Thursday, August 20, 2009

Making People Richer: The Benefits of Globalization

Everywhere you look in this day and age you will see the results of a global economy.  From the car you drive, to the television you watch, from the coffee you drink, to the instrument you play, we are fully engrossed in the fruits of a world economy.  

Over the years in America, however, there has been a public outcry against the looming threat of increased globalization.  Many called for closed economies to protect American jobs from outsourcing or protectionism of certain sectors from foreign investors.  Others have stated that overseas factories exploit lower-income nations by enslaving their populations in sweatshops to churn out goods for American consumption.  These people paint the picture of the American businessman getting rich while dancing on the backs of the poor.  I feel, in the interest of fairness, that it is important to address these concerns through the lens of how global economics works and address the root causes for the problems faced by the upper-income and lower-income nations alike.

Let us address the first concern of globalization eroding away the American workforce.  The notion is based in fear-mongering because free trade with other nations has shown to make the American citizen richer on the whole.  Abraham Lincoln had famously remarked that buying a coat in America keeps the coat and the money here in America but buying one from England brings the coat here but sends the money to England, effectively removing it from our economy.  What this misguided argument failed to address is that when any product is purchased with our currency, that currency eventually makes its way back to our country when foreign consumers purchase American products.  It is simple mathematics.  

So when governments push for tariffs on foreign goods--for example taxing a foreign car as an incentive to buy a domestic car instead--they are essentially taxing American consumers and limiting their choices.  Taxation certainly does not make the American consumer richer.  Even if those consumers decide to buy domestic cars only, the Detroit autoworker is the only one who truly benefits from the transaction.  The rest of the country actually becomes collectively poorer.  

The same applies to the protection of jobs.  Union operatives will wax poetic about the benefit of buying domestic products helps keep Americans employed but fails to address the inefficiency in protecting industries in the first place.  If people stopped wanting to buy American automobiles, it is a horrible waste of resources to continue producing the product.  It would be tantamount to the government protecting the horse-and-buggy industry over the automobile industry just in the interest of keeping cartwrights employed.  In a free market, when one sector of industry produces something undesirable, the resources of labor and capital are shifted to something that is desirable.  And everyone is better off for it.  Additionally, the outsourcing of jobs to foreign countries where labor is cheaper makes the cost of production a fraction of what it was in the United States, thus dropping the prices of the items in question, making those products available to more people, regardless of their individual income.  It also increases the dividends and investment returns to shareholders in those corporations, of which 50% of the American population is involved with on some level or another.

On the other side of the globalization coin, what about the exploitation of poorer nations at the hands of greedy capitalist interests?  Well, let us break down what goes on in an overseas factory.  In lower-income nations, government bodies tend to have less stringent policies regarding entrepreneurship or property rights.  Without an incentive to get people to innovate and produce, that nation's people are sitting on resources they cannot really use.  Instead of letting their resources rot on the vine or languish in the mine, the citizens instead trade these resources to foreign bodies who can make use of it.  Since prices are generally determined by the supply of the resources versus the demand for it, these items are generally acquired cheaply.  Even so, according to the principle of voluntary exchange, both parties in the transaction are better off for it.  

And what of sweatshop labor?  The common outcry against outsourcing is that foreign workers are put to work in unsafe environments for long hours and paltry wages.  What many fail to ponder are the alternatives.  While child labor or uncompensated overtime are fundamentally deplorable, they are still better options than what the citizenry had available in the first place: starvation or selling themselves into sexual slavery in an underground economy.  Because of lower-income nation's despot-driven policies of government-sanctioned larceny and loose property rights, the people have few choices available to them to produce.  In fact, studies have shown that countries with foreign investment have citizens that, on the whole, enjoy a higher standard of living than those without, with some of their children going to college for the first time in their family's history.  Refusing to engage in trade with these poorer countries just contributes to them staying poor.  While the conditions are far from what westernized nations feel are acceptable, one cannot overlook the fact that industrialization in our own country started out much the same way and put us on the path of prosperity.  As people become more empowered, social change inevitably results, and convergence becomes all the more possible.

In summary, a free global economy is far more capable of improving the lives of everyone involved than the oppressive hand of government protectionism and closed economic policies.  So long as the principle of voluntary exchange is practiced between trading parties, everyone in the global economy walks away better off than when they started.  And every little bit brings up the standard of living for everyone involved.

Wednesday, August 12, 2009

Stealing From the Poor to Buy Teenagers iPods: The Law of Unintended Consequences

So it's been over a month, I got all my vacation needs out of me in the past month and, as a diligent reader (or maybe both of them) pointed out, it's time to get this train rolling again.  Toot toot!

So next on my list of topics I will discuss economic policies and their various unintended consequences.  An unintended consequence is something that happens as a result of an otherwise well-meaning policy either in the form of a hidden cost or a change in people's behavior that was unexpected.  Today I'll discuss minimum wage.

Now minimum wage, as a concept, is rooted in altruism: you set a wage floor so that any working individual has to make at least a particular wage which is decided to be a "living wage" according to the benevolent bureaucrat who comes up with that number.  Those politicians (mostly on the left) who support it state that this is to help poor, working families make ends meet.  I think we'd all agree that that seems like a worthy goal.

And it's an easy policy to enact; politicians don't have to spend any taxpayer money and it is highly visible.  In this instance the benefits are very easy to see with a numeric value.  But what about the costs?

And that is the kicker because the costs are much less obvious, especially to those who, ostensibly, are supposed to be being helped in the first place.  One of the biggest costs is to the job sector itself: since the government is raising the wages above their market value (i.e. they are not allowing a free negotiation of wages between a willing worker and willing employer), they are forcing employers to hire fewer people.  If you have been paying attention in my essays about the Great Depression (and of course you have been) you'd see right away that a wage control actually INCREASES unemployment.  

Because firms have the freedom to choose whatever they want to pay willing workers to perform a particular job taken away from them, they exercise their freedom of choice in other ways; namely just cutting jobs and forcing what remains of their workforce to work harder to cover the loss of production.  If they can't realistically do that they then they raise the prices of their products to defray the cost.  Or, perhaps the worst scenario of all (and not at all an uncommon one) they use the minimum wage as an excuse to do both.  

So, to use an example, if you are one of three shelf-stockers at Clem's Ball-Bearing Emporium and you make minimum wage at $5.15 an hour.  The government, feeling that you are unfairly paid for your immeasurable talents of matching numbers on a box with numbers on a shelf, decides to give you a $2.10 raise.  Now Clem, the owner, has to assess his options.  If you and your two coworkers worked there full-time, Clem is now shelling out just over another $1,000 a month for the same amount of work.  That might not seem like much but if Clem is a good manager he is already operating at the margin and squeezing every dollar for what it is worth to undercut his competition.  

Since Clem has to pay you more he has to find some way to make up that $1,000  He will either have to raise the prices on ball-bearings after assessing his monthly revenue (which might not be a good idea if his competition lays off workers to keep their prices down) or he will have to decide which of the three of you he has to put out of a job.  If he lays one of you off, he ends up saving himself over $1,100 a month in addition to the costs of maintaining you on the payroll.  But he will have to push the two remaining guys even more to make up the work, or even spend valuable amounts of his own time doing it as well, instead of devoting more time doing the more important and essential things involved in running a business.  

Now, to be fair, minimum wage isn't all that powerful of tool for helping out poor people (or hurting businesses) in the grand scheme of things (but it sure looks good for politicians seeking reelection) since minimum wage barely keeps pace with inflation, but there are more insidious costs involved.

For one thing, over 90% of the people making minimum wage aren't even the sole sources of income for their households; most of these jobs are held by people with part-time side jobs and teenagers still living with their parents.  That fact kind of takes the whole "we're doing this for poor people" claim right out of the equation.  Secondly, businesses use minimum wage increases as an excuse to raise their prices anyway and, since most of those jobs are in service and retail industries like Wal-Mart or McDonald's), the people on the lowest rungs of the income ladder--who weren't actually propped up by the change of minimum wage in the first place--actually shoulder more of a cost than they received in benefits.  Ouch!

So, as you can see, the Law of Unintended Consequences rears it's ugly head in a fashion that not only doesn't actually benefit the people it was designed to benefit, but actually does them more HARM overall.  I wonder how many votes these politicians would get if they just told the truth and said "I'm proposing that we make goods more expensive for poor people so teenaged kids have more money for iPods"?  I'm guessing not very many.