Hello everyone,
This is my first post but I have been studying Austrian economics for a while now. I have a specific question to ask. Whenever the idea is brought up that if we could lower taxes and regulations and free up the market it would make corporations want to produce things domestically, people frequently say that it would ALWAYS be cheaper for them to produce things in China because workers are willing to work for nearly nothing. How can we compete with that? Maybe the regulatory system and tax system could be made friendlier to business but in a globalized economy, wouldn't it generate greater profits for most large corporations to always produce things in third world countries or emerging markets where workers are happy to work for much less than Americans would?
I hope someone here can help me with this question because it comes up a lot is conversations with liberals and others who scoff at the idea that reducing regulations and lowering taxes will mean more domestic production. I don't have a good answer yet, perhaps someone here could provide one?
Thanks.
1. How do Germany and Japan do it? They pay much higher wages than the chinese, and yet they are doing very well. what is their secret?
2. "What the protectionists don't bother to explain is why U.S. wage rates are so much higher than Taiwan. They are not imposed by Providence.'
3. Here is the answer to it all:
http://mises.org/rothbard/protectionism.asp
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In reply to 1, people usually say Germany and Japan successfully keep wage rates high because of protectionism. AFAIK, Japan is certainly protectionist and mercantilist.
Why are they net exporters to China? Why can't we be net exporters to China? What do they have that we don't?
If investment always and only chased the cheapest source of labor, then you would find a lot more investment in, say, Afghanistan.
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It's not just about price. You have to remember productivity. The US has the highest wages because the US has the most skilled workers. Now for those whose marginal productivity is lower than minimum wage, you face a problem. They get no income and businesses can't hire them. This is why Peter Schiff has been on a tear lately about minimum wage causing unemployment. If we want those low skill jobs to come back, and we really want to improve the condition of the poor, then we need to get rid of the minimum wage.
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They are net exporters to China because they tax Chinese goods heavily. At least that's the case with regard to Japan (I haven't studied Germany). Koreans too, tend to buy Korean garlic because the government will arbitrarily tarriff Chinese garlic at 600% if some old farmers demand protection.
I don't know why we would wanna be like them. Their goal is to work hard all day and never take vacations so that they can export stuff and then get shiny MONEY (yay!), then buy a $40 restaurant meal with it because their markets are so protected.
Americans are smarter. They let Chinese people work all day for them, and the Chinese government extort from its citizens, in order to subsidize Americans and give them free stuff. Good deal IMO.
In spite of all that's been said and done, the US still has an enormous industrial base and is still one of the world's leading exporters. The problem is how the industrial base has changed since the '50s and the early '60s. This is in part due to changes in regulation and taxation, but is also part due to the changing nature of the global economy. Since the '50s and the '60s most of the world has opened up for trade with the US, including the former "Red Menace", China and Russia.
Where the American (and also German and Japanese) industry excels is at products requiring high capitalization per worker. Examples of this are advanced microprocessors, "exotic" chemicals, sophisticated machining tools etc. In these sectors labor costs aren't as paramount as in "low tech" industries (a sweatshop producing 100% cotton t-shirts for example): what really matters is the capital invested in making the workers productive and to acquire the latest technologies.
As you rightly said even by reducing legislation and taxation it would still be cheaper to just buy some goods from China or Taiwan. These goods, not surprisingly, would be those requiring low capitalization per worker. But it wouldn't matter: the US could sell more competitively priced goods requiring high capitalization and just buy the rest. That's called division of labor.
Of course there's a big question. Due to legislation and taxation concerns and thanks to advances in industrial automation relatively high tech products can now be manufactured in countries with low capitalization per worker. Two examples: the iPhone and the XBox 360. Both are designed and sold by American companies but both are manufactured in China. While it's pretty obvious these products are not on par with, say, a top of the line molding machine, they still require a whole lot of capital to be designed and manufactured. Would a reduction in taxation and regulation convince Apple and Microsoft to move their assembly lines back to the US? That's the big question.
Domestic production would be encouraged if savings rates increased, because more savings would mean more investment, meaning more capital per worker, meaning workers could be paid higher wages while still remaining internationally competititive. If an American factory had twice as much capital per worker as a German factory, for instance, its workers would be twice as productive, so it could afford to pay them twice the wages of a German worker and still remain competitive (http://mises.org/daily/5455). Japan and Germany have had, historically speaking, much higher savings rates than America, which helps explain their ability to remain competitive in manufacturing, due to them having more capital invested per worker, and China too has a high savings rate, around 50% of GDP, which certainly hasn't done its manufacturing industry any harm. Savings rates would increase naturally if the state monopoly on currency was abolished, as the sound money that replaced it would mean higher interest rates than the current Fed-induced 0% (creating more incentive to save), and inflation would be almost non-existent, increasing the value of savings. They would also increase if the welfare state was eliminated, as people would have to save to fund their own retirement and to support themselves during periods of unemployment.
Why should there be any production in the US as long as they demand higher wages than the competition?
Excellent post, Mad Miser.
Very true.
The q is, since that obviously cannot last forever, or even much longer [the Chinese cooolies are committing suicide in protest of exactly that, which the govt there kinda listens to], and we don't have the industrial base to make our own shirts, as Kakugo pointed out, what will we do?
I don't think high wages are the problem. Germany and Japan have high manufacturing bases with high wages. I believe it's quite a few factors such as onerous regulations, high taxes, expensive health insurance, and the lawsuit happy culture that all contributed. Certainly the fiat money system doesn't help either which allows the US to run endless trade deficits, which could not be done under a gold backed currency.
Germany produce/export high quality products.