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Post By
EcMan

In Reply To
Skrull

Subj: Re: questions
Posted: Fri Oct 17, 2008 at 12:19:28 pm EDT (Viewed 541 times)
Reply Subj: Re: questions
Posted: Fri Oct 17, 2008 at 07:21:46 am EDT (Viewed 653 times)


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> > 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.
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> First, thank you again for your patience.
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> Now - here's what I think is an important point, but I may be off base. The worker and the consumer are the same person. If the labor market is global but the consumer market is local, this seems to enable damaging inequities, doesn't it? Here's what I mean. You've explained how the American worker and the Chinese worker are in the same labor market. But they're in different consumer markets, because consumer markets are local. A bag of rice in China costs far less than a bag of rice in America, and the American worker can't buy the Chinese bag of rice except by traveling to China, which would of course be prohibitive from both a cost and time perspective. This means that if I make six dollars an hour in America, I'm poor, but if I make that same amount in China, I think the sky is raining gold. Thus it isn't possible for the American worker to compete with the Chinese worker fairly. The Chinese worker must win, because the worker and the consumer are the same person, and the Chinese consumer faces far lower prices than the American consumer. This is a damaging inequity for the American worker, isn't it?

In a way, we're back around to where we began. First, let's assume China is playing fair, just to keep it simple. When an American company outsources a job to China, we would have winners and losers exactly as you are saying. The Chinese worker would "win", the American worker losing their job "loses" and the owners of the American "company" win. Because efficiency is improved, the "winners" are dividing up a larger income than before and paying lower prices. Those gains are larger than the American workers loss. In fact, those gains are big enough that the American company can take those gains and create new, different jobs (create new products, innovate, etc.). Now those jobs probably don't go to that original American worker that lost his, they go to some other Americans. So yes, there is the potential for inequality to increase. That goes back to the earlier post, where we said more could be spent to help that original American worker re-train and get a new job, which would reduce inequality if we want. Everyone would win in that scenario.
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> > 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.
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> That word "good" is a funny one, as you've noted previously. If China takes actions that benefit China, one would likely consider that "good" from a Chinese perspective, and if I were Chinese, I would applaud my government. Would I be wrong?

Yes and no. Clearly, from the Chinese perspective, they think it is "good", and we clearly don't. However, the effect of Chinese currency manipulation is that it keeps wages and buying power in China artificially low, so Chinese workers aren't able to buy as much goods and services as they should be able to. That clearly is "not good" if you're a Chinese worker. But of course, the Chinese government doesn't seem to care (at least in my view).


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> > 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.
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> Do my personal savings, or lack thereof, impact domestic investment? I guess the answer would be yes, because the banks use my money to invest.

Yep, banks take in deposits from you and I and that provides the "loanable funds" that banks lend for investment purposes.


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> Yet the main reason most people don't save is that their mortgage monthly payments are so high, devouring their paychecks, and the reason for that is the absurdly inflated housing market. Absent this inflation, discretionary income would be higher, enabling greater savings, at least theoretically. No?
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Sure, eliminate or reduce any number of monthly expenses (and mortgage payments are the biggest one) and Americans could save more. However, Americans might not save it. They might just take that money and buy more plasma screens, fancy cars, and other consumption items.
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> > 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.
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> That makes sense, because budget deficits causes much of our tax money to be spent repaying government debt, when that same money could instead be invested in America, either by the government or by citizens and businesses paying lower taxes and thus having more discretionary income.
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> > 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).
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> That explains the high capital "inflow" from other nations, but doesn't explain our low domestic investment. Or did I miss something?

Well, if you go back to that saving equation, and start with lots of foreign investment, one of 2 things has to happen. Either there would be a) low domestic investment and high national saving or b) high domestic investment and low national saving. Clearly, b) is reality and Friedman is saying it is caused by that foreign investment. I'm not saying I agree that is the direction this works, I was just saying that is an argument he made.


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> > > If American companies stopped outsourcing, wouldn't foreign companies still be free to invest in American assets? Or am I missing your point?
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> > 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.
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> Doesn't that imply that the Chinese view their lending to us as somehow altruistic? Otherwise, if they view it as being in their own self-interest, wouldn't they keep on doing it regardless what we do? The exception would be if we attack them militarily, of course.
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> I would have figured the Chinese profit by lending to us and profit by us outsourcing to their country. No?

This gets us back to China's motives. It is hard to tell, because it is such an odd situation. Basically, China is on average, a lower middle income country and of course the US is a rich country. So we have this situation where a relatively poor country lends massive amounts of money to a rich one. Superficially it doesn't make sense. It would be reasonable to think China should not be lending us money and should be plowing their profits back into their own economy, but they don't (other than the military). I assume China is looking to use it's lending for political power over the US, but who knows for certain.


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> > 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.
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> I don't see how. In the final analysis, our losses would exceed our gains, and we would end up with a net loss, no? I guess you're saying it isn't a zero sum game:

This is the heart of free trade. Free trade is not a zero sum game. Basically there is a tradeoff. Here's a little thought experiment. Would you and a friend rather split a $1000 equally ($500 each), or $2000 unequally (one gets $600, the other gets $1400)?


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> I think you're saying X investment will lead to Y job creation, regardless what form the investment takes, with X equaling the dollar amount invested and Y equaling the number of jobs. I think that would be true if our economy was primarily a job creation engine, as it should be, but our economy is primarily a business owner profit engine, and business owner profits experience negative pressure in direct proportion to the size of payroll, creating an incentive to keep payroll as small as possible. For this reason, I would think some investments are more job-conducive by their specific natures, in that some investments directly and unequivocally require the creation of jobs, for example the building of a new factory. No?

It is certainly true that some investments will create more jobs than others. The thing to remember though, is that profits eventually are either a) spent on goods and services which creates a need for production and hence jobs or b) plowed back into other investments which also creates jobs. There are lots of flows and it is hard to trace them all out, but usually you have to go past the first round.


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> > 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.
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> And productivity is measured ultimately in terms of profit for the business owner, right? And profit for the business owner is inversely proportional to the size of payroll, right? Doesn't this tell us that economic efficiency pushes in the direction of fewer jobs and lower wages?

Productivity is output per worker or output per hour of work. It doesn't really say anything about how the benefits of productivity gains are shared. There are at least 2 forces. One is that higher productivity could mean less jobs (less workers needed to do produce the same amount) or higher wages (more producitivy means more value-added, which gets rewarded). Yes, it may mean more profits too, but again, those profits go somewhere. They are either consumed or saved and re-invested. Both of those create or at least maintain jobs.


-EcMan



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