Tuesday, December 13, 2011

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.


Phil said...

You seem to be arguing with the voices in your head (again). Nowhere did the President use the word "tariff." What the President was stumping for, had you paid attention, was a more equitable distribution of national income (not wealth, mind you, but income).

As for China, a tariff might be what's needed to fend off their blatant currency manipulation. Most economists regard China's currency policy as unfair for her trading partners, much the same way that in the Euorzone, Germany has manipulated their inflation and wage rates to ensure that they are the only exporter nation to other Eurozone countries.

I suggest you watch this video from Dr. Heiner Flassbeck, a former deputy secretary in the German Ministry of Finance and currently chief economist the UN agency for World Trade and Development in Geneva. He untangles the Eurozone mess and shows that it's not a debt problem, but an economic manipulation by Germany problem.

And given our current economic plight is a direct result of a libertarian "free market" failure, invoking the spirit of Bastiat is both amusing and absurd.

Rick Esenberg said...

He didn't use the word tariff. He said it was good for the country for businesses to operate at a higher cost by, in effect, ignoring the law of comparative advantage. I explained why that won't work and then refuted the notion that the problem can be fixed by the imposition of a tariff.

Our current economic plight was not caused by a libertarian "free market" failure. But we'll get to that.