International Trade and Globalization Archives
Why We Trade
By Russ Roberts
from Foreign Policy, November 2007
To hear most politicians talk, you’d think that exports are the key to a country’s prosperity and that imports are a threat to its way of life. Trade deficits—importing more than we export—are portrayed as the road to ruin. U.S. presidential hopefuls Hillary Clinton and Barack Obama want to get tough with China because of “unfair” trading practices that help China sell products cheaply. Republican candidate Mitt Romney argues that trade is good because exports benefit the average American. Politicians are always talking about the necessity of other countries’ opening their markets to American products. They never mention the virtues of opening U.S. markets to foreign products.
This perspective on imports and exports is called mercantilism. It goes back to the 14th century and has about as much intellectual rigor as alchemy, another landmark of the pre-Enlightenment era.
The logic of “exports, good—imports, bad” seems straightforward at first—after all, when a factory closes because of foreign competition, there seem to be fewer jobs than there otherwise would be. Don’t imports cause factories to close? Don’t exports build factories?
But is the logic really so clear? As a thought experiment, take what would seem to be the ideal situation for a mercantilist. Suppose we only export and import nothing. The ultimate trade surplus. So we work and use raw materials and effort and creativity to produce stuff for others without getting anything in return. There’s another name for that. It’s called slavery. How can a country get rich working for others?
Then there’s the mercantilist nightmare: We import from abroad, but foreigners buy nothing from us. What would the world be like if every morning you woke up and found a Japanese car in your driveway, Chinese clothing in your closet, and French wine in your cellar? All at no cost. Does that sound like heaven or hell? The only analogy I can think of is Santa Claus. How can a country get poor from free stuff? Or cheap stuff? How do imports hurt us?
We don’t export to create jobs. We export so we can have money to buy the stuff that’s hard for us to make—or at least hard for us to make as cheaply. We export because that’s the only way to get imports. If people would just give us stuff, then we wouldn’t have to export. But the world doesn’t work that way.
It’s the same in our daily lives. It’s great when people give us presents—a loaf of banana bread or a few tomatoes from the garden. But a new car would be better. Or even just a cheaper car. But the people who bring us cars and clothes and watches and shoes expect something in return. That’s OK. That’s the way the world works. But let’s not fool ourselves into thinking the goal of life is to turn away bargains from outside our house or outside our country because we’d rather make everything ourselves. Self-sufficiency is the road to poverty.
And imports don’t destroy jobs. They destroy jobs in certain industries. But because trade allows us to buy goods more cheaply than we otherwise could, resources are freed up to expand existing opportunities and to create new ones. That’s why we trade—to leverage the skills of others who can produce things more effectively than we can, freeing us to make things we otherwise wouldn’t be able to afford.
The United States has run a merchandise trade deficit every year since 1976. It has also added more than 50 million jobs during that time. Per capita income, corrected for inflation, is up more than 50 percent since 1976. The scaremongers who worry about trade deficits talk about stagnant wages, but they ignore fringe benefits (an increasingly important part of worker compensation) and fail to measure inflation properly.
In a recent Republican presidential debate, one of the moderators said that since 1989, the United States has lost 5 million jobs to foreign trade. He wanted to know what the candidates were going to do about it.
I have no idea how you measure that number, but the implication was that 5 million lost jobs over 18 years is a big number. Five million is a large number if we’re talking about the number of pennies I have to carry in my pockets. It’s a big number if we’re talking about the number of people coming to my kid’s birthday party. But it’s a very small number when you’re talking about job destruction and the job creation that follows in a dynamic economy.
On the first Friday of every month, the U.S. Bureau of Labor Statistics produces an estimate of how many new jobs are added to the U.S. economy. That’s the net change, the gains minus the losses. The bureau also estimates quarterly gross job changes, the absolute number of jobs created and destroyed. In the fourth quarter of 2006, there were 7.7 million jobs created and 7.2 million jobs lost. That happens every quarter when there isn’t a recession—that’s how you add 50 million jobs over three decades.
Five million jobs lost over 18 years? Every three months, the U.S. job market more than makes up for those losses.
Trade is just one economic force that creates and destroys jobs. Tastes change. Innovation makes workers more productive. Some industries shrink. Others expand. Some disappear. New industries get created. Joseph Schumpeter called it creative destruction. He understood that it is the underlying mechanism that transforms our standard of living for the better.
Let’s stop trying to scare people with the Chinese threat to our economy. The world would be a better and more peaceful place if we stopped measuring the trade deficit. But if we’re going to measure it, the least we can do is talk about it sensibly.
Russell Roberts is professor of economics at George Mason University and a research fellow at Stanford University’s Hoover Institution. He is the host of the weekly podcast EconTalk at EconTalk.org and the author of The Choice: A Fable of Free Trade and Protectionism (Upper Saddle River, NJ: Prentice Hall, 2006), a primer on trade issues written in the form of a novel.
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Protectionists Never Learn
By Russ Roberts
This commentary appeared in the Wall Street Journal on March 12, 2007
I'm thinking of a country. America's trade deficit with this country just reached an all-time high. This country holds more U.S. Treasuries than any other foreign country. It's one of the world's largest economies. And the name of that country is?
Japan? Yes. Remember when Japan was a big threat to the American economy? You have to go back to the late 1980s. Back then, every politician in the mood for pandering to economic ignorance could scare a bunch of folks with worries about how the Japanese were stealing our jobs. How our trade deficit with Japan was going to destroy the American economy. How the Japanese economy was soon going to pass America's. How the Japanese auto industry was part of a sinister strategy to destroy our core competencies.
You'd think Japan would still make good political fodder. The story of the baseball off-season is the Red Sox spending $100 million to bring Daisuke Matsuzaka from Japan to the United States. Dice-K, as he's known, is the ultimate import. He takes away a job from an American pitcher. And the Japanese baseball teams discriminate against American players with strict quotas. But even though America's trade deficit with Japan just hit that all-time high, no one uses Dice-K as a symbol of unfair Japanese trade policy.
Why not? Instead, it's China all the time. We're told that China cheats on its currency, stealing America's manufacturing capacity and destroying American jobs. China's holdings of U.S Treasuries threaten our sovereignty, according to Hillary Clinton, even though Japanese holdings are almost twice as big.
Why isn't Japan just as scary as China? One answer is that Matsuzaka smiles too much. He's only scary if you're 60 feet 6 inches away from him, trying to hit his famous gyroball with a wooden stick in your hand. And unlike other imports, it's easy to see how he doesn't just help his relatives in Japan with all that money he's getting from the Red Sox. He helps the Red Sox. Trade makes both parties to the trade better off.
But still. Why isn't Japan scary?
One answer is that the doom-and-gloomers already tried, but nothing happened. They told us that Japan was going to destroy our economy. They told us we needed a plan to cope with brilliant Japanese economic strategies. But then the Japanese economy hiccupped and played Rip Van Winkle for a decade, while America kept growing.
The real reason Japan isn't scary is because it wasn't and isn't a threat to our standard of living. Trade makes both parties better off, remember? But when Japan slumps and the U.S. surges, it's too hard to fool people with bad economics.
So when the sky didn't fall, a new candidate had to be found. Mexico and Nafta fit the bill. Not Canada, even though Canada was part of Nafta. Evidently, politicians and some voters find Mexicans more scary than Canadians. So it was Mexico. When that great "sucking sound" was never heard, a new sinister foreign nation had to be found. And so it's the turn of the Chinese.
Yes, China holds a lot of our bonds. But Japan holds more. Yes, we run a big trade deficit with China. But that lets us buy lots of inexpensive stuff instead of having to make it for ourselves. Yes, there are more than a billion Chinese. I guess that means they can take all of our jobs four times! But our economy keeps growing. We have more jobs than ever before. And contrary to popular belief, the American standard of living and the American middle class are thriving.
We were told that at a minimum China (and India with its own billion-strong population) would take all our high-tech jobs. But the high-tech sector bounced back from its downturn (a downturn that had nothing to do with outsourcing) and is growing again, partly because we can get some of the simplest database and programming tasks done so cheaply by Indians and Chinese.
So why can politicians still make China scary? Why didn't Americans learn from the previous sky-is-falling episodes? The simple answer is that if you don't understand economics, you might be convinced by a politician who says that trade with China is bad for America.
The next time you find yourself losing sleep over China, remember that you were worried about Japan and Mexico and everything turned out OK. Then ask yourself if America would be a richer country if China cut itself off from the rest of the world.
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Does the Trade Deficit Destroy American Jobs?
By Russ Roberts
Click to download PDF File
Testimony before the U.S. House of Representatives on trade (CAFTA)
By Russ Roberts
U.S. HOUSE OF REPRESENTATIVES
THE COMMITTEE ON ENERGY AND COMMERCE
COMMERCE, TRADE, AND CONSUMER PROTECTION
APRIL 28, 2005
DR. RUSSELL ROBERTS
PROFESSOR OF ECONOMICS
SMITH DISTINGUISHED SCHOLAR, MERCATUS CENTER
GEORGE MASON UNIVERSITY
Mr. Chairman. Representative Schakowsky. Members of the committee. Thank you for the opportunity to appear before you and discuss CAFTA, the Central American Free Trade Agreement, which now includes the Dominican Republic as well.
On the surface, CAFTA would seem to be an easy agreement for the United States to support. Many products and services already arrive duty-free in the United States from Central America. But under CAFTA, many products and services currently protected in Central America would now have to compete with American exports, opening markets to numerous American products.
Yet CAFTA remains highly controversial with concerns that the agreement will cost the United States jobs trying to compete with low-wage workers in Central America working in a less demanding regulatory environment.
Having recently traveled to Costa Rica at the invitation of the State Department to speak on trade issues, I was struck by the similarity of the concerns raised in Costa Rica. Surely, little Costa Rica would have no chance of standing up to the United States economy. Jobs would be lost to the powerful American workers.
Both arguments cannot be right. It cannot be that employment in both economies will shrink as the other expands. One of these worries is wrong. Or both are. But both cannot be right.
Both are wrong. When NAFTA passed, we were told of the millions of jobs that would inevitably flow to Mexico because of Mexico’s lower wages and less rigorous labor and environmental standards. Yet those fears were unrealized. They were no more plausible than the notion that all of America’s jobs would end up in Mississippi because of Mississippi’s low wages.
Trade changes the kind of jobs we do, but in a flexible labor market, particularly one as dynamic as the United States, the number of jobs is determined by how many people want to work and the skills they have. The main effect of trade is to allow both trading parties to use their skills wisely and effectively.
Costa Rica currently has a state monopoly on telecommunications. There are a lot of engineers employed by that state monopoly. What will happen to them when that monopoly is opened to competition by CAFTA? Some will keep their jobs working in areas like land-line phones that the government will probably still be able to provide competitively. Some will find work with American firms now free to operate profitably in Costa Rica. Some will lose their jobs and find work as engineers outside of the telecommunications industry. And some will lose their jobs and find work outside of engineering.
The average Costa Rican who is not an engineer employed by the state-run telecom company will be better off. The average Costa Rican will enjoy lower prices and more choices. That will mean more resources left over to do new things with, new products and services to enjoy that were not affordable before. That in turn will mean more employment in Costa Rica as those products and services expand, offsetting any job losses in the engineering sector.
The bottom line for Costa Rica is better phone service and internet access at lower prices and more opportunities created elsewhere in the economy. Understandably, Costa Rican engineers are nervous about the uncertainty and challenges of the future. But the net effect on Costa Rica would be positive.
The same logic applies to the Costa Rican car industry. Wisely, Costa Rica doesn’t have a car industry—it would be too expensive. It would create inefficient and unproductive jobs in the car sector relative to other sectors. By importing cars, Costa Rica gives up those jobs and creates jobs elsewhere. By importing cars, Costa Rica uses the skills of its people more wisely and the result is less expensive cars for Costa Ricans to enjoy.
I spoke to a wide array of people in Costa Rica—students, journalists, labor representatives and government cabinet ministers. Being a small country that has undergone a great deal of economic change in the last 25 years, they were very aware of the benefits of being part of the global trading system. They also understood the uncertainty and unpredictability of the future. But most Costa Ricans I spoke to embraced that change as an inevitable part of growth and the transformation of their economy.
But they would always ask the same question. If trade is good, why doesn’t CAFTA allow Costa Rica to export sugar freely to the United States? Costa Rica is willing to cope with the challenge of competing with American telecom engineers and American telecom companies? Why isn’t America willing to cope with the challenge of Costa Rican sugar farmers?
They were referring to the fact that while American farmers and telecom companies and medical device companies would have relatively open access to sell their products in Costa Rica, sugar farmers in Costa Rica would have very little freedom to sell their sugar in America. Despite the words “free trade” in the title of the agreement, CAFTA would allow only the tiniest of expansions in sugar imports phased in over 15 years. CAFTA limits the expansion of sugar imports into the United States to less than 2% of US consumption over the next 15 years.
Why do Americans fear Costa Rican sugar?
They don’t, I would explain to my hosts in Costa Rica. Not most Americans, anyway. In fact, keeping out foreign sugar punishes me and every other consumer in the United States. The US price of sugar is roughly double that of the rest of the world. We are punished, not you, I explained, by the decision to keep out virtually all sugar from Costa Rica that might come in under a truly open market. Jobs created in the sugar industry are offset by job losses in the American candy and food industries and elsewhere.
So we negotiate a trade agreement with some of the poorest countries in the region but we make sure that one of the things that they do best, grow sugar, is essentially off the table. There is no attractive way to defend that policy when you’re standing in the fields of a poor country.
It makes no more sense for America to insist on always growing its own sugar than it does for Costa Rica to use protectionism to create a Costa Rican car industry. But that is what we have decided with CAFTA.
So CAFTA is not perfect. In a perfect world, sugar would be freely traded along with telecom services and cars and tourism and ornamental plants and corn and chicken. But CAFTA is a step in the right direction. It lowers trade barriers on an enormous range of products that are traded in the region. The best should not be the enemy of the good. CAFTA will encourage the signatories to the agreement to do what they do best and the result will be a higher standard of living for all of the partners to the agreement.
Ironically, despite the special treatment of the American sugar industry in CAFTA, the American sugar industry has become the flashpoint for the debate over the agreement in this country. Even though the sugar industry gets preferential treatment, even though the sugar industry has quotas and tariffs in place that isolate them from world competition, even though the sugar industry has made sure that CAFTA leaves their domestic monopoly virtually intact, somehow, the entire debate over CAFTA is about fear of losing jobs in the sugar industry.
That’s quite an achievement for an industry with less than 60,000 employees. (The sugar industry claims there are 372,000, but that number is inflated by counting corn sweetener jobs and then multiplying the total by two and a half.) About 8 million jobs are destroyed and created every quarter in the US economy. When the economy is going well, more jobs are created than destroyed. When we are in a recession, more jobs are destroyed than created. But the norm is good times—a growing economy where there is net job growth, where more jobs are created than destroyed. But even in good times, millions of jobs disappear for thousands of reasons—companies go out of business, consumers decide they want fewer of one thing and more of another. These jobs are replaced by new jobs in new companies or companies that are expanding.
Millions of jobs appearing and disappearing. That is a sign of great economic health, that churning of jobs in response to new desires, new information, new technology and new opportunity. All of those jobs destroyed and created in response to economic change. It is a strange thing to exert all this political energy to stop economic change in one tiny sector, the sugar industry, but because it is identifiable, the sugar jobs and the sugar profits get special treatment.
Our natural concerns for workers in the sugar sector and other sectors that will be affected by CAFTA should not confuse us about the costs of stopping the economic changes that CAFTA will bring. Economic changes like free trade create our standard of living and the incredible opportunities that each generation has to shape the world according to its dreams and skills. Without economic change, without trade, without innovation, our economy would be stagnant. A dynamic economy and a growing standard of living are the greatest gifts we can give each generation.
Even with such benefits, economic change is always challenging, no matter its source and no matter how small or how fair such change is. I was explaining to my children how understandable it is for people to fear change and competition. For example, I explained, imagine being a white baseball player when there was discrimination in baseball and African-American players were not allowed to play in the major leagues. You would be worried about losing your job to a better player. My seven-year old did not find this understandable. What about Willie Mays, he wondered. And he told me that the white players should have been in favor of letting African-Americans play because it would be good for the team. Besides, he said, keeping out some players because of the color of their skin isn’t nice.
That got me thinking about the Dominican Republic. At the start of this year’s baseball season, 385 players born in the Dominican Republic had played in the major leagues including Pedro Martinez, Sammy Sosa, Albert Pujols, Miguel Tejada, Vladimir Guerrero and Manny Ramirez. Surely, the game of baseball is better for allowing them to play here. Surely our lives as fans have been enriched by their excellence. And surely their lives have been enhanced by the opportunity to play here.
Who would argue that we should keep them out in order to create more opportunity in baseball for native-born Americans? As my seven year old understands, that would not be nice. And it would be bad for baseball and its fans.
It is good that we have let players from all over the world come to America to use their skills to their greatest advantage. Both America and those players benefit. And it will be good to let other things besides baseball players come to the United States from the Dominican Republic and her fellow nations in Central America. In return, we will send our products using our skills to help them in return. CAFTA will be good for the United States, good for the Dominican Republic and good for Central America. It will raise the standard of living of each nation, but perhaps more importantly, it will make sure that the peoples of each nation have the greatest opportunity to use their skills in the most effective and productive ways.
Outsourcing and Job Security
By Russ Roberts
Note: Newsweek Japan asked me and others to comment on ten questions related to the global economy. Here's the question they asked on outsourcing and job security, along with my answer. I have a second answer to another question here.
Q8: Why are firms in many countries still restructuring and firing employees, even though the economy seems to be definitely recovering? With this as a lead, please also answer the following questions. Is there any good way to reduce the unemployment rate? How should workers defend their livelihood in this age of high unemployment with so many immigrants flooding into their countries?
From Newsweek Japan
The corporate urge to restructure is insatiable in today's global economy. For some critics, this is the ultimate indictment of capitalism--profits are always preferred to people. Isn't there some level of profit that's sufficient? Why do firms incessantly look for ways to cut costs even in good times?
The world moves very quickly and quicker than ever. A firm that stands still risks going out of business. Consider the humble egg. A school teacher in America in 1900 had to work about an hour to earn a dozen eggs. Today the equivalent number is about three minutes! A twenty-fold improvement. How was that achieved? The technology of teaching hasn't changed much in 100 years. Eggs would seem to be unchanged, too. The technology is inside the chicken. But the technology of eggs has changed. In 1900 a farmer put a bunch of chickens in the back yard and tossed some feed on the ground. Then he'd look to see if any eggs had been laid.
A chicken in those days laid about an egg a week. Today you still have to feed the chickens and collect the eggs. But over the last 100 years we've learned a lot about the breeding, health and nutrition of chickens. The average chicken in America now lays almost an egg a day.
But the increased productivity of chickens is dwarfed by the increased productivity of the workers who do the feeding and collecting. In today's hen houses, two workers work alongside 800,000 chickens to produce 240 million eggs a year! How can those two workers be so productive? The key is the modern hen house, transformed by technology. The hen house of today does more than keep the chickens out of the rain.
By making the houses larger and by using computers and various mechanized technologies for delivering food and medicine and collecting and inspecting the eggs, only two people are necessary to manage 800,000 chickens. As our standard of living grows, there is a relentless substitution of this kind of labor-saving capital for labor. The amount of worker's time that goes into an egg has fallen steadily over time. Older technology with more workers would mean costlier eggs.
A farmer in the 21 st century who uses the 19 th century techniques of letting a bunch of chickens run around in the backyard can only raise chickens as a hobby, not as a money-maker. He can't compete with the technology of a modern egg facility. What drove the transformation of the egg industry and so many others like it? Competition. The risk of being left behind and going out of business.
The transformation of the hen house has taken away thousands of jobs that existed or would exist if we still had a bunch of chickens running around in lots of backyards. Was that transformation good or bad for America? Would it have been better in 1900 or 1950 or 1980 if egg farmers had been content with the level of technology and cost structure of the day rather than looking for ways to always cut costs? Wouldn't it have been better to have kept more jobs in the chicken business?
To answer those questions, we need to ask another--who captured the gains from transforming the hen house? We did. The rest of us--the eaters of eggs. Technology and productivity lowered costs. That should have raised profits for egg farmers. But it didn't. Instead, prices fell 20-fold.
The same competition that drove firms to innovate, also lowered prices. As one retired veteran of the egg business once told me, the problem with the egg business is too many eggs. Keeps the profits down. That does make it tough on the egg farmers. But it sure is good for the rest of us.
That process--the inexorable search for ways to cut costs and particularly the drive to replace expensive labor with less expensive capital is constantly taking place around the world--from cars to electronics, from cell phones to eggs. It would be natural to assume that this progress must come at a terrible cost in destroyed jobs.
Ironically, America has added about 100,000,000 jobs over the last 100 years at an almost steadily higher standard of living, year in, year out. The cost savings from higher productivity has allowed new products and new industries to be created with the capital and resources freed up by the improvements in productivity.
The latest manifestation of this drive for lower costs is outsourcing, the use by multinational corporations of skilled, but lower-wage labor in countries such as India and Ireland. This phenomenon is no different than a worker losing a job to an immigrant. It's no different from a worker losing a job to a new technology. There are a lot of ways to cut costs. All of them lead to wealth eventually. In dynamic economies, that wealth is shared in the form of lower prices. But those innovations lead to unemployment in the short-run. Should a society tolerate this unemployment? How can a worker protect himself or herself from these challenges? The human cost of unemployment depends on the vitality of the labor market.
Every three months, the American economy loses between 7 and 9 million jobs through firms downsizing or going out of business. That's about 6% of all the jobs in the economy. But incredibly, the American economy creates between 7 and 9 million jobs every three months.
And until the recession of 2001, the American economy steadily created more jobs than it lost. So unemployment is relatively short-lived compared to less dynamic economies such as Europe's where job growth is flat.
What's the difference between America's job market and Europe's? Most European countries make it expensive to fire workers and downsize. That's good for workers--their jobs are safer.
But that security comes at a cost--fewer jobs get created. Creating a job is much riskier in Europe because a mistake comes dear. As a result, Europe has a much higher unemployment rate. The best way for workers to cope with the risks of unemployment is to have flexible skills and education. Workers in dynamic economies have to keep learning and investing in knowledge. It is important to remember that the world tomorrow need not be like the world today.
That makes for a challenging environment. It comes at a cost. But the benefit is a rising standard of living and the advances in health and well-being in the countries that have embraced the dynamic competition of the global economy.
The Great Outsourcing Scare of 2004
By Russ Roberts
From the Hoover Digest, Spring 2004
People are worried that Indians are going to take away all of America's good jobs. The "outsourcing" of call-center and software coding jobs to India has been a tough pill to swallow for an educated workforce. The alarmists, from presidential candidates to think tank economists, see a dim future for America if nothing is done to arrest the flow of jobs from West to East.
The level of fear reminds me of an earlier time. In the early 1990s, Japan was thought to be the great threat to the American economy. Japan was strategically pursuing a policy of stealing America's jobs. America was being hollowed out. Back then, Amazon was a river and Spam was a food, sort of, anyway. The focus was mainly on manufacturing jobs, which back in the early 1990s were more numerous than they are today.
I remember a Frontline documentary from those days. It's a wonderful world we live in. A few hits on Google and I was able to find the Frontline web site and a description of the documentary: Losing the War with Japan Frontline looks at the challenge Japanese-style capitalism poses to the U.S. market. The program examines three industries--automobile, video games, and flat panel displays used in computers.
Robert Krulwich introduces the hour-long documentary and anchors a closing half-hour roundtable discussion. The show ended with a parade of returning veterans from the first Iraq war that had recently ended successfully. The voiceover was something like, "We won that war, but can we win the economic war?" The implication of the war imagery was that economic competition was a zero-sum game--the economic pie was a fixed size and every slice that went to Japan was a slice taken from our plate.
Economics takes a different view--trade is mutually beneficial. Both parties benefit and the pie gets bigger. But there was a second part to that documentary that I haven't thought about for a decade. It comes back to me now in the alarm over outsourcing. The documentary paid a lot of attention to Nintendo. Nintendo was accused of the nefarious strategy of keeping all the best jobs, the creative jobs designing new games, in Japan. The lousy jobs were relegated to America. And as an example of those lousy jobs the Americans were given, we were shown American kids answering the phones, giving advice to gamers who had questions about how the games worked. A call center!
So in 1991, the world was going to hell in a handbasket because we'd be stuck with the call center jobs. In 2004, the world is going to hell in a handbasket because we're losing the call center jobs. Hard to understand how both of those arguments can be right. At the heart of these fears is a theory about how nations prosper--the key is to get the good jobs. Ross Perot had a simple way of expressing it. He said it's better to make computer chips than potato chips.
In this mistaken theory of how jobs affect our standard of living, wages depend on the title on your business card. If somehow the foreigners corner the computer chip market, we're left peeling potatoes for minimum wage, if we're lucky. The problem with this theory is that, if a nation's skill level is low, making computer chips makes you poorer, not richer. It's like me at 5' 6" deciding to be a basketball player because basketball players have high salaries. Or Haiti trying to jump-start its economy by creating a domestic pharmaceutical industry sector because pharmaceuticals are very profitable.
Ironically, perhaps, the potato chip business in America is rather high tech. Perot's slogan makes you think of a bunch of folks with potato peelers standing over vats of hot oil. In fact, a potato chip factory (like virtually everything else in a high-wage economy) uses a high ratio of capital to labor. Basically a truck dumps a bunch of potatoes into one end of a highly customized and sophisticated piece of machinery run by a computer. Bags of potato chips come out the other end. Designing and building that machine, along with the software that makes it tick, are not exactly what Perot had in mind. Our wages don't depend on our job titles but on our skills and the amount of capital we have to augment those skills. Opening our economy to trade in goods and services allows us to use our skills and capital as productively as possible.
There are two ways to get things in life. The first is to make them for yourself. The second is to let someone else make it for you and trade for it. When others can make something more cheaply than you can make it for yourself, it makes sense to outsource it. You specialize in what you do most productively and swap for the rest of your desires. That specialization creates wealth. If Indians have low wages and can write computer code more cheaply than Americans, it makes sense to import that code. It's no different from importing inexpensive televisions from abroad and saving our resources for other things we can do more effectively.
It's no different from finding a new production technology that lets you produce at lower cost. It's about getting more from less. That's the true road to wealth. Make the pie bigger by getting more from less. That's the story of the last 100 years of economic progress in America. We've found ways to get more from less. Imagine a world where Indian tech workers were really cheap. Cheaper than cheap. Free.
Suppose India decides to give us free software and run those call centers just out of kindness. Would it ever make sense to refuse the free software in order to preserve high-wage jobs in the software industry? Oh no, not the free software, must be a trick.
Refusing inexpensive software is no wiser. It makes us poorer as a nation, not richer. Imagine reacting that way to high-quality Japanese cars. Imagine refusing to allow Japanese imports into the United States in order to preserve the size and wages of the auto industry. With less competition, the quality of American cars would fall. But the real loss would be all the resources we'd have to devote to cars--all the people and capital and technology and managerial talent--when there would be a less expensive alternative. Savings those resources is what allows us to create the new jobs that come from lower-cost automobiles. In 1900, 40 percent of the workforce was in agriculture.
Technology, figuring out ways to get more from less, allows us to produce more food today with only 2 percent of the workforce. That transition was hard on a lot of farmers, but their children and grandchildren live in a better world because of those changes. The lower costs meant higher profits at first for those farmers who stayed in business, but competition among farmers forced them to share the gains with the rest of us. The result is that food is dramatically cheaper than it was. That means more resources are available to make the myriad of products that we have now in addition to having the food.
The same transition will take place with today's computer programmers who lose their jobs to Indians. There will be personal challenges as workers look to find new jobs. Some new jobs will be created because businesses will have access to less-expensive software. Other opportunities will come along because cheaper software means more resources will be available elsewhere to create new companies and new products. The skeptic wants to know now what the new jobs will be. What if there aren't any?
OK, says the skeptic, I accepted the argument for trade when we outsourced the assembly line jobs or the textile jobs. Those were the bad jobs. But the computer jobs? Those are the jobs we wanted to keep! Those were the good jobs. We went from a manufacturing economy to a service economy to an information economy. There's nothing left! We're going to have to go back to the "bad" jobs, flipping hamburgers and doing each other's laundry. What sector will come along if we've used up all the information jobs? I don't know, but I'm sure it will be something that uses creativity and knowledge. This uncertainty frightens people.
If we can't think of what the next generation of jobs will be, how can we be confident that something will indeed, come along? Think about that farmer back in 1900. Imagine telling him that in 100 years, farm jobs will only be 2 percent of the workforce. Two percent! What jobs could possibly come along to replace the farming jobs? Well, you explain, there will be jobs at Federal Express and Motorola and Intel and Microsoft and even General Motors. The farmer won't even be able to even imagine the products that those companies will make. Imagine being told a decade ago that some people would make their living writing software for iTunes at Apple. What's iTunes? Oh, it's a place where people download music into their iPods. What is downloading music?
Just think how much the world has changed in only 10 years, all the jobs we couldn't have imagined that are now here. Back in the early 1990s, when people were up in arms about Japan, we ignored the alarmists. We mostly kept to our naive policy of letting people buy freely from around the world. It turned out fine. The alarmists were wrong.
Japan didn't steal our jobs or ruin our country. Employment in the United States grew steadily, as did wages, helped in part by imports from Japan and the rest of the world. Japan, in the meanwhile, has stagnated. My guess is that today's alarmists will turn out to be wrong as well. There's another interesting parallel to the early 1990s. Then and now, the critics of open markets claimed a new paradigm. In the early 1990s, the new paradigm was the unique partnership in Japan between industry and government that supposedly threatened our standard of living.
Today it's the loss of software jobs, the alleged last frontier of employment. But the real reason those arguments have popular and political traction is that both today and in the early 1990s, we're coming out of recessions with sluggish employment growth. When the economy warms up and the jobs come, the worries about outsourcing will fade into the background.
A final thought. Can you imagine how strange our worries about outsourcing must sound to India? Hearing us complain about their low-wage competition is like listening to the Yankees complain that the Red Sox signed Pokey Reese to a contract. You don't know who Pokey Reese is? That's the point. It's the Red Sox who have it rough. But baseball is a zero-sum game--when the Yankees win, the Red Sox have to lose. Unlike sports, international trade makes both sides better off. Outsourcing lets Americans get less-expensive software and the Indians get better wages and the chance to buy more American goods. It's a good deal for both of us.
« Close It
Jobs Abroad, Benefits at Home
By Russ Roberts
From Business Week Online
Outsourcing is all over the news. U.S. businesses are hiring foreigners, often in India, to do things that Americans once did. The tasks range from manning call centers to writing software code. We often hear that this economic phenomenon is bad for America, that the benefits of free trade no longer hold. The world has changed.
We're told that information moves more quickly than in the past. Capital is more mobile. The fall of communism has unleashed thousands of new workers into the global labor force. The U.S. is shedding service jobs, having already lost millions of manufacturing positions. Now white-collar jobs are being lost.
All of these are true. But none of them change the benefits from open trade with our neighbors—nor its costs.
CREATIVE CYCLE. When an American outfit creates a call center in India or sends some of its software-design business there, it's able to do more with less—more output with fewer workers, less capital, and fewer raw materials. Costs go down.
These savings come from different sources—innovation and productivity changes, importing goods rather than making them, or using foreign labor for services that used to be done in-house. All of these allow companies to get more from less, which means America is more productive as a nation. The result is higher wages and a better standard of living for the average American.
That's the story of the last 100 years of the U.S. economy. In 1900, 40% of the country's work force was in agriculture. Today, the percentage is about 2%. That transition was driven by innovation, getting more from less. Prices fell. People spent less money on food. That freed cash to to be used on new products, and new companies could be created.
FEWER FACTORIES, MORE OUTPUT. During the transition, farm employment dwindled, but tens of millions of new, higher-wage jobs were then able to come into existence. The U.S. would be a lot poorer if the country had insisted on keeping those farm jobs. The change was hard on a lot of farmers, but it was good for almost every American. The children and grandchildren of those farmers enjoy the benefits today.
The same transition has happened in manufacturing over the last 50 years. Businesses have found new ways to get more from less. Some of those ways involve new technology or importing goods that were once made here. Both result in fewer manufacturing workers and greater output.
If the U.S. had insisted on making all its own cars, watches, TVs, radios, or shoes, resources wouldn't have been available to channel into creating the jobs of the last 50 years in telecommunications, software, and biotech. People wouldn't have been available to work in those industries, and the American standard of living would be dramatically lower.
PROTECTED BUT POORER. But what if India gets all the software jobs? (See BW, 3/1/04, "Software".) I doubt that will happen. I suspect that for most information-technology jobs, Americans will still be more effective than foreign workers. But suppose Indians decided to work for free and give away the software, the ultimate competitive threat. If outsourcing work to low-wage Indians is bad, surely free software from zero-wage Indians is even worse.
Free software would be hard for the U.S. workers in the software industry to compete with. But it would be a boon for America—plenty of U.S. outfits would expand. Having free software would let a lot of new companies come into existence that couldn't have been profitable before. Programs at no cost would mean lower prices across the board. That would liberate resources to do new things all over the economy. Many of those out-of-work American programmers would find new jobs. The same effect occurs when the software is merely cheaper, rather than free.
The hardship that results from economic change always tempts politicians to limit individuals' freedom to buy what they want and businesses to hire whom they desire. Such political restraints will make life more secure—but poorer and less dynamic. Ultimately, it will have no effect on the number of jobs in the U.S. but only make the ones that survive pay less.
By Russ Roberts
Audio (click to listen/download)
Carrots and Sticks
By Russ Roberts
From the St. Louis Post Dispatch
Before the war in Iraq began, there were two divergent views on how it would go. The optimistic view, predicted a cakewalk. The pessimistic view predicted a quagmire.
In the first week of the war, the quagmire view seemed to be vindicated. In Basra and Nasriya, snipers maintained control of parts of those cities using guerrilla tactics and human shields. Suicide bombers rattled coalition confidence. Attacks took place from Red Crescent ambulances. Fedayeen posed as welcoming civilians and opened fire.
The quagmire seemed inevitable. Even if millions of Iraqis welcomed the overthrow of Saddam, they could not be distinguished from the thugs. The victims of Saddam were essentially his hostages. Baghdad suddenly seemed an impenetrable labyrinth of foe and unidentifiable friend. A lengthy siege that would harm the citizens we were trying to help seemed unavoidable.
It has not turned out that way. When people are dying, calling it a cakewalk is obscene. But so far, the optimists have been right—military and civilian resistance appears to have evaporated. Why didn't the sporadic guerrilla incidents of the first week of the war grow more common as coalition troops approached and entered Baghdad?
Many of the predictions of quagmire were based on interviews with ordinary Iraqis. A common theme coming from the Iraqi "street" was that yes, Saddam was a monster, but the United States was even worse. Pundits predicted house to house fighting and a million civilian casualties.
But the interviews that created that pessimism had no more value than an interview with the Iraqi information minister about Saddam's charitable activities.
In a police state, the truth is dangerous. There's no gain to honesty, especially when talking to a foreigner. So everyone is a miniature Saddam—the Wizard of Oz before Toto pulls back the curtain—full of bombast and bluster.
The reality is different. In a thugocracy like Iraq, reality is driven by the carrots and sticks that keep the population in line—the carrots of plunder and the sticks of torture and death that allow the plunder to proceed. The carrots and sticks emanate from the top and work their way down through the food chain. In a thugocracy, the little fish follow the wishes of the bigger fish or they are devoured.
As it becomes increasingly clear that Saddam is either dead, mortally wounded or even merely powerless, the incentives facing the rest of the fish change dramatically.
Those closest to Saddam still have an incentive to fight. They are well known to many. They face the threat of death or a war crimes tribunal. But their ability to keep the rank and file motivated diminishes greatly as defeat becomes increasingly likely. The rank-and-file's urge to lay low and escape death becomes irresistible. This is the likely explanation of the "elite" "loyal" "battle-hardened" Republican Guard simply evaporating into thin air.
The same incentives face the citizens of Baghdad when the Coalition army enters the city. Even if Saddam is alive, his power over the carrots and sticks ebbs daily. In such a world, who wants to be sniper? There's no reward to heroism, no cost to disobedience. The carrots and sticks held the thugocracy together. Now, things fall apart. The toughest part of the invasion is no longer the terrorist, but the need to maintain order as citizens avenge their mistreatment at the hands of the thugs.
The next challenge will be post-war Iraq. There will be much hand-wringing from the pundits about how America's image in the Middle East depends on how we treat Iraq. Ignore those Arab-in-the-street interviews coming now from Syria and Iran. They tell us nothing except how the Coalition's success threatens the other thugocracies in the region. The real challenge will not be mollifying those regimes or their unfortunate, cowed citizens. The real challenge will be creating some kind of genuine institutions of democracy in Iraq. No quagmire perhaps. But no cakewalk either.
Mr. President, Don't Toy With The Truth
By Russ Roberts
From the St. Louis Post Dispatch
What if there really were a toy shop at the North Pole where elves made toys and gave them away?
And suppose you were dictator for a day. It's up to you to decide whether to let those free toys into America. You're a nice dictator, the kind that inhabits fiction and op-ed fantasies. So you ask your people how they feel about free toys. The American toy manufacturers tell you that it's a ruse—part of a conspiracy to take away jobs from Americans. But most of the people you hear from are parents. They're pretty pleased at the prospect of free toys. More smiles for the kids. And with less money spent on toys, there will be more money available to spend on clothes or vacations or books or piano lessons.
Is it a tough choice? Would you preserve the status quo and stop the world of free toys? Or would you bring it on and let people have the free toys with all the changes that would entail?
We're actually getting close to a world of free toys. How? By letting China make them. China is the toy shop of the world.
I was thinking about free toys when President Bush came to St. Louis promoting his economic stimulus package. He came to JS Logistics, a warehousing and delivery operation, and posed in front of a bunch of boxes to talk about how small business would benefit from his economic proposals.
There was one problem. The boxes behind the President said "Made in China." So in advance of the photo ops, White House aides replaced them with boxes saying "Made in USA." (Bigger letters, too.) And they took the boxes that said "Made in China" and taped over the offending words and pushed them aside. In the New York Times photo, a few of the offending boxes could be seen in the foreground. The tape was clearly visible. So were the words "Build a Bear."
The Build-a-Bear Workshop was started in St. Louis five years ago by Maxine Clarke, entrepreneur extraordinaire. Build-a-Bear now has over 100 stores. Over a hundred stores where kids can have the thrill of creating their own bear. You choose a skin, stuff it, drop in a heart, sew it up, and if you want, you can buy clothes for it.
You can get a basic bear for $10. You'd think for such a low price, it would be a little palm-sized creature. But it's 14 inches high. And if you want to go crazy, you can have a two-foot high Panda, for a mere $25.
How can Build-a-Bear cover its costs at such low prices? Part of the answer is in those "Made in China" boxes. The skins come from China. If they had to be made here in the U.S., they'd cost a lot more.
It's good for China that they've become the toy shop of the world. It's allowed millions of Chinese to escape from rural poverty. And it's good for America, too.
If Build-a-Bear bought its skins in America, there would be more jobs in America making bear skins. But there probably wouldn't be 100 Build-a-Bear stores any more. And they'd have to let go of some of their 4000+ employees. Because if we didn't buy things made in China, the bears would cost more and Build-a-Bear wouldn't sell as many. That also means fewer jobs at JS Logistics and all the other American companies that Build-a-Bear works with. And the smaller number of customers who pay the higher prices at Build-a-Bear would have less money to spend on something else. So there'd be fewer jobs in other industries outside of toys. We'd be poorer as a nation if we tried to be self-sufficient and make everything for ourselves.
There'd be one more change to think about if we stopped buying things made in China. Fewer bears sold means fewer smiles from grandparents and their kids, fewer birthday parties. I wish President Bush had proudly stood in front of those "Made in China" boxes and explained how international trade creates jobs in America and makes the world a better place. He'd have saved some masking tape, some embarrassment and created a little more economic literacy.
We Can't Get Rich Doing Each Other's Laundry
By Russ Roberts
From Ideas on Liberty
Since World War II, manufacturing employment as a fraction of total employment has declined steadily. In the middle of the war, it was over 40 percent of the work force. By 1966 it dipped below 30 percent for the first time. By 1985, it dropped below 20 percent for the first time.
In 2000 there were just over 18 million jobs in the manufacturing sector-a mere 14 percent of total nonfarm employment.
Should we be alarmed at the continuing decline of the manufacturing sector as a source of employment? Those who are alarmed argue that manufacturing jobs are the good-paying jobs. The alternative to manufacturing jobs are service jobs, which have a less than stellar reputation. Ignoring fringe benefits, the average manufacturing wage is slightly higher than the average wage in the service sector.
I recently heard a new slogan arguing for the importance of manufacturing jobs over service jobs: "We can't get rich doing each other's laundry."
Isn't that a great slogan? It conjures up a frightening future of an America without manufacturing jobs and the great masses of us stuck doing the most menial of tasks at subsistence wages.
I can think of lots of variations on this theme: We can't get rich selling each other cosmetics. We can't get rich flipping hamburgers for each other. We can't get rich chopping firewood for each other. And so on.
So is there any economics in any of these slogans? Are they legitimate warnings of the fate that awaits us as we slough off manufacturing jobs en route to a pure service economy?
It's worth noting that we probably can't get rich doing each other's laundry. That's what makes the slogan so clever-it's probably true.
What's false about the statement is the implicit assumption that if we're not careful, we're going to lose all our manufacturing jobs and have them replaced with service jobs. There's an additional implicit assumption that if we ever do lose or choose to shed our manufacturing jobs, then the service jobs that remain will be menial and low-paying.
Finally, there's an implicit assumption in all this that the decline in manufacturing jobs is a natural force, an unstoppable trend that will inevitably lead to the end of the manufacturing sector. And in some versions of the laundry story, the reason we're losing those manufacturing jobs is that foreigners are stealing them. While we sit idly by naively trying to do the best we can, foreigners are systematically stealing our high-paying manufacturing jobs. In this version of the story, America is being "hollowed out." Soon it will just be a dry husk supported by service jobs and will collapse.
What's really going on? Why is manufacturing employment declining as a proportion of total employment? Can a nation's economy survive on just the service sector? And if America does end up as a pure service economy, will we all be living in poverty? The manufacturing sector as an employment source is in decline for two reasons. The first is innovation: manufacturers have found ways to get by with fewer workers. The second reason is international trade: some manufacturing jobs are cheaper to do outside the United States than here.
What that means is that the shedding of manufacturing employment is what has kept manufacturing wages above wages in the service sector. If we had stopped either of these trends in the name of keeping the high-paying manufacturing jobs, then they wouldn't be high-paying anymore.
But how can we stay rich doing each other's laundry? Isn't the inevitable result of these trends an America that relies totally on the service sector?
Doing the Mexicans' Wash
Imagine for a moment an America where everyone knew one thing and one thing only-how to wash clothes down by the river. That would be a poor country indeed. Not only can we not get rich doing each other's laundry, we'd starve to death without food. If everyone can only do laundry, there is no opportunity for trade, at least domestically. If we were really fabulous at laundry, it's conceivable that some of us might be able to do it for Canadians and Mexicans and thereby have access to some other goods beyond clean clothes.
Those who worry about foreigners' stealing all the "good" jobs-the manufacturing jobs-presume that when those jobs disappear, all we're going to be left with is those low-paying service jobs, and in the ultimate indignity, only the worst service jobs are going to be left.
But of course in the real world, in the America you and I actually live in, our skills go beyond laundry. Our wages don't depend on the name of the job we hold; they depend on our skills and the demand for those skills. Nothing will stop us from applying our dazzling array of skills domestically to basketball, health care, movies, education and the myriad of other service sectors.
Could we survive on just services? We wouldn't have to. We could trade those services, just as we do now, for manufactured goods made by foreigners. But wouldn't we be a lot poorer than we are now? If we were, some of us would find it highly lucrative to go into manufacturing. We'd turn our skills to making things again. If we ever shed all our manufacturing jobs, it will be because the cheapest way to get manufactured goods will be by swapping services for them.
Just as we are phenomenally more wealthy today than we were in 1943, when manufacturing was at its century-high peak as a proportion of total employment, we will be wealthier still if we ever become an all-service economy. That would occur as the natural result of our choices as to where to apply our skills.
So we can't get rich doing each other's laundry. But we can get rich choosing service-sector jobs over manufacturing jobs if that is where the highest applications of our skills lie. We've been doing it successfully for over 50 years. And it's likely that the next 50 years will see the manufacturing sector continue to shrink as a source of employment. But barring wars or horrible public policy, we'll continue to get wealthier.
America and the World's Resources
By Russ Roberts
From Ideas on Liberty
At the heart of almost all economics is the idea of mutually beneficial exchange. When two people voluntarily engage in an activity, economists assume that both parties are better off. Otherwise, one of them would have refused the deal. It doesn't mean people don't make mistakes—sure they do. And sometimes people regret the choices they make. But, in general, people do what they do because they get pleasure or satisfaction or some kind of benefit from their actions.
Not everyone is comfortable with this view of the world. A lot of people see the world as a zero-sum gain—any benefit I receive comes at your expense. In this view, corporations take advantage of their workers and their customers and the economic marketplace is a battlefield where the "haves" are always routing the "have-nots," where the rich get richer and the poor get poorer.
Sometimes this view gets applied to the economic success of America versus the rest of the world. In the '60s this view condemned American corporate imperialism. We took the raw materials from poor countries and profited. The complaint was that there was no investment. Today, American multinationals do invest in foreign countries. Still, they are condemned.
One proof offered by these critics of how rapacious America is in the rest of the world is the observation that America consumes more than "its share" of world output. We are only 5 percent of the world's population, yet we consume x percent of the world's resources. Usually x is given as 25. I recently found a commencement address online by a noted writer that put the number at 75. The implication is that this is somehow unfair. It implies that some sophisticated form of theft is at work.
The usual response by the economist to this kind of remark is that, well, after all, the United States produces a healthy share of the world's resources. And when you take that into account, it's not so unfair anymore.
This response, which I've given myself many times, misses making the most important point about the issue. The real point is that the world's resources, however you define resources, are not finite, to be split like a pie into slices. The world is not a zero-sum game where America's wealth comes at the expense of others.
One way to see this is on an individual level. Bill Gates is a wealthy man. He is only able to take money from millions of people because he provides something in return—software—which the consumers value more than the money. Suppose Bill Gates's lakeside villa in Seattle burns down and the blaze also consumes a few boats and cars. Gates has less wealth. Does anyone else have more? Sure he might rebuild the house and benefit some builder, but as Bastiat points out, something else that Bill would have spent money on isn't going to happen, so that's a wash. The world is poorer if Bill Gates's house burns down, even though his share of the world's wealth has gotten slightly (very slightly) smaller.
Let's make the impact more dramatic. Suppose Bill shrugs. Tired of the government's lawsuits, he decides to sabotage Microsoft and destroy the company. As a major stockholder, his wealth would fall dramatically. Would the rest of the world be richer?
Now take it to the national level. Let's say Americans go through a religious or philosophical transformation and suddenly decide to work half as hard, accept lower pay, and spend more time reading, swimming, hanging out with their families, and so on. We would still be 5 percent of the world's population. We would no longer have command over 25 percent of the world's resources. But those resources wouldn't be magically freed up to go to poorer citizens of other nations. The resources created in the past when we worked harder simply wouldn't exist.
Maybe what people really have in mind when they complain about our disproportionate share of the world's resources is that we should give more of it away. We have too much. The same complaint is often heard about Bill Gates. He has too much.
This is the only sense in which there is something of a zero-sum game. Things I decide to keep and not give away to you are things you don't have. Implicit in this strange understanding of the world is again a very static view of wealth creation.
The Product of Luck?
I remember hearing a prominent economist say that wealth was not the product of wisdom or skill but of luck. Therefore, we can tax wealth at 100 percent and redistribute it to those without wealth. I wasn't sure whether the word "therefore" was a moral statement or a practical one, but taking the practical interpretation, I thought, sure, you can do that. Once. After the first time, even the wealthy who are merely lucky are going to stop trying to accumulate wealth. Similarly, I don't think American citizens are going to continue to accumulate wealth for the purpose of giving it all away. Sure they give some of it away. For me, charity is a moral imperative. But I know of no religion or moral system that demands you give all of it away. There is a name for that: slavery.
There is one more possible interpretation of the 5 percent/25 percent criticism: it is referring only to physical resources like oil, energy, tin, titanium, and so on. Such resources, the critics would argue, are surely finite, and therefore every barrel of oil left in the ground is a barrel for someone else to have. So America consumes "too much."
This analysis is also flawed. It assumes that the natural resources of the world are miraculously sitting in some giant pile, waiting to be distributed. In fact, natural resources have to be found and uncovered at great expense. If we didn't consume them or use them to produce other products, they wouldn't be freely available to the poor. But there is a bigger flaw. As Julian Simon pointed out (see The Ultimate Resource 2, for example), there is no real sense in which the world's physical resources are finite. Due to the unlimited creativity of humanity, we are able to discover new sources and use old ones more effectively.
I suspect what motivates those who complain about America's unfair share is a particular measure of fairness—simple egalitarianism. No one should have more than anyone else. If that is their true goal, the only way to achieve it is through force and the impoverishing of not just the United States but those we trade with around the world.
Does Trade Exploit the Poorest of the Poor?
By Russ Roberts
From Ideas on Liberty
Roughly 180 years ago David Ricardo discovered comparative advantage. He showed that trade benefits both trading partners even when one is less productive than the other across all activities. There are gains from trade and specialization even in that case.
Ricardo's insight is in the news these days as talk continues about broadening free-trade agreements to the Americas and as the anti-trade forces that raised their heads in Seattle remain in the spotlight.
Or perhaps it is more accurate to say that Ricardo's insight is not in the news. For it remains misunderstood or underappreciated by almost everyone other than professional economists.
I was recently discussing comparative advantage with a student. She said that the whole concept seemed to miss the point of how trade exploits the poorer nations. In explanation, she told me that when she had lived in Nepal she had done her laundry by hand. She considered hiring a local woman to do it for her. But to pay someone the tragically low prevailing wage would be, in the student's view, a form of exploitation. She could have chosen to pay more than the prevailing rate—an amount that she would have considered "non-exploiting." But at that rate, it was worth it for her to do her laundry herself. So rather than "exploit" the washerwoman, the student continued to do her own laundry.
I argued that the washerwoman did not see it as exploitation. She saw it as an opportunity. Surely she would be thrilled to have the job and would be better off from having it.
Ricardo was right: both parties benefit from trade even when there are gross inequalities of skill and productivity. Ironically, the poor may have more to gain than the wealthy. My student saved herself from the indignity of paying someone a pittance in return for cleaner clothes. Her arms and shoulders got a little sore from the novelty of washing her own clothes by hand.
But the washerwoman probably paid a higher price. She may have lost an opportunity to clothe her child. She may have lost an opportunity to keep a child in school instead of sending him off to work. What my student saw as a pittance may have been life-altering for the washerwoman.
The same is true at the national level. If we closed our borders, the impact on Americans would probably be smaller than the impact on our poorer trading partners.
If we closed our borders to avoid "exploiting" the poorer nations of the world, we would face higher prices and have a lower standard of living. There would be less innovation without the spur of foreign competition. The jobs that would be available would be a little less interesting. But if we only bought things made by other Americans the impact would be mitigated by the size and diversity of the U.S. economy.
Malaysia, Indonesia, and many of our other trading partners, however, would pay a heavy price. You can see the difference by imagining more and more severe forms of protectionism in the United States.
I live in St. Louis. Suppose I could buy things made only in Missouri. Life would get dramatically less interesting and a lot poorer. Missouri has some car factories, but they would get a lot smaller and be a lot less efficient if the cars had to be sold in-state. As a result, they'd be a lot more expensive. Think about the food in the grocery. If the store couldn't import produce from California or Florida, oranges and avocados and garlic would either get a lot more expensive or they might not be available at all.
Then think of how poor life would be if I had to buy products made only in St. Louis and no imports were allowed from outside the city. I'd probably lose my job. There wouldn't be enough students here in town to support the current number of universities here in town. A lot of us would have to become farmers if we wanted to feed our families. Houses would have to be destroyed in order to devote land to farming, pushing people into apartments. A whole string of economic changes would occur and all of them would be impoverishing.
The poorest countries are a lot like St. Louis or Missouri in that their size makes self-sufficiency extremely expensive. Trade lets them avoid that trap. Trading with them doesn't exploit them—it allows them to escape the poverty of self-sufficiency.
The protesters of free trade would have us believe that Nike and other multinationals exploit their workers by paying low wages and creating an unpleasant work environment. Their claim would be that Nike pays pitiful wages and exploits its workers because it can.
But the workers in those foreign countries are thrilled to see a Nike factory open. They don't stay away for fear of being exploited. People line up in China and Indonesia and Malaysia when American multinationals open a factory. And that is because even though the wages are low by American standards, the jobs created by those American firms are often some of the best jobs in those economies.
Even with trade, life is not easy for the Nepalese washerwoman or the Nike worker in Malaysia. It may make us uncomfortable at times to trade and interact with people who have such hard lives. But lack of education and marketable skills, not trade, are the cause of that hardship. Trade helps poor nations and their workers accumulate a bit of wealth and comfort. That in turn allows the poorest of the poor a chance to keep their children in school. It allows them the possibility of a brighter future. To deny them the opportunity to trade is the ultimate exploitation.
How Safe is that Trucker in the Window?
By Russ Roberts
You might have noticed that Mexican trucks have been in the news lately. Who wins and who loses when Mexican trucks are allowed to carry cargo into the United States?
The New York Times reports that a NAFTA dispute resolution panel has ruled that NAFTA requires the U.S. to let Mexican trucks into the United States. President Bush has said that the U.S. will comply with the ruling. Mexican trucks have been excluded from freely traveling throughout the U.S. since 1995 when President Clinton decided to keep them out on safety grounds.
According to the Times, "Union officials voice fears that Mexican truckers, who often earn one-fourth as much as unionized American truckers, will take American jobs. And consumer groups, noting that 41 percent of Mexican trucks failed American inspections at the border, argue that the trucks will endanger Americans."
Illuminating the Unseen
By Russ Roberts
From Ideas on Liberty, Vol. 49, No. 3, at FEE.org
The good effects of laws are often easily seen. The bad effects, unseen. So observed Frederic Bastiat 150 years ago. His basic insight remains true today. We live in busy times. Information bombards us. In such a world, even that which is seen is often overlooked. The unseen is that much more elusive.
If we are to make the case for economic freedom, we have to make these unseen costs come to light. Consider an increase in the minimum wage. What is seen: businesses give some of their low wage workers a raise. The direct effects of the minimum wage—more money for low-wage workers, less money for businesses who pay them—frame the entire debate.
People have trouble seeing the unseen, less obvious, effects of the minimum wage. But if Senator Bond of Missouri says the minimum wage is bad because it hurts small business—as he argued in his recent re-election campaign—then most people see the minimum wage as a tax on small business that helps the poor. No wonder many people think it's a good idea.
If we want to dent the consciousness of the average American, we have to bring the unseen to light. We have to talk about how the minimum wage doesn't just tax small business. We have to show how it bankrupts some firms that hire low-skill workers, putting them out of business. That means fewer opportunities for low-skill workers. But even the firms that survive will try to reduce the hours of low-skill workers and their numbers. In short, while the minimum wage helps some low-skill workers by giving them a modest pay increase, it has a devastating effect on others, pushing them out of the work force and into the street. The minimum wage thwarts human possibility among those it tries to help. And as Bastiat understood, it is easy to see those who are helped by the minimum wage. Those who are harmed are much harder to identify.
We've done a decent job explaining the hidden costs of the minimum wage. We've done such a good job, in fact, that proponents of the minimum wage have actually tried to argue that increases in the minimum wage have no effect on low-skill employment. To paraphrase Orwell, you'd have to be an academic economist to find that argument compelling. But in other areas, we have a long way to go if we wish to cast light on the unseen costs of government intervention.
Free Trade and Protectionism
Here's how trade often gets discussed in the media: should we destroy jobs in America in order to have cheap imports? That's like being asked how long you've been beating your wife. Why does it get discussed this way?
Opponents of free trade want the American people to think that trade is about destroying jobs in order to get cheap foreign goods. It makes free trade look mean-spirited and mercenary. But another reason is that these are the most obvious effects of free trade. If Americans buy from foreign suppliers, people understand that fewer Americans will be hired in the competing domestic companies. Unseen are the jobs created making the products we exchange with foreigners. Unseen is the impact of specialization and comparative advantage. Unseen is the power of foreign competition to induce our domestic industries to innovate.
Unless we can illuminate the unseen, making the case for free trade will be an uphill battle. Unfortunately, one of the best things about free trade is extremely difficult to see: free trade allows resources to flow to their highest use. But to make the argument compelling, we have to describe it in a way that allows it to be seen without a semester's worth of economics.
Illuminating the Unseen
Somewhere in South Carolina, there's a high school girl whose Mom works in a textile factory. This girl doesn't know what she wants to do with her life, but like most high school kids in America, she probably doesn't want to work in the same job or career as her parents. The security of the textile factory is appealing, but she might want to go to college and try something different. It all depends on her options.
That factory is threatened by Chinese competition. Should we let the factory go under or should we protect it from the cheaper Chinese imports? We could spend hours on the pros and cons and the economic impact of that decision. But let's look at the impact on that girl in high school. If we keep the factory around, we make the choice of working in the factory more appealing. If we let the factory die, we change the available options. We push her out into the world.
Exploring the world is a good thing but that's not reason enough for letting the factory go under. What is harder to see is that the world to be explored is a more vibrant and alive place when the factory goes under. Allowing the factory to die frees up capital and management skill than can be used elsewhere. If we maintain all of the factories and all of the companies that cannot survive competition, then the American economy is a much more static place.
If we try to make everything for ourselves and be self-sufficient, we lose the opportunity to specialize in doing what we do best. Our capital gets tied up in industries that do not take the greatest advantage of our unique skills. Free trade allows a high school kid in South Carolina to inherit a world of maximum human potential, with the maximum chance for her to use her gifts, whatever they may be.
A skeptic would ask how the girl in South Carolina is going to achieve her potential if her Mom is out of work. And that in turn might lead to a discussion of how past generations have managed to survive and thrive in a dynamic economy. In 1900, 1/3 of the American work force was in agriculture. Today the number is around 3%. Do you think the kids on the farms of 1900 are glad that we let agriculture become more capital intensive with fewer jobs? It wasn't a trivial transition, but in 1900, we couldn't see the industries that would arise to use the skills of the next generation. And we can't know the opportunities that will arise to help that girl in South Carolina if we let the textile factory fail. But they will arise. What they will be depends on the gifts and aspirations of the next generation.
If we want to inspire people to support free trade, we must touch their imagination. Bastiat understood that 150 years ago. Our best chance is to make the unseen, seen. Economics can bring the unseen to light, but only if we leave the jargon behind and show how free trade and other economic freedoms help transform our lives.