend it on books that say nasty things about Hillary Clinton, or he might spend it on guns, or he might spend it on Bibles! Why, we must CONTROL THE EVIL GROCER'S MONEY!
The above, if you can't figure it out, is SARCASM.
More tanks for the communist regime?
Great! They waste their money on nonproductive assets!
Another palace for a ruling dictator?
Fine, SFW?
A nuclear weapons program?
Yup, spend that money on MORE nonproductive assets.
But I'm not talking about just China. The "fair trade" types demand that ALL countries that export to the US must buy goods and services from the US in amounts equal to their exports.
So, why not insist that if someone spends $4,000 a year at Food Lion, Food Lion must spend $4,000 a year on goods and services from that person? Hell, let's make EVERY business in America do that with EVERY customer they have. Why, surely it would be good for the American worker, if that theory is correct.
The advantage that the US used to enjoy was that capital investment was more secure here than elsewhere. You had politicians nationalizing factories, oil wells, and mines, and wanting bribes to allow you to do business, so locating your factory in the US made good business sense. But that was then, this is now
Now we have trial lawyers engaging in billion-dollar product liability lawsuits, the EPA shutting down manufactorers and making them pay tens of millions in cleanup costs, EEOC fining you millions if you don't maintain the right racial mix. It's not worth it to make products here any more. We need to put the alphabet agencies and the trial lawyers on a tighter leash, or there won't be any jobs left
The author is convinced that his readers are very stupid.
Well, let's be honest: the Marxist free trade crowd gives him little reason to think otherwise
Are you saying that most of the American work force is only as productive as largely uneducated peasants in third world countries?
Since he's trying to talk to Marxist-Leninist-Buchananites, he has good reason to be so convinced.
My first business I started with a $1500.00 loan from a finance company cosigned by my father. I was 18. This was in 1977 and In my first full year of business (1978)I did over 28K. I had one employee, me! I paid off all my business debts by the third year. (Upgrade in equipment a vehicle, etc)
My most recent business was started in 95 on $8700.00. even though I still have some debt on the business, a little over 10K at 3.5%, I am totally in the black because I have over 8 times that much in various investments earning on average 5% as well as the very low salary I pay myself and the dividends my company stock pays me.
BTW at no time did I get any help from the government.
Oh and Charlie is a good friend of mine, he owns the Chineese restaurant located about a block from here. He came here from China about 12 years ago and worked his ass off. He opened his business about the same time I did. Had to sleep in the storeroom his first year.
He stopped by last week to show me his new Lexus.
America is a wonderful country!
Ah, "used" to enjoy.
That's the key, ain't it?
You had politicians nationalizing factories, oil wells, and mines, and wanting bribes to allow you to do business, so locating your factory in the US made good business sense. But that was then, this is now
Indeed.
Now we have trial lawyers engaging in billion-dollar product liability lawsuits, the EPA shutting down manufactorers and making them pay tens of millions in cleanup costs, EEOC fining you millions if you don't maintain the right racial mix. It's not worth it to make products here any more. We need to put the alphabet agencies and the trial lawyers on a tighter leash, or there won't be any jobs left
Look at the trial lawyers as engaging in stealth nationalization. Owners are allegedly free to run their businesses as they see fit...provided that they comply with all governmental edicts. It's socialism by proxy.
It's a way for the government to get the money and the business owner to eat all the liabilities.
So, OF COURSE they flee.
This is correct only in an academic ivory tower. There may be an infinite number of things to do -- but only a small subset of things that people will pay money for. A Marxist might claim that value is in the labor. This is false. Equal time and skill might be expended to make pies out of dirt as out of apples -- but I assure you that the apple pie maker will make money and the dirt pie maker will not. Thus we see that the reason this "simple truth" seems to have escaped most of the economic profession is that most people in that profession are not as egocentrically ignorant as this pontificating buffoon.
It is all your fault. As the wise Mr. Anderson noticed - "if U.S. workers want to price themselves out of market after market, they are free to do so, but must pay the consequences.".
You should have found what is the normal wage in India for your type of job and have volunteered with the appriopriate pay cut.
Yep that is the free market in a nutshell! And used to be we had all kinds of jobs in America until the unions and the government made it more lucrative to go offshore!
What do you expect from business? Atlas has shrugged and you want to pile more weight on his shoulders to remedy the situation!
Sorry, but the horse is dead now, dismount and look for another approach!
Silly me. I thought she got into trouble because she was given insider information to sell out, and she did. Since that is in fact illegal and has little to do with investors, entrepreneurs, and executives "doing well" I suspect that most investors, entrepreneurs, and executives who are doing well have little to fear from prosecutors. Nor do I expect most investors, entrepreneurs, and executives to look at the Martha Stewart situation and declare "Golly, I guess I'll just have to invest in Asia because insider trading is illegal in this country!"
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