Exporting American Jobs

In the United States, offshoring – the business practice of moving operations overseas, usually to less developed countries with lower labor costs in Asia – has become a major political controversy. Dr. Sennholz explores…

Outsourcing – the business practice of moving operations and jobs to other countries – undoubtedly is the crucial issue of the European Union. Facing Union-wide competition, companies are eager to move to places where conditions are more favorable. They may want to leave France, Germany, and Italy where labor legislation and regulation condemn many millions of workers to chronic unemployment. They may prefer to move to new E.U. member states where labor is less encumbered and production costs are much lower. But such moves give rise to loud calls for government intervention, especially in countries that see themselves as losers and victims of the freedom for companies to move. Indeed, outsourcing is casting grave doubts about the future of the European Union.

In the United States, offshoring – the business practice of moving operations overseas, usually to less developed countries with lower labor costs in Asia – has become a major political controversy. It played a major role in the 2004 presidential election in which Senator John Kerry, the Democratic Party’s candidate, denounced corporate executives who were offshoring American jobs as traitorous “Benedict Arnolds.” He, and many of his colleagues, proposed legislation to eliminate all tax breaks to corporations that export jobs. Offshoring undoubtedly will play an even bigger role in future elections when many more jobs will have gone abroad.

Offshoring Jobs: The Voices of Protectionism

Loud voices of protectionism were heard already in 1992 when the North American Free Trade Agreement was to lower trade barriers and make the United States, Mexico, and Canada more competitive in the world market. It raised loud fears that it would lead to ever greater expatriation of U.S. jobs to Mexico where labor is less expensive. The same voices now are sounding the alarm about American jobs going to China and other Asian countries. Moreover, they are greatly upset about the nature of the work being exported. In the past, American companies had concentrated on transplanting low-skilled jobs which minimum-wage legislation and benefit regulation had made unlawful. More recently, the voices have focused on professional jobs going to China, India, the Philippines, and Malaysia where university-trained technologists are engaged in software engineering, computer chip designs, and code writing. After all, many thousands of engineers in those countries studied at American universities and acquired such expertise. General Electric Corporation has sent most of its technology services to graduates in China; Aetna is sending them to India.

Many legislators are eager to call a halt to such exports of American jobs. They are ready to levy steep fines, raise taxes, or imprison the violators of their laws and regulations. But they are not willing to lower the benefit costs that they imposed. In their private lives many were attorneys, counselors-at-law, civil servants, educators, or heirs to family fortunes before they embarked upon political pursuits. Few are knowledgeable economists familiar with basic principles of economics. Instead, they usually are enamored by their own position and especially by their great legislative powers. The only limit they may recognize is the political clout and vote of other legislators.

Most members of Congress are unaware of the inexorable principles of foreign trade and international cooperation. One of the great 19th century economists, David Ricardo, clearly elaborated and stated them. He propounded the Law of Comparative Cost, better known as Ricardo’s Law of Association, which applies to the common situation in which economic goods move readily across national borders, but governments prevent capital and labor from moving freely. Under such conditions, people everywhere benefit most if they concentrate on the production of those goods in which conditions are most favorable, leaving all other production to others. The case is similar to that of a surgeon who concentrates on surgery and leaves all supportive work to his assistants although he also excels in their simple tasks. And it is similar to that of a master mechanic who relies on his apprentices and assistants for ordinary work, although he could outdo them readily, but chooses to concentrate on the work requiring greater skill. Cooperation and division of labor benefit all.

In Ricardo’s time, the mobility of both capital and labor was limited rather severely. Later in the 19th century, under the influence of classical economic thought, both capital and labor became rather mobile. They created the “world market” with rapidly rising productivity and standards of living. During the 20th century, unfortunately, economic nationalism and rampant socialism closed many borders and precipitated not only ugly trade wars but also numerous armed conflicts. After World War II the “cold war” between the Soviet and American blocs of nations divided the world, creating political tension and military rivalry short of actual war. Yet the comparative differences in production cost allowed both sides to benefit from peaceful trade.

Offshoring Jobs: No Nullifying Ricardo’s Law

Ever since the disintegration of the Soviet bloc the market order has gradually expanded to most corners of the world and business capital has assumed new mobility, seeking employment wherever production conditions are favorable. But no matter how mobile capital now may become, it cannot nullify Ricardo’s Law of Association as long as labor lacks the mobility to move freely and expeditiously from country to country. The great differences in religious, racial, national, and cultural characteristics as well as the notable differences in birth rates and mortality rates will never allow man to spread evenly around the globe, but they may encourage him to engage in peaceful cooperation and international trade.

There cannot be any doubt that the problems of offshoring will be with us as long as economic conditions change and business is free to move. American business may move abroad, and it may come back again. Guided primarily by cost and yield comparisons many American companies are known to have canceled outsourcing projects in Asia, citing poor employee training and performance, inadequate support, personal and property security concerns, and political arbitrariness, hostility, and corruption. They must cope with anti-offshoring legislation and political malice wherever they would like to leave and with unfair competition laws and regulations where they like to settle. After all, construction of a modern plant undoubtedly leads to the closure of many old shops and relocation and training of their employees. Surely, closure of shops and relocation of workers are painful also in Asia.

Economists like to reflect on all the effects of a business move to places and countries where it is more productive. They are ever mindful of Ricardo’s Law of Association which affirms that trade benefits both countries. And they are elated when foreign competition persuades legislators and regulators to reduce their obstacles and restraints, trim mandated labor costs, and remove employment barriers. But they are saddened by the rising mood of protectionism in Europe as well as in the United States. The voices of nationalism and socialism are rather persuasive; they speak of interest, not of reason. They pay no heed to the old precept: What you do to others, they will do unto you.

Regards,

Dr. Hans Sennholz
for The Daily Reckoning

August 16, 2005

Dr. Hans Sennholz is president emeritus of The Foundation for Economic Education (FEE) in Irvington, NY. His essays and articles have appeared in over thirty- six major German journals and newspapers, and 500 more that reach American audiences. Dr. Sennholz is also the author of 17 books covering the Great Depression, Gold, Central Banking and Monetary Policy.

We are still on vacation. During these idle, brown days of late summer, we’re determined to find some new thoughts. Our old thoughts have seemed a little worn…like an old pair of slippers. We think we should try on something new; but the old ones seem more comfortable than ever.

Yesterday, we began a rumination based on a speech we gave in Vancouver last week. Today, we continue it…

Our new thought is that you can tell where you are in a major investment cycle by looking at the attitudes and beliefs of investors. When they are very bullish, it is late in the cycle of rising prices. When they are very bearish, prices are likely to turn up soon. We suspect also that attitudes similarly evolve in an imperial cycle, in which a country’s economic, financial and military power runs up over several generations and then decline. At the peak, the imperial people come to believe that their system is superior; that their values are universal, and that their way of live will inevitably dominate the entire world.

Readers will recognize these attitudes in a famous article by Francis Fukayama, written after the fall of the Soviet Union, in which he suggested that the world might have reached the “End of History.” It was the end of history because the American system had triumphed; no improvement seemed possible. Fukayama’s idea was not original. Hegel, and Marxist intellectuals, had proposed the same thing more than a 100 years earlier. With the victory of the proletariat, no further advance could be made. History had to stop.

Hegel stopped ticking. Marx died, too. History continued.

But when people feel they are on top of the world, they begin to take for granted things that they previously thought absurd. As we mentioned earlier, Americans now depend on the savings of Communist China in order to pay for their lifestyles…and their wars to make the world safe for democracy. They do it without thinking. Subconsciously, they’ve come to believe what imperial people always seem to believe – that their society is so superior that the rest of the world longs to be just like them. That’s the premise behind the billions of dollars Americans are investing in China. A few years ago, if someone had suggested that they invest in a communist country they would have thought the man mad. China is still run by veterans of various Great Leaps Forward, but Americans are convinced that they’re all becoming just like us – capitalists and democrats at heart! So vain are we that we can’t imagine anyone wanting to be anything else.

Likewise, we were just down in Nicaragua. We have a house down there and buy more land whenever we get an opportunity. Prices have soared in the last five years. Someone bought a beachfront lot recently for $350,000, a price that would have been thought insane a few years ago. Nicaragua is, after all, a third-world country. It is also a country that was run by communists until a few years ago. Even now, the nation’s politicians are debating a proposed law that would declare all land within 200 meters of high tide “public.” In effect, we’d all lose our land, our houses, and the money we’ve invested down there. But none of us quite believe it will happen. Because we’re convinced that they all want to be just like us – and we’d never do such a thing.

And of course, the invasion of Iraq was based on the same sort of thinking: that even the grubby desert tribes want to be just like us. All we have to do is to get the dictator all their backs and the men will start building shopping malls and the women will all start dressing like Britney Spears.

Those are the sort of delusions you get at the top of an imperial cycle. Cultural attitudes, political systems, and economies are never as universal and eternal as we think. Instead, everything evolves.

Now, for the news from our team at The Rude Awakening:

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Eric Fry, reporting from Manhattan…

“An espresso bar that rarely sells an espresso may represent a kind of aesthetic tragedy, but it is a capitalistic triumph. Just ask Starbucks’ shareholders.”

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Bill Bonner, back in Ouzilly…

*** Before getting involved in the market, investors must examine their ‘twin tolerances for risk,'” advised Steve Sarnoff, last Friday at The Agora Wealth Symposium.

“First, you must only gamble with money you can afford to lose. Never assume you are going to make huge gains.

“The other tolerance for risk is psychological. Review your temperament. Will you be able to handle the emotional roller coaster of the market?”

*** The American lumpeninvestoriat are jumping ship at a greater rate than any time since 1994. US investors bought $146 billion worth of bonds and equities outside the US in the past 12 months. Perhaps they are beginning to sense the urgency of panicking now… and avoiding the rush.

Thank god, the foreign lumpen haven’t gotten the message, huh? Overseas investors poured $71 billion into the US… more than covering the $58.5 billion shortfall created by the consume-at-will culture of ours.

(Addison’s book, by the way, explains the relationship between the current account deficit and the value of the dollar, quite clearly. What’s more, it shows you how you can profit from it – in an easy way.

*** Even in France, our closest cousins do not share our American attitudes. In the United States, we all seek to maximize our incomes. We work long hours. We start enterprises. We invest. In France, people do not seek to maximize their incomes. Instead, what they want to maximize is their leisure, and the quality of their lives. They spend more time talking about how to cook the bacon than they do about how to bring it home.

France once had a European Empire – from Spain to Moscow. Later, it had a worldwide empire – with subject countries and colonies in Africa, the West Indies and the South Pacific. From the time of Richelieu to the time of Leon Blum, France had one of the most powerful armies on earth. Even at the beginning of WWII, France had the largest army in Europe – on paper. But there never was a cycle that didn’t want to turn. And the imperial cycle turns along with the rest of them. For many generations, the French believed they had the finest culture, the best schools, and most advanced scientists, and the most dynamic builders in the world. France saw its mission as bringing the benefits of its civilization…of vin rouge and the Rights of Man…to the rest of the globe. But now it’s our turn. It is we Americans who think we have the best culture, the best economy, the best government, and the best army the world has ever seen. Now, it is we who have the burden of the “mission civilisatrice.” It is our duty to bring freedom and democracy to this tattered old ball; our president said so.

More to come…