03/04/2003
In a recent cover story Business Week magazine observed that economists haven’t begun to fathom the implications of outsourcing for the U.S. economy. Economists don’t understand globalism because they don’t think about it. They simply assume globalism to be the beneficial workings of free trade.
Most economists take for granted that the benefits of free trade offset its costs. For example, the lower prices consumers pay for imports give more benefit than the harm done to the workers who lose their jobs in inefficient domestic industries. Any questioning of globalism raises the specter of protection — the prevention of resources from flowing to their highest valued use.
If a New York company can outsource its 1-800 call center to a lower wage state, why not to India? If a Floridian can freely trade with a Georgian, why not with a Chinaman?
If a person can run an indefinite trade deficit with his local supermarket, why does it matter if a country runs the same endless deficit with its trading partners?
All of these rhetorical questions (and many more) can be found in the Economists' Book of Mantras. Economists use these questions to reassure themselves so that they don’t have to think.
Let’s ask a new question: Is outsourcing trade?
What is being traded when a U.S. firm or industry relocates its capital and technology in China, where it employs Chinese labor to produce goods for the U.S. market?
Adam Smith’s argument for free trade is an argument against self-sufficiency in all goods and services. It is not an argument for exporting a country’s productive capability to countries with the lowest labor costs.
In the Smithian model, countries have different endowments. Differing climates give advantages to the production of different crops. Differing histories and inclinations result in different advantages in finance, skills and manufacturing.
If each country specializes in areas where its advantages are greatest or disadvantages are least, the gains from trade will make each country better off than it would be if it remained self-sufficient.
But, if there are no given endowments because business know-how, capital and technology are globally mobile, the advantage lies with countries with untapped pools of educated and skilled low-wage labor. The advantage 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.
To return to the question: Where is the trade in outsourcing?
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 U.S. is currently running a $125 billion trade deficit with China alone, a third world country. That’s why the U.S. is turning over $1.5 billion per day in its accumulated wealth to pay for all the outsourced goods and services that return to our markets as imports.
One reason that trade between countries is not the same as trade within a country is that more than one currency is involved. A country that runs persistent trade deficits dispossesses itself of its wealth and the future income that flows to the new owners of that wealth.
A second blow falls when foreigners find themselves satiated with dollars, or overweight U.S. investments. Then the dollar devalues, and the outsourced goods and services on which the U.S. is import-dependent become expensive.
An economy can, of course, stand some outsourcing.
But when goods and services in general are outsourced, where is the economy?
The enormous untapped labor pools in China, India, Indonesia and the Philippines exceed in size the U.S. population. They are sufficiently large to hold down living standards and wages in those countries until all U.S. manufacturing and information technology jobs have been outsourced in order to boost corporate profits.
A country devoid of high productivity jobs is a poor country. Is the U.S. on the outsourced path to becoming a third world country?
The Bush administration should think about this question before it gratuitously attacks Iraq. The consequences of war in the Middle East are unknown.
The Bush administration should also think about the rapid rate at which outsourcing is dispossessing the U.S. of its accumulated assets, including the domestic supply chains that are the backbone of American productivity.
How long will foreigners accept an annual outpouring of $500 billion before they force a devaluation of the dollar?
What becomes of the living standard of a people whose jobs and careers have been outsourced, people who are dependent on imported goods and services, and whose currency loses its value?
Protection is not a solution. Protection is a strategy to protect domestic producers from foreign ones. But U.S. global firms and firms whose profits benefit from outsourcing are not domestic producers. Protection would require the U.S. to erect tariff and quota walls against the products of U.S. firms who use foreign labor to produce for U.S. markets.
Do Americans possess enough national identity to have a shared national interest?
Are government and economists capable of recognizing that the global labor market is a threat to U.S. living standards and political stability?
Paul Craig Roberts is the author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice. Click here for Peter Brimelow’s Forbes Magazine interview with Roberts about the recent epidemic of prosecutorial misconduct.
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