“Demagoguery beats data in making public policy,” former economics professor and later the Republican House Majority Leader, Dick Armey, once observed. He was no doubt proud, then, that the Senate’s recent attempt to bring the Creating American Jobs and Ending Offshoring Act (S. 3816) to the floor for an up or down vote showed how keen his powers of observation were.
S. 3816 attempted to mandate three things: (i) exempt the employer portion of payroll tax on wages paid to new employees working in the US, (ii) prohibit a firm from deducting the expense of discontinued operations for business units transferred out of the US, and (iii) repeal the current tax deferral on unrepatriated income from offshore operations when those operations sell into US markets. All three provisions intentionally erect barriers to free trade to protect domestic jobs without regard to the competitiveness of those jobs in a global economy.
This kind of legislative silliness is based on the old bromide that international free trade causes the loss of US jobs. Where do politicians and protectionists think “lost jobs” go? To the land of lost socks? Jobs aren’t “lost.” The fact that they are done by a different person or done in a different way doesn’t mean they are lost, unless they were unnecessary in the first place. Inefficient jobs misallocate domestic resources. They go to the country that can do them acceptably but at less expense – those evil “low wage” countries. Since it takes two to tango in this transaction, it ought to prove that since there is trade – you give me this and I’ll give you that – both countries win: the country that gets the job done cheaper by exporting it and the country that gets to do the job by importing it.
Forty Republican and four Democrat Senators voted against cloture – essentially extending a filibuster and preventing S. 3816 from moving to the floor for a simple majority up or down vote.
Politics aside, what economic justification is there in paying someone $20/hour to do a job that someone else is willing to do for $2/hour unless the former is ten times more productive than the latter? The fallacy in arguing that jobs are “lost” in international trade assumes that trade is a zero sum contest – if someone wins then someone else must lose. Jobs, however, are traded like products – both domestically and internationally. Unless trade is a win/win for both parties, there will be no trade.
For example, most of us have other people launder and dry clean our clothes, mow our lawns, and paint our houses. If someone were to suggest that we should protect ourselves from “losing” these jobs to lower-paid providers by doing our own laundry and dry cleaning, mowing our own lawns, and painting our own houses, we’d think that person daft.
What if Congress had been able to legislate that there would be no more losses of US farm jobs to the US manufacturing sector in the late 19th century. Would our economy be better off today? If laws had frozen the number of manufacturing jobs in the mid 20th century at 25% of the workforce, would we have the standard of living we have today when only 5% of the workforce is in manufacturing? Have any of us been deprived because we didn’t learn to use a rivet hammer or work in a grimy rolling mill?
Somehow we’ve managed to feed ourselves and a good chunk of the world even though we “lost” almost all farm jobs to other occupations – down from half of the workforce in 1900 to 2% in 2000 and almost two-thirds of the remaining farm jobs are part-time. We don’t have nearly 50% unemployment because those who once farmed are unemployed. They and their descendents found work doing other jobs of greater economic value. And notwithstanding the “loss” of manufacturing jobs to automation and to foreign workers, we’ve been able to keep the workforce once employed in those jobs busy doing higher value jobs today. When productivity increases faster than demand, as it did in farming and manufacturing, employment declines and the workforce shifts to other fields.
To which fields will the workforce shift? To the fields in which the US possesses a relative advantage over other countries. The reason I don’t clean my clothes, mow my lawn, or paint my house is that my time is better spent in activities that pay more than the money I save in cleaning, mowing, and painting – i.e. activities in which I have a relative advantage over the people who clean, mow, and paint. Stated differently, it costs me more to do those jobs in addition to my regular job than to pay someone else to do them. I’m more productive doing what I’m most qualified to do and buying the rest. The cleaners, mowers, and painters are more productive doing what they’re most qualified to do. That is the basis for domestic and international trade.
Absent a productivity differential there is no basis for trade. That’s the reason why, for example, US software programming flows to Indian programmers. It isn’t because Indian programmers are “willing” to work for less. Indian and US software programmers are paid exactly the same amount per unit of output – but not per hour. The former is the product labor cost resulting from productivity and the latter a wage rate.
The notion that US goods can’t compete with goods produced in low-wage countries, therefore, is an economic fallacy that isn’t substantiated by logic or experience. If Indian programmers are one-fourth as productive as American programmers (because of tools, processes, management, for example) then the equilibrium wage for Indian programmers will be one-fourth that of Americans. It has nothing to do with the “willingness” of Indian programmers to work for less. Low wages are the consequence of low productivity because low productivity produces lower economic value than high productivity.
Here’s how. Worker A produces one unit per hour. Worker B produces two units per hour. Units have the same value regardless of who produces them or where they are produced. Worker B is paid twice the hourly rate that A is paid, although both are paid the same per unit of output. Productivity and wages always reside at or move toward this equilibrium. Equilibrium can exist with low wages and low productivity or high wages and high productivity, but never low wages and high productivity.
If wages and productivity are misaligned, an arbitrage will occur. Wages that exceed their productivity equilibrium, which commonly occurs in labor union agreements, will cause jobs to export to low wage markets. Wages that fall below their productivity equilibrium will import jobs from higher wage markets, even with a loss of productivity – i.e. even if the market “losing” jobs is in wage-productivity equilibrium. Therefore, if the US is three times more productive in software programming but has twice the wage rate of India, jobs will stay here. In contrast, if India has a third of the productivity and one-fourth the wage rate of American programmers, jobs will move to India.
Do you think anyone in the Congress or White House gets this?
These same principles play out in the US domestic economy. As farming became more productive in the 20th century, the farmers who were less productive earned lower wages for their labor than farmers who were more productive. The least productive farmers were ultimately displaced because they couldn’t live on their wages. Over time only the most productive 2% survived, because they were so productive that only 2% were needed to do the work that 50% once did – i.e. feed the nation and part of the world.
Those farmers who were displaced moved to cities and found jobs in manufacturing and other sectors of the economy. Most became more productive because their jobs were leveraged by technology and automation and/or they produced higher value goods, allowing them to be paid higher wages because of their increased productivity. Wages that became misaligned with productivity because of, for example, collective bargaining resulted in further displacement. If those jobs weren’t exported, they were displaced by a robot or other automated “worker.” They weren’t “lost” simply because a human no longer performs the job.
Even though in the long term Americans enjoy rising incomes and a higher standard of living, the short term can bring difficult times as displacements are going on. Who can dispute that small communities benefit when big box stores like Wal-Mart bring low prices and large selections – unless it’s the “mom and pop” retailers who lose livelihoods because their productivity can’t stand up to that of Wal-Mart? In the short term mortgages, car payments, and tuition must be paid, even though in the long term households enjoy multiple inexpensive, flat screen, high definition TVs with hundreds of channel selections scattered about their houses – unlike the one expensive black and white monster with five channels that occupied the living room in our parent’s house.
Because long term gains produce short term pains, politics lives in the short term. Political silliness like the Creating American Jobs and Ending Offshoring Act can’t prevent a free market economy from destroying old inefficient jobs and replacing them with more efficient jobs. Do we really want laws that protect a farm economy which ties up half of the workforce when it’s been proven that more crops can be produced by a small fraction of the workforce? Do we really want to pay several hundred dollars for shoes made in the US that Nike can make in Vietnam and retail here for $30? (Keep in mind that lower prices have the same effect as higher incomes, which becomes a higher standard of living.) When resources are misallocated, society has to pay for it – it has to give up something. Do we want to give up those hi-def TVs? Cell phones? Second cars? Better public health? There is no free lunch. All of these advances in economic and social well-being came from resources previously tied up doing something that we figured out how to do better with less.
When the US steel industry lost over 200,000 jobs in the 1980s to a more productive Japanese steel industry, the industry howled and politicians obligingly interfered with the free market to limit steel imports. Absent competition, higher steel prices drove up the cost of steel-based products, like cars, putting them at a cost disadvantage with competitors in their US and international markets. In the end, government protectionism gave an estimated $240 million in added profits to the US steel industry and “saved” 5,000 jobs – much to the delight of the steel workers union. But the industries that had to buy more expensive steel, because foreign competitors were shut out of the US market, lost $600 million in profits and 26,000 jobs. Who won?
Demagoguery beats data in formulating public policies. After their jobs losses to the more efficient Japanese steel industry, there remained 160,000 workers in the US steel industry lobbying for tariffs to be imposed for their protection. But it was well known that there were nine million workers in industries using steel. So it can hardly be surprising that these tariffs caused net job losses nationwide. Too often laws are passed for political motivations, restricting international trade for the benefit of a concentrated and vocal constituency, even though these restrictions will likely cause far more losses of jobs nationwide that lack the concentration to be a vocal constituency.
PCs became a mainstream product in the mid-1990s as their performance improved in leaps. Each leap increased the economic value of the PC. But in time, performance overshoot occurred because performance and economic value became disconnected. PC performance became “more than good enough.” At that point, the PC began to be commoditized. Manufacturing shifted to the Far East, primarily Taiwan, which produced PCs on razor thin margins. Economic value shifted from hardware to software. While the US lost many thousands of PC manufacturing jobs, it became the leader in software development, something it couldn’t have accomplished if its computer engineers had remained tied down in the production of machines that could be produced just as economically in other countries. Manufacturing moved where the comparative advantage was higher, Taiwan, causing the US to “lose” jobs where it had no comparative advantage, freeing engineers to focus on software development. Not one single politician “helped” make this dramatic transition. It occurred in only a few years, guided by the invisible hand of self-interest. The media, of course, gushed the manufacturing job lost news, guardians of the status quo wrung their hands, but the sky didn’t fall. We have more people employed in software product development today than we ever had building computers. Who won?
Notwithstanding Ross Perot’s doomsday prediction of a “giant sucking sound” when NAFTA was implemented, one post-NAFTA study showed that 37,000 jobs were lost to Mexico from 1990 to 1997 because of free trade while, during the same period, 200,000 jobs per month were being created in the US. Unemployment in the US fell to record lows. No zero sum here, however. Both Mexico and the US exploited their comparative advantages to gain from international trade. Who won?
Mark Twain said that he was all for progress. It was the change that he didn’t like. Change is painful and disruptive in the short term. Even though it usually benefits everyone in the long term, structural economic change impacts a relative few in the short term. There are no political platitudes, no easy solutions to propose to people whose jobs have traded places with a machine or a person across the globe. Their careers and lives are forever changed and must start anew somewhere else in an economy that treated them roughly. However badly we may feel about this turn of events, preventing it is not the answer if America is to continue to be the largest exporter and the largest economy in the world. Whatever our problems, we have more options for solving them as long as we are the leader of the world economy.
S. 3816 attempted to mandate three things: (i) exempt the employer portion of payroll tax on wages paid to new employees working in the US, (ii) prohibit a firm from deducting the expense of discontinued operations for business units transferred out of the US, and (iii) repeal the current tax deferral on unrepatriated income from offshore operations when those operations sell into US markets. All three provisions intentionally erect barriers to free trade to protect domestic jobs without regard to the competitiveness of those jobs in a global economy.
This kind of legislative silliness is based on the old bromide that international free trade causes the loss of US jobs. Where do politicians and protectionists think “lost jobs” go? To the land of lost socks? Jobs aren’t “lost.” The fact that they are done by a different person or done in a different way doesn’t mean they are lost, unless they were unnecessary in the first place. Inefficient jobs misallocate domestic resources. They go to the country that can do them acceptably but at less expense – those evil “low wage” countries. Since it takes two to tango in this transaction, it ought to prove that since there is trade – you give me this and I’ll give you that – both countries win: the country that gets the job done cheaper by exporting it and the country that gets to do the job by importing it.
Forty Republican and four Democrat Senators voted against cloture – essentially extending a filibuster and preventing S. 3816 from moving to the floor for a simple majority up or down vote.
Politics aside, what economic justification is there in paying someone $20/hour to do a job that someone else is willing to do for $2/hour unless the former is ten times more productive than the latter? The fallacy in arguing that jobs are “lost” in international trade assumes that trade is a zero sum contest – if someone wins then someone else must lose. Jobs, however, are traded like products – both domestically and internationally. Unless trade is a win/win for both parties, there will be no trade.
For example, most of us have other people launder and dry clean our clothes, mow our lawns, and paint our houses. If someone were to suggest that we should protect ourselves from “losing” these jobs to lower-paid providers by doing our own laundry and dry cleaning, mowing our own lawns, and painting our own houses, we’d think that person daft.
What if Congress had been able to legislate that there would be no more losses of US farm jobs to the US manufacturing sector in the late 19th century. Would our economy be better off today? If laws had frozen the number of manufacturing jobs in the mid 20th century at 25% of the workforce, would we have the standard of living we have today when only 5% of the workforce is in manufacturing? Have any of us been deprived because we didn’t learn to use a rivet hammer or work in a grimy rolling mill?
Somehow we’ve managed to feed ourselves and a good chunk of the world even though we “lost” almost all farm jobs to other occupations – down from half of the workforce in 1900 to 2% in 2000 and almost two-thirds of the remaining farm jobs are part-time. We don’t have nearly 50% unemployment because those who once farmed are unemployed. They and their descendents found work doing other jobs of greater economic value. And notwithstanding the “loss” of manufacturing jobs to automation and to foreign workers, we’ve been able to keep the workforce once employed in those jobs busy doing higher value jobs today. When productivity increases faster than demand, as it did in farming and manufacturing, employment declines and the workforce shifts to other fields.
To which fields will the workforce shift? To the fields in which the US possesses a relative advantage over other countries. The reason I don’t clean my clothes, mow my lawn, or paint my house is that my time is better spent in activities that pay more than the money I save in cleaning, mowing, and painting – i.e. activities in which I have a relative advantage over the people who clean, mow, and paint. Stated differently, it costs me more to do those jobs in addition to my regular job than to pay someone else to do them. I’m more productive doing what I’m most qualified to do and buying the rest. The cleaners, mowers, and painters are more productive doing what they’re most qualified to do. That is the basis for domestic and international trade.
Absent a productivity differential there is no basis for trade. That’s the reason why, for example, US software programming flows to Indian programmers. It isn’t because Indian programmers are “willing” to work for less. Indian and US software programmers are paid exactly the same amount per unit of output – but not per hour. The former is the product labor cost resulting from productivity and the latter a wage rate.
The notion that US goods can’t compete with goods produced in low-wage countries, therefore, is an economic fallacy that isn’t substantiated by logic or experience. If Indian programmers are one-fourth as productive as American programmers (because of tools, processes, management, for example) then the equilibrium wage for Indian programmers will be one-fourth that of Americans. It has nothing to do with the “willingness” of Indian programmers to work for less. Low wages are the consequence of low productivity because low productivity produces lower economic value than high productivity.
Here’s how. Worker A produces one unit per hour. Worker B produces two units per hour. Units have the same value regardless of who produces them or where they are produced. Worker B is paid twice the hourly rate that A is paid, although both are paid the same per unit of output. Productivity and wages always reside at or move toward this equilibrium. Equilibrium can exist with low wages and low productivity or high wages and high productivity, but never low wages and high productivity.
If wages and productivity are misaligned, an arbitrage will occur. Wages that exceed their productivity equilibrium, which commonly occurs in labor union agreements, will cause jobs to export to low wage markets. Wages that fall below their productivity equilibrium will import jobs from higher wage markets, even with a loss of productivity – i.e. even if the market “losing” jobs is in wage-productivity equilibrium. Therefore, if the US is three times more productive in software programming but has twice the wage rate of India, jobs will stay here. In contrast, if India has a third of the productivity and one-fourth the wage rate of American programmers, jobs will move to India.
Do you think anyone in the Congress or White House gets this?
These same principles play out in the US domestic economy. As farming became more productive in the 20th century, the farmers who were less productive earned lower wages for their labor than farmers who were more productive. The least productive farmers were ultimately displaced because they couldn’t live on their wages. Over time only the most productive 2% survived, because they were so productive that only 2% were needed to do the work that 50% once did – i.e. feed the nation and part of the world.
Those farmers who were displaced moved to cities and found jobs in manufacturing and other sectors of the economy. Most became more productive because their jobs were leveraged by technology and automation and/or they produced higher value goods, allowing them to be paid higher wages because of their increased productivity. Wages that became misaligned with productivity because of, for example, collective bargaining resulted in further displacement. If those jobs weren’t exported, they were displaced by a robot or other automated “worker.” They weren’t “lost” simply because a human no longer performs the job.
Even though in the long term Americans enjoy rising incomes and a higher standard of living, the short term can bring difficult times as displacements are going on. Who can dispute that small communities benefit when big box stores like Wal-Mart bring low prices and large selections – unless it’s the “mom and pop” retailers who lose livelihoods because their productivity can’t stand up to that of Wal-Mart? In the short term mortgages, car payments, and tuition must be paid, even though in the long term households enjoy multiple inexpensive, flat screen, high definition TVs with hundreds of channel selections scattered about their houses – unlike the one expensive black and white monster with five channels that occupied the living room in our parent’s house.
Because long term gains produce short term pains, politics lives in the short term. Political silliness like the Creating American Jobs and Ending Offshoring Act can’t prevent a free market economy from destroying old inefficient jobs and replacing them with more efficient jobs. Do we really want laws that protect a farm economy which ties up half of the workforce when it’s been proven that more crops can be produced by a small fraction of the workforce? Do we really want to pay several hundred dollars for shoes made in the US that Nike can make in Vietnam and retail here for $30? (Keep in mind that lower prices have the same effect as higher incomes, which becomes a higher standard of living.) When resources are misallocated, society has to pay for it – it has to give up something. Do we want to give up those hi-def TVs? Cell phones? Second cars? Better public health? There is no free lunch. All of these advances in economic and social well-being came from resources previously tied up doing something that we figured out how to do better with less.
When the US steel industry lost over 200,000 jobs in the 1980s to a more productive Japanese steel industry, the industry howled and politicians obligingly interfered with the free market to limit steel imports. Absent competition, higher steel prices drove up the cost of steel-based products, like cars, putting them at a cost disadvantage with competitors in their US and international markets. In the end, government protectionism gave an estimated $240 million in added profits to the US steel industry and “saved” 5,000 jobs – much to the delight of the steel workers union. But the industries that had to buy more expensive steel, because foreign competitors were shut out of the US market, lost $600 million in profits and 26,000 jobs. Who won?
Demagoguery beats data in formulating public policies. After their jobs losses to the more efficient Japanese steel industry, there remained 160,000 workers in the US steel industry lobbying for tariffs to be imposed for their protection. But it was well known that there were nine million workers in industries using steel. So it can hardly be surprising that these tariffs caused net job losses nationwide. Too often laws are passed for political motivations, restricting international trade for the benefit of a concentrated and vocal constituency, even though these restrictions will likely cause far more losses of jobs nationwide that lack the concentration to be a vocal constituency.
PCs became a mainstream product in the mid-1990s as their performance improved in leaps. Each leap increased the economic value of the PC. But in time, performance overshoot occurred because performance and economic value became disconnected. PC performance became “more than good enough.” At that point, the PC began to be commoditized. Manufacturing shifted to the Far East, primarily Taiwan, which produced PCs on razor thin margins. Economic value shifted from hardware to software. While the US lost many thousands of PC manufacturing jobs, it became the leader in software development, something it couldn’t have accomplished if its computer engineers had remained tied down in the production of machines that could be produced just as economically in other countries. Manufacturing moved where the comparative advantage was higher, Taiwan, causing the US to “lose” jobs where it had no comparative advantage, freeing engineers to focus on software development. Not one single politician “helped” make this dramatic transition. It occurred in only a few years, guided by the invisible hand of self-interest. The media, of course, gushed the manufacturing job lost news, guardians of the status quo wrung their hands, but the sky didn’t fall. We have more people employed in software product development today than we ever had building computers. Who won?
Notwithstanding Ross Perot’s doomsday prediction of a “giant sucking sound” when NAFTA was implemented, one post-NAFTA study showed that 37,000 jobs were lost to Mexico from 1990 to 1997 because of free trade while, during the same period, 200,000 jobs per month were being created in the US. Unemployment in the US fell to record lows. No zero sum here, however. Both Mexico and the US exploited their comparative advantages to gain from international trade. Who won?
Mark Twain said that he was all for progress. It was the change that he didn’t like. Change is painful and disruptive in the short term. Even though it usually benefits everyone in the long term, structural economic change impacts a relative few in the short term. There are no political platitudes, no easy solutions to propose to people whose jobs have traded places with a machine or a person across the globe. Their careers and lives are forever changed and must start anew somewhere else in an economy that treated them roughly. However badly we may feel about this turn of events, preventing it is not the answer if America is to continue to be the largest exporter and the largest economy in the world. Whatever our problems, we have more options for solving them as long as we are the leader of the world economy.
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