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Subj: questions
Posted: Thu Oct 16, 2008 at 07:44:30 am EDT (Viewed 590 times)
Reply Subj: Re: Milton Friedman: Economist
Posted: Thu Oct 16, 2008 at 12:22:56 am EDT (Viewed 647 times)

> That's not really an externality. Imagine you and I sell comicbooks online. You and I both compete for the same customers. Suppose you are better at it than I am and offer better prices and I lose business. My loss is not an externality, it is simply the consequence of competition. I would be a "market loser" but a market participant nonetheless. Externalities are about non-market participants.

You clearly know a lot about economics, so I'm going to stop debating and start asking questions. I sense an opportunity to learn something! \(geek\)

First question. You've explained that externalities are about non-market participants. With regard to American companies outsourcing, why wouldn't the American worker be viewed as a non-market participant? How does the American worker participate in the Indian or Chinese labor market or the Indian or Chinese consumer market?

> Nope, I meant what I said. There is a basic relationship in economics that
> National Savings = Domestic Investment + Net Capital Outflow
> As you know, US national savings is negative and our domestic investment is positve. The only way that can happen is if net capital outflow is very negative (which it is). That means foreign entities are acquiring more of our assets than we do theirs. Those assets include dollars (like loans we pay to China) and real estate or physical capital (like factories from foreign direct investment).

Interesting. Next question. (And by the way, thank you for your patience.) Is there a way the above is helpful to the American worker?

> There is certainly an argument to be made about the root cause of the issue, but it definitely exists.

What is most likely the root cause?

> In fact, one way to spin this would actually strengthen your outsourcing argument. You could argue that by limiting outsourcing, we limit foreigners acquiring our assets.

If American companies stopped outsourcing, wouldn't foreign companies still be free to invest in American assets? Or am I missing your point?

> > True. Good point. Yet it's still bad for American workers. If an American company creates a customer service phone bank in America, it's a net gain for the American worker. If that same company creates a customer service phone bank in some other country, it's a net loss for the American worker. American companies have a responsibility to post net gains for the American worker. This is the American company's version of patriotism.
> You are correct that some US workers lose. However, the argument is that overall openness (free trade) creates more jobs. Again, that is of little benefit to someone who loses their job, but it says that on net, the US gains. Also, consumers benefit from lower prices and shareholders (which include a wide cross-section of Americans) win from higher profits.

I understand how increasing American exports would create jobs in America. But isn't it true that America imports more than it exports? Doesn't this mean the net job gain is more on the side of other countries and less on the side of America?

Also, do you happen to know some way of approximating the percentage of foreign investment that is spent on building new companies, new factories, new loading docks, new railroads, etc., from the ground up?

Do you think it's true, as I've been assuming, that the best foreign investment (from the American worker's perspective) is that which builds new work sites from the ground up, because this creates new jobs in America?

> Well, see there is a difference between what's "efficient" and what's "fair". You're basically saying that wages are unfair. That's a judgement call and unfortunately, different people have different definitions of fairness. I'm simply saying free markets and trade (more often than not) are efficient.

OK. Quoting Wikipedia:

Economic efficiency is used to refer to a number of related concepts. A system can be called economically efficient if:

- No one can be made better off without making someone else worse off.
- More output cannot be obtained without increasing the amount of inputs.
- Production proceeds at the lowest possible per-unit cost.

I think I understand this. It means, for example, that the American worker can't be made better off without making business owners worse off. It also means the American worker's wages, which are unit costs, are being kept at the lowest possible level.

Question: Is executive compensation included in the concept of unit cost? I'm thinking we could increase worker's wages by decreasing executive compensation.

> The need to provide support to people adversely affected by trade is a separate issue, not evidence to eliminate free trade.

This is a good point, and one that I think mjyoung agrees with, along with the author he recommends to me elsewhere on this thread. I would have to agree with this point if I could see how the most odious part of free trade - outsourcing - or its balancing element, foreign investment - is in reality a net gain for the American worker. This is the crux of my questions to you.

If I saw many foreign companies outsourcing to America, it would all make sense to me. Yet it seems to me that the only reason a foreign company would outsource to America would be to avoid transportation costs for heavy manufactured goods, such as automobiles. Are there other reasons they might do so?

Am I right that American outsourcing to foreign countries far outstrips foreign outsourcing to America?

> > Your comment seems to imply that if other countries are enriched, that's as good as America being enriched. If I lived in those countries, I'd agree, but since I live in America, the only enrichment I value is that which occurs in America.
> Fair enough, and you are certainly welcome to feel that way. I guess I don't see how someone or some company getting rich in Texas does someone living in New Jersey any good any more than if that person or company were in Mexico instead of Texas.

I guess it's a patriotism thing. If Texas gain outweighs New Jersey loss then America has a net gain. If China gain outweighs New Jersey loss then America has a net loss. But isn't it also true that China is less open to America than America is to China? Meanwhile, Texas and New Jersey are equally open to one another, aren't they? Isn't it a net loss for America that China is less open to America than America is to China?

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