Sunday, February 9, 2014

Free Trade, Employment, Outsourcing, and Protectionism

NOTE: These posts have been reproduced from my old blog, "Random Notes", because I plan to cite their contents in an upcoming essay. I have finished the essay, but, unfortunately, it cites a lot of essays I have not yet reproduced. So it may take time to find and post all of them. Until then, you will like see a handful of these essays popping up on my blog amid a few new essays.

I recently wrote a satirical piece mocking those who argue that we should not "outsource" jobs, but satire, while it can illustrate points, is not in itself an argument. So I have decided to write a slightly more substantive piece on the same topic.

First, let me explain why I am arguing both "outsourcing" and protectionism in the same essay. The fact is that the two arguments are essentially the same. While opponents of outsourcing argue about the direct loss of jobs, most often protectionists* also argue that by buying overseas we are losing jobs as well. So, in the end both are arguing that it is in our interest to make sure as many jobs as possible remain within the US rather than being performed by people in other countries.

Now, let us deal with one fallacy right away, foreign trading partners, and that includes those doing jobs for the US as they are effectively trading their labor, all of those who trade with the US want something in return. If they wanted only "money", not any goods, then we could become immensely rich by simply printing money, buying everything we need from the rest of the world, and living a life of leisure, as we would have everything we needed and had given up only worthless printed pieces of paper.

No, these foreign trade partners, in one way or another, expect goods or services in return for the goods or services they provide. They may not demand them directly, they may trade their dollars to another country which then demands the goods, or there may be dozens of trades between the purchase and the demand for goods, but at some point there will be a demand of goods in exchange for goods. So, despite the mythology, we simply cannot outsource all our jobs, nor can we ship all our industries overseas. If we produce nothing and perform no services then we would be unable to buy anything from foreign nations.

As I have mentioned before, the government itself perpetuates this myth that we can buy without selling by talk of a "trade deficit". There can, in the long run, never be a trade deficit, unless a foreign nation decides to hold US currency. And if they do so, then that effectively means we got goods for nothing, which seems beneficial, not harmful. However, more often than not, what the government considers a trade deficit is simply a purchase the government does not consider trade, such as Toyota using US money to build a plant in the US. They are still buying land and materials from the US, but since we are not shipping tangible "trade goods", there is a "deficit". Likewise, the government does not count some types of services, so we end up with the absurdity of a "trade deficit".

Then again, think about the "trade deficit" and ask why we fear it so much. If a trade deficit could really exist, it would mean a foreign nation gave us something without getting anything in return. In the real world of human interaction we call this "a gift" and consider it a good thing. Taken to the extreme, a 100% trade deficit would mean we were getting all our foreign goods for free, which hardly seems a problem.

But, of course, in reality such a trade deficit could never exist, I simply am pointing out that were it possible, I still fail to see why a gift from abroad is to be feared.

So, if we can't buy abroad, or employ others abroad, unless we have something to trade in return, then why are some so fearful of shipping either jobs or industries overseas? The reason most often offered is that we are losing jobs in the US.

However, this is a fallacy. We are losing specific jobs, that's true. If we buy steel or citrus or technical support services overseas, we have fewer steel workers or citrus farmers or technical support operator jobs in the US. To that degree the statement is accurate. However, what it fails to take into account is that labor is nonspecific, and even without foreign trade would be constantly shifting between applications. Even if we never traded outside of the US there would still be steel workers and citrus farmers and technical support operators who would find themselves out of work and have to learn a new skill, foreign trade does not create that reality, a dynamic economy does.

But let us ignore that for a moment and ask if "losing" jobs to foreign countries is harmful. If we look at it objectively, we can see that the idea that outsourcing is harmful rests on three errors. First, a poor understanding of division of labor. Second, a confusion of labor with wealth. And third, a failure to understand that labor is flexible, and the basis for all other resources.

The basic fact is that we achieve maximum wealth by dividing tasks between various individuals.We need only to look at a modern nation to understand that. What if, rather than the multitude of specialists we have today every individual were responsible for growing his won food, building his own shelter, making his own clothes, and manufacturing everything he needed? If that were the case we would clearly devolve into primitive conditions very quickly. By allowing each individual to pursue a task at which he is a specialist and then trade the product of his labor for those things he need, we make ourselves immensely more wealthy.

And that benefit does not diminish if the tasks are performed overseas. Whether we have a task performed by an individual down the street or around the globe, it still benefits me to have someone take on that task and free me to perform those things at which I am best. And that is why we ship jobs overseas. The labor pool in the US, relative to much of the world, well educated, endowed with a large amount of capital per worker and expensive. It makes no sense to use such expensive, skilled labor to perform relatively unskilled, labor intensive tasks such as sewing or assembly when it can be performed overseas by much cheaper labor. The labor supply of the US is better employed at tasks requiring a higher degree of skill or a higher quantity of available capital.

However, this argument often falls on deaf ears, as those arguing against moving tasks overseas tend to confuse wealth and labor. Which is a bit ironic, as the advantage of the US is precisely that we can produce so much wealth with so little labor. In fact, technology is intended precisely to reduce the amount of labor we need to do. Yet many of thsoe who worry about outsourcing or overseas trade focus on the fact that the US will have to do less labor.

If we took this theory seriously, then those who argue about outsourcing should also be adopting Luddite strategies and smashing machinery, as it also reduces the amount of work we need to do. Nor should they allow farmers to use mechanized equipment or even fertilizer and pesticides, as growing food without any of those requires many times the labor.

But, obviously, they are not consistent. While they are happy to reduce the amount of labor required through technology, they then fret over the reduction of labor requirements by moving simple tasks overseas. 

The reason being that they do not recognize the fact that labor can be reassigned infinitely, and labor itself is the ultimate resource, and the only real restraint on an economy. Any other resource can be increased given an adequate supply of labor. Labor itself is the only resource truly in short supply. Every task requires some labor, making labor the only consistent restriction on economic activity.

In the absence of government or union restrictions, when labor is freed it will, in time, be reassigned by the market to some other use, most likely the most demanded unfulfilled need. Which means that when we free labor by shipping  a job overseas we then have labor available to fulfill a need not currently being met. 

Now, this is not perfect, and obviously individuals will have hardships thanks to reallocation of labor. But that is true of any economic change, whether caused by moving a job overseas or to another state or an industry vanishing, retooling, or changing the skills required. All economic change creates hardships for some, that is just the nature of change. Unless we are willing to completely prohibit economic change, we will always have some hardships.

But looking at the picture of the economy as a whole, the freeing of labor from activities which can be more cheaply performed overseas frees up labor for more difficult domestic tasks which allow us to fulfill more needs and generally improve the conditions of the average citizen, increasing our overall wealth. Even once we take into account the goods we need to manufacture to pay for the foreign labor, we still are wealthier for having more efficiently used our labor pool.

That is, in essence, the argument against those who would stop us from engaging in overseas trade or outsourcing of jobs. But i would be remiss if I did not address one other popular complaint. Even among those who recognize that we are not going to end up unemployed, and who recognize that we must trade for goods received from abroad, the complaint is often heard that we are trading "good" manufacturing jobs for "service" jobs.

I still can't quite grasp this complaint. It shows a strange attachment to heavy industry which has no real economic significance. In fact, if anything, it resembles argument heard in the 19th century from people who argued against surrendering "good" farming jobs for industry. The argument then was that countries that weren't net exporters of food would be at the mercy of their neighbors. The success of Japan gave lies to this, so now we hear if a country is not a net exporter of manufactured goods, then they are at the mercy of their trading partners.

But it just isn't so. Except in as much as any nation is "at the mercy" of its trading partners. Yes, if you go to war with your trading partners they will no longer trade with you, but that is actually a good point of capitalism, the interdependency of trade tends to dispose countries toward peaceful relations rather than encouraging warfare*. But it does not leave them "at the mercy" of one another. Prior to World War II the US had virtually no domestic armaments industry, yet we managed to retool and refit and win a war in short order. Even had we built up form scratch, I doubt we would have failed to win the war. To argue that we must have a mass of factories at hand or else risk conquest by another nation is just absurd, and history does not support it. Wealthy nations can retool and fight wars, and trade builds wealth. Sticking with industries which are not efficient depletes wealth. And more than factories, wealth wins wars.

Nor are we helped by the derisive use of "service jobs". Most often this is used to imply that the US has been reduced to a nation of McDonald's cashiers. In reality, most jobs to which people aspire are "service" jobs. Lawyer, doctor, professor, theoretical physicist, computer programmer, musician, 0investment banker, actor, movie producer, engineer, and so on are all massed in this description of "service jobs"**. To argue that becoming the primary source of research and development for the world makes the US weaker is just absurd.  It is akin to saying that Switzerland is weaker than Nigeria based on the amount of manual labor carried on in each.

It is hardly a problem that our economy has shifted over time, that is inevitable. Technology changes what jobs are in demand, and as other countries become better at manufacturing jobs, it only makes sense to send part of our manufacturing overseas to free US labor for more capital or education intensive tasks, just as changes in technology once allowed us to move from a predominantly agricultural economy to a primarily industrial and manufacturing one. Unless those who worry about this are willing to surrender the advantages of economic and technological advances, they will have to accept this.

Things change over time, and trying to cling to the old ways is suicidal. Likewise, trying to cut our nation off from the rest of the world, while it may be possible, is only going to make us poorer, not richer.


* It is actually a bit disturbing that so many think of foreign trade in terms of warfare. It sounds as if there a number of theorists whose sole thought of foreign trade is to prepare us for the future conquest of our neighbors. Trade is the antithesis of conquest, and to think of trade in military terms is to distort one's understanding greatly.

** Does anyone tell their child "Son, don't become a doctor, you need a good job in the steel mill"? If not, then why this worry about moving from heavy industry to service jobs?

Originally posted in Random Notes on 2008/07/02.

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