Reading Obama in Osawatomie, part 1

Last week President Obama gave a much vaunted "inequality" speech in Osawatomie, Kansas. It is an awful speech full of the blunt edged demagoguery that is increasingly the President's only rhetorical tool. It is full of misstatements, misunderstandings and irrelevancies. It promises much but delivers little.

So let's undertake a leisurely deconstruction.

Obama suggests that it is heroic for a business to keep its costs higher than they otherwise would be by refusing to produce less expensively overseas:

At a time when the cost of hiring workers in China is rising rapidly, it should mean more CEOs deciding that it’s time to bring jobs back to the United States -- (applause) -- not just because it’s good for business, but because it’s good for the country that made their business and their personal success possible. (Applause.)

Who would disagree with that? Well, I would - and so would most economists. The statement is an illustration of what is so often the difference between conservatives and liberals on economics. The latter focus only on immediate impacts. The former, following Frederic Bastiat, pay attention to what is not so readily seen.

A company that refuses to outsource will "save" American jobs - for a while. Because others will not make the same choice (or foreign competitors will enter the market), the long term result is likely to be a loss of market share or even bankruptcy. Not only the "saved" jobs  - but those of other employees - are gone.

This is the justification for tariffs. If everyone who wishes to import foreign goods must, in essence, pay a fine, then the competitive disadvantage outlined above will be eliminated or reduced.

But the impact of a tariff is to raise the cost of goods to American consumers. This will reduce demand - again reducing employment in the protected firm albeit not by as much as outsourcing - but will also reduce American wealth. Consumers forced to pay higher prices will have less money to spend elsewhere. Other jobs will be lost or not created.

Put another way, Americans will lose the increase in wealth created by buying the same goods at a lower cost. Note that this is  a dead loss. It is not made up by the increased purchasing power of workers who are not replaced. That increased purchasing power is  nothing more than a transfer of funds from consumers to retained workers.

Note that this is true even if the cost advantage is the result of an artificially deflated foreign currency or lower regulatory standards. Either way, the American economy is the net beneficiary of lower costs.

And, of course, neither of these conditions is likely to be sustained over the long run. We once thought that the Japanese were undercutting us with cheap labor. That inevitably changed as Japan became more prosperous. The same thing will happen in places like China and India.

To be sure, outsourcing has a significant (and highly visible) impact on displaced workers. It may be that part of the surplus created by their displacement should be devoted to ameliorating that impact through retraining.

It may also be that certain industries that are strategically significant should be protected for military reasons. But that's an argument that is susceptible to all sorts of mischievous uses.


But Obama's suggestion about what is "good for the country" has it backwards.