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Post By
EcMan

In Reply To
Skrull

Subj: Re: questions
Posted: Thu Oct 16, 2008 at 10:45:00 pm EDT (Viewed 619 times)
Reply Subj: questions
Posted: Thu Oct 16, 2008 at 07:44:30 am EDT (Viewed 590 times)


Hi,

> 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?
>

See, that's the thing. In a globalized world, there is only 1 labor market for a lot of jobs. At a given quality level, companies are looking for the cheapest labor worldwide. So an American factory worker is trying to compete for jobs with a Chinese factory worker. Since they are bascially competing for the same job, they are in the same labor market and both would be considered participants even though only 1 gets a job.

As an aside, I should also say, one complaint is that countries like China aren't playing fair because they manipulate their currency, which makes labor costs in their country look even cheaper to outsiders. Those sorts of distortions aren't good.

>
> > 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?
>
That's an interesting question, and it's hard to say for certain. I guess what I would say is the best case would be if we (Americans) saved more money ourselves so that we didn't need to borrow from other countries. Since we've chosen not to do that, it's better to borrow than not. If we didn't borrow, even more jobs would leave because there would be lower investment and lower production.
>
> > 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?

Honestly, no one really knows for sure. A lot of people would say that the government budget deficit is the main cause. Budget deficits and trade deficits tend to go together. Ironically, Friedman would argue almost the opposite. He'd say that the safety and security of investing in the US is the root cause (in other words, it's a good thing).

>
>
> > 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?
>

Yes, they could, but they wouldn't. Basically, if we limit outsourcing to say China, then China will likely retaliate and lend less money to us. They wouldn't have to retaliate, but there is some probability that they would.

>
> > > 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.

It is certainly possible that other countries gain more from free trade than the US. The US still gains, though. For example, it is likely that NAFTA is a much more positive thing for Mexico than for the US or Canada, but the US and Canada still benefit from it.


>
> 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?


Not always. What you are talking about, I think, is called "greenfield investment". A lot of investment is actually through mergers or takeovers, which isn't from the ground up. Also, there is portfolio investment, which is simply buying stock and bonds. It's probably true that a greenfield investment project creates more jobs than the other types simply because it is more expensive and time consuming. I don't have any number or percentage off the top of my head. I'm sure it could be found on some government website.


>
>
> > 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.

Ok, there are actually different economic definitions of efficiency. That Wikipedia entry contains some of the overly complicated ones. When I said "efficient" I meant the second definition "More output cannot be obtained without increasing the amount of inputs". In other words, using your scarce resource to produce the most output is efficient. Markets are believed to work because resources go to where they are the most productive.

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

That's probably more of an accounting question than an economic question. I believe executive compensation would be part of "overhead" and not unit cost, but I'm not an accountant. As to limiting executive compensation, that's a fairness issue not an efficiency issue. It's certainly ok if you want that. Personally, I waffle back and forth on that.

>
> > 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?

You're actually quite right that the main reason for a foreign company to produce in the US right now would be to avoid transportation costs and to have more direct access to the US market. Despite our troubles of late, the US is still a giant market that has an attractive customer base for foreigners to sell their products in. There is some outsourcing of services to the US by foreign companies, especially if it can be done electronically. So for example, a company in Signapore might outsource computer programming tasks to a company in Silicon Valley, etc. I would have said that certain financial services might be outsourced to the US too, but given our current situation, that might not be true for long.


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

Yep, the US has a dubious title as world leader in outsourcing.
>
>
> > > 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?

That's true. Like I mentioned earlier, to the extent that China doesn't play by fair rules, if we don't do anything about it, we're pretty dumb. Also, I completely understand the patriotism argument and I'm as nationalistic in a way as anyone. It's just that in today's world, I can buy stock in Telmex (Mexican phone company) just as easy as I can buy stock in AT&T and potentially profit from both.

-EcMan


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