Tuesday, January 27, 2004

Another rant on economics,

Note: This is another posting that originally went on Dan Drezner's website responding to a followup Dan did on outsourced jobs. Why pick on Dan so much? Well, to be fair Dan is a thoughtful intelligent writer which is what attracted me to his website so much. However, Dan makes no bones about "taking on" writers such as Krugman who he feels fall short in their arguments. Well, Dan is an unabashed proponent of "free-trade" but hasn't really told the other side of the story. So I am. That's all there is to it. If Dan weren't able to put together a half-way decent argument, I wouldn't bother rebutting them. So in a way, it's sort of a compliment. ;-)

Oh boy!

Where to begin? First comparing the automation and then information revolutions to the outsourcing (manufacturing or intellectual) is like comparing apples and oranges. Why? Because the automation and information technology allowed the savings in profits to be reinvested directly back into the same national economy. Outsourcing contains the possibility of "leakage" to another economy. In addition, there is the question of production infrastructure - it's not just jobs moving but the factories, research centers, and the demand economy for skilled labor moving overseas.

For outsourcing to result in a net gain is a subtle argument. You see, a company pays less to have a worker overseas do the job for less. But unless they pay the worker a negative amount of money, they can't actually make more money in absolute retail pricing (without raising prices). What they do is convert the labor costs to profits.

Now this money they pay to these workers, plus the money that would go into building the facilities and the stimulus on the education system for producing skills for these workers, clearly is being injected into a foreign economy.

For there to be a net benefit to the domestic economy there must be a ROI argument. That is the company must get a better return on investment of capital, and being able to spend the same amount of capital to get a better return (because of higher profit margins) they produce more wealth. And this created wealth must be greater than the loss due to price-competition and "leakage" in production infrastructure and outright labor costs to the other country, for it to be beneficial to the domestic country.

Thirdly, market liberalism in "free-trade" has some seriously contradictory arguments. One argument they make is that foreign investment is the way to help third world countries develop. Indeed, it is a way to do that since the transfer of jobs, facilities, an education demand economy, and other aspects of production infrastructure cause a nation to develop. However, the citizens of the other nation will soon become more educated and capable of doing better work. So they will start competing for information tech, knowledge, and creative type jobs. Market liberalists also claim (correctly) that competition reduces prices. This is correct. Even if one were not to factor in the lower cost of living factor, the basic laws of economics dictate that a greater supply relative to the same demand leads to a downward pricing pressure. Thus this "outsourcing" job transfer overseas would lead to downward labor wages *across the board* in the more "advanced" domestic economy.
Thus a "rising tide" would NOT lift all boats! This would be reflected in practice by a largening discrepency in incomes - which we are seeing.

If a pie grows, but your cut of it shrinks, you can end up with a smaller slice of pie than if the pie had stayed the same size but your cut of it had stayed the same too. You do the math.

Finally, the "outsourcing" argument does nothing to address the concern of simply being "outcompeted". Once these massively populated nations have modern social infrastructures, manufacturing capacity, and educated populaces what's to stop them from simply beating our pants off in a straight up contest? Unless you "magically" believe that the laws of market competition have ceased to apply to nations, one cannot assume that the direction of the flow of profits from global productivity increases will necessarily continue to flow to the United States. The world may get richer - but the US may get poorer. Market distorting factors such as inequities in intellectual property protection, working environment standards, government subsidy of education, etc. will only exacerbate this problem.

In other words, we're all in big trouble because the professors like Dan have missed the forest for the trees.


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