Wednesday, January 14, 2004

Are we exporting America? Laize Faire capitalism comes back in style

That any single job disappears isn't cause for concern. The oft cited example is buggy-whips. Times change. Once horses went out of fashion as a transportation means, the accessories of horse-drawn travel vanished from the popular landscape. However, this should be treated with caution. New jobs must be created to take the place of old ones. Furthermore, most people would not be satisfied with new jobs that pay less or offer less benefits or are less fulfilling than their old jobs. That wouldn't be considered forward progress.

In a thoughtful op-ed, Robert Samuelson in the WaPo argues that job-loss fears are over-blown. However he notes a possible problem, writing that:

Is America's economic vitality still suffering from the technology and stock "bubbles''? If companies won't expand -- if they're glum about the future -- then lackluster job growth will choke the recovery. And what about the trading system? In Asia, some countries hoard export earnings. They accumulate huge reserves of "hard" currencies (mainly dollars) rather than spend for imports. If too many countries do this, the trading system promotes stagnation and merely shifts jobs from one country to another. In a weak job market, outsourcing -- a small threat by itself -- could become a large lightning rod for anti-globalization discontent. [Emphasis added]

Writing on inflation in the Weekly Standard, Irwin Steltzer notes that in an otherwise optimistic picture we have the following condition:

THE DOLLAR IS DOWN. Oil is up. America is running huge trade and budget deficits. The Japanese are intervening massively in the currency markets to prevent the yen from rising, and the Chinese show no signs of abandoning the renminbi's peg to the dollar. So the euro is bearing the brunt of the dollar's decline, making euroland goods less competitive and snuffing out any signs of a European recovery.

Daniel Drezner, a free-trade and market liberalization proponent who teaches political science at the University of Chicago, makes an argument that there is no difference between buying goods here and goods made elsewhere except that it's more efficient to buy them from the low-cost producer. Most notably he quotes from Noam Scheiber at the TNR who argues that:

Put differently, you can either trade machines and workers (which is basically what you're doing when you're outsourcing), or you can trade the goods these machines and workers make. But, as a theoretical proposition, the two scenarios are EXACTLY THE SAME: They both maximize productive efficiency. Indeed, one of the great accomplishments of international trade theory, post David Ricardo, was to prove mathematically that trade in goods accomplishes the exact same thing, efficiency-wise, as trade in machines and workers.

But the problem is that trading machines and workers is NOT the same as trading goods. The difference is not theoretically equivalent. The key issue is production infrastructure. Here that means machines, companies that produce goods, and workers skilled in making them. Suppose there was one country that was the low-cost producer. In the theoretical case, all production would shift to that country. That country would then have all the production infrastructure, because there would be no need for any of the other countries to have any.

As one can see, either trading goods or trading production is not equivalent theoretically at all. Well what's the problem with this? Suppose that something real enters into the airy world of economics, like a war. Countries still go to war with each other you know, even with international treaties and the U.N. around. Suppose the country that you went to war with, was the country that produced all your stuff? Well that would be a big problem wouldn't it?

In WWII, car factories were converted into making tanks. Bids were put out for a new transport vehicle, giving us the creation of the jeep/humvee. Companies that made airplanes, were tasked with creating new planes to fight over the skies of Europe and the waves of the Pacific. It was the great production capacity that helped Winston Churchill sleep soundly at night when he heard that the US had entered the war finally.

Is this a reasonable concern anymore? It should be remembered that China took hostage a US spy plane in 2001. Furthermore, sentiment on the street in China stoked by proganda was strongly nationalist and advocated strong "measures" against "US aggression". The US manufactoring base has contracted 16% in the last three years, with many lost jobs going to China. In addition, the US has long standing international tensions with China over Taiwan and the Korean Peninsula. Recently, China has stated that it will "pay any price" to ensure Taiwanese reunification with the Mainland, something the US is committed to opposing if it happens by force.

Remember, that it isn't just a matter of getting new machines or converting old ones to make products. Without a need for them, people stop training to make those goods. Afterall, their jobs are going to be Walmart greeters or retail store clerks or short-order cooks. Why should they invest the time and effort to become engineers, mechanics, or learning how to use dangerous industrial machinery when they won't be able to get jobs using such skills? When was the last time you met anyone that knew how to make a buggy whip?

If this was a perfect world, then the economists would be right. It would be okay to ship our computer and telecom service jobs to India, and it would be fine to ship our factory jobs and equipment to China. However this is not a perfect world, it is filled with governments that disagree with each other and occasionally go to war.

Besides, free trade only works if it is truly free. The problem is that all countries have protectionist policies that prevent truly free trade. The only cases where free trade has actually happened historically have been small-scale experiments, local small-scale markets, and the theoretical models of the free-trade proponent economists.

As this article on Free-trade history in Foreign Policy in Focus (FPiF) shows, nations have never been all that eager to open up their markets. To this day, massive agricultural subsidies in corn, cotton, and sugar are given lots of funding by the US government. Cheap chicken is flooding the markets of Ghana from Europe according to NPR. Do you fly on planes often? After 911, airlines received a massive bail-out. Without that bail-out many companies would have folded, and with less competition ticket prices would have shot up. Do you use long-distance calling? In the 80's and 90's, the Federal government sold off cell-phone radio-wave bandwidth licenses very cheaply. The consequence was that cell-phone companies were able to offer long-distance virtually for free, cause they'd gotten the frequencies practically for free. It was this that drove long-distance calling prices into the ground, and not regulatory anti-trust breakup of Ma Bell into the Baby Bells. Yes, competition helped there somewhat but it was really government subsidy that dropped the price almost to nothing. As for the telecom companies themselves, they did invest allot of money laying fiber-optic lines but they were responding to a demand created by the Internet - a creation of the DOD and government scientists starting in the 70's and meant to hook up university research (as well as provide Doom's-day contigency communication lines).

So from everything we do, whether type on a computer or ship packages (Railroads and the Post Office were government funded projects), to call long distance (space satellites, Internet, and cell-phones all subsidized by government), to buy a cotton T-shirt, to bake a cake (sugar industry protection), to fly (Boeing and American plane manufacturers are subsidized by pork-ridden Military procurement; the Wright brothers' first customer was the US military), to make a sandwhich (the grain in the bread is subsidized), to pay your electric/gas bill or driving down the street (we intervene militarily overseas to ensure oil stability and access), to turning on the lights (hydro-electric and nuclear power was subsidized and developed by the government) - every facet of our lives is touched directly or indirectly by incredibly distorting government subsidy.

There really is no such thing as a "free-market" or a market without "regulation", and in fact even if it were to exist one finds that it would collapse and be completely unworkable even in theory. Why? Because without the regulation of law&order, people will try to cheat each other. The reason the FDA exists is that the Food and Drug Administration is meant to stop people who try to be Snake Oil Salesmen. Caveat Emptor or let the buyer beware has been completely discredited as a viable economic practice. Yet under the guise of "deregulation", "privatization", or "market liberalization" individuals are trying to bring back laize faire capitalism. Yes, too much regulation can be stifling as anyone who has sat through too many meetings knows. However completely removing regulation only leads to anarchy.

However this is the course that we have set for ourselves as a nation by listening to pie-in-the-sky scholars and pundits in the pockets of the unscrupulously greedy.

Btw the "low-cost" producer after WWII, was the USA. Because Europe and Asia were devastated by war, the US became the producer for the world. This was what helped the US become immensely rich and powerful after WWII. So there must be some advantage to being able to make all that stuff, right?


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