A common economic idea is that the choice of US citizens to buy cheap foreign products (e.g. from China via Walmart) is causing American jobs to lost, and is hence devastating for the US economy. I've read enough here over the past year to now understand this is a false idea.
I haven't been able, however, to find any article on this site that directly addresses this fallacy and refutes it. If anyone remembers such an article, I would like to ask if you could post a link to it in reply.
Thanks
Peter
Ludwig von Mises covers the topic in an article titled "The Economic Role of Saving and Capital Goods":
What elevates the wage rates paid to the American workers above the rates paid in foreign countries is the fact that the investment of capital per worker is higher in this country that abroad. Saving, the accumulation of capital, has created and preserved up to now the high standard of living of the average American employee.
What Is Free Trade? by Frédéric Bastiat
http://www.gutenberg.org/etext/16106
http://bastiat.org/en/petition.html
I don't consider it a fallacy, it IS true that buying foreign products decreases jobs DIRECTLY for the same product, BUT, it doesn't follow that it's overall bad for the domestic economy.
Conagain: I don't consider it a fallacy, it IS true that buying foreign products decreases jobs DIRECTLY for the same product, BUT, it doesn't follow that it's overall bad for the domestic economy.
In the very immediate sense one can say that free trade increases unemployment, but in the somewhat farther direct sense (strange I know), there's an increase in employment due to lower marginal costs brought about by international trade and international divisions of labor. The Mexican baker can buy his grain at a lower cost from efficient American farmers relative to inefficient Mexican farmers, almost immediately. In the long run, indirectly speaking, trade eliminates dead-wight losses and frees up labor for more productive economic ventures, leading to longer term efficiency and prosperity. So I wouldn't say that it directly decreases jobs; sure, the Mexican farmers see direct losses, but Mexican bakers, and whisky producers, see immediate gains (they can then higher more labor, or invest in more capital, ect,.)
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
keep in mind that jobs are not good things, they're only a means to an end.
if you truly want to make money, print money.
Pete:I've read enough here over the past year to now understand this is a false idea.
Oh, no, no, no... you shouldn't get off that easy.
If you understand why the idea (job losses) is false, then you should tell us why it is false.
If you tell me your idea of why it doesn't lead to job losses, then I'll tell you my idea of why it does in concrete terms.
Keith Ackermann: Pete:I've read enough here over the past year to now understand this is a false idea. Oh, no, no, no... you shouldn't get off that easy. If you understand why the idea (job losses) is false, then you should tell us why it is false. If you tell me your idea of why it doesn't lead to job losses, then I'll tell you my idea of why it does in concrete terms.
Read my response and get back to me, okay?
Ensuric is right. Jobs which go overseas are generally jobs that require less skills, and so unemployed persons in the United States tend to get jobs which require higher productivity (or, the person has to accept a lower wage). That is why von Mises said that there is generally more capital invested per worker in the United States. It frees up labor for more productive ventures.
In addition to what Esuric mentioned, US dollar spent oversees is eventually either kept, or spent back in the US. So, if a foriegn nation (e.g. China) keeps US dollars and never spends them, then we benefit in the aggregate from the exchange - we give them paper money (which is rather in expensive to create), and they send us lots of stuff we like to buy. On the other hand, if the foriegners spend the dollars here in the US, then there is no reason to conclude US employement has suffered for the worse (in the long run).
Jonathan M. F. Catalán: Ludwig von Mises covers the topic in an article titled "The Economic Role of Saving and Capital Goods":
This is an excellent article about capital accumulation, but I'm not seeing how it addresses the issue of the alleged advantage of buying domestic, over buying foreign.
I should add that I have not read the old debates about Mercantilism, but what I've encountered has left me with the impression that this was one of the issues refuted by the classic economists (e.g. Ricardo).
You buy a honda. You save money. That money you saved can be used to buy domestic products. Honda uses your dollars to purchase products, and that money eventually filters back into the US economy, as somewhere down the line, someone uses their increased income to purchase American goods.
There is another crucial thing to remember: absent government intervention in the money supply, there has to be a balance of trade and payments in the medium and long run.
When there was a world gold standard trade always balanced because of inflation/deflation associated with trade. Say there are two countries, C1 and C2. C1 purchases $100 bn worth of products from C2. C1 now has $100 bn less in currency and C2 has $100 bn more. Prices in C2 rise disproportionately, while prices in C1 fall disproportionately. This makes it more profitable for consumers in C2 to purchase products from C1, since prices are lower in C1. The money then travels back to C1, completing the cycle of trade and creating a trade balance.
Under the modern system of monetary nationalism, there should still be a trade balance absent government intervention. If the US purchases $100 bn worth of products from China, Americans need to trade $100 bn for the equivalent amount of Yuan (Chinese currency) at the prevailing exchange rate. This makes the USD depreciate in value as the RMB appreciates in value. All of a sudden, the Chinese have higher purchasing power than the Americans, which makes them able to purchase more American goods, evening out the exchange rate again.
The reason why the US has sustained trade and current account deficits for 25+ years has been due to government intervention via the Fed and other central banks. First, the Fed has promoted unsustainable consumption by keeping interest rates low, which has helped Americans borrow in order to purchase foreign goods. Second, this excessive money creation has also prevented prices from depreciating relative to Chinese prices, which has prevented the Chinese from having greater purchasing power in order to purchase US goods. Third, foreign central banks have kept their currencies at artificially low exchange rates to the USD by purchasing US Treasury Bonds, in effect weakening their currency (and thus keeping their citizens' purchasing power artificially low).
You have to remember that in light of this, trade quotas, tariffs, domestic tax policies, etc. all have exactly zero effect on trade. Trade is determined by monetary flows. Because monetary flows have been perverted due to these government interventions, America has been running high trade and current account deficits. Even if the US had absurdly high tariffs, trade quotas, and non-existent business taxes, while the rest of the world practiced free trade but had high business taxes, the trade balance would remain the same, due to government intervention in monetary flows.
Now, when you enter into an argument with someone about this subject and have to explain it to them, but they keep on interrupting you, just remind them that your political philosophy is more than just bumper sticker phrases and talking points. Make sure to say that. Too many times people throw around talking points, and its important to call them out on it. Dig deeper than something a politician might have posted on a billboard.
Political Atheists Blog
Look no further then Hazlitt's "Economics in One lesson". chapters 11 and 12 cover this very well:
Who's “Protected” by Tariffs?
The Drive for Exports
Esuric: Keith Ackermann: Pete:I've read enough here over the past year to now understand this is a false idea. Oh, no, no, no... you shouldn't get off that easy. If you understand why the idea (job losses) is false, then you should tell us why it is false. If you tell me your idea of why it doesn't lead to job losses, then I'll tell you my idea of why it does in concrete terms. Read my response and get back to me, okay?
Everything you say is true in a theoretical sense, but here is how I see it has developed:
US companies have shifted their labor force overseas with the selfish, and rational goal of obtaining the same level of productivity for less cost. This enables companies to deliver less expensive products, with the effect of selling more of them. That part works, and you only have to look at the growth of WalMart for proof. The growth of WalMart offset some of the domestic labor loss, but every time they added an employee, it was to facilitate greater cash outflows from the US.
These cash outflows to other nations came back to the US through purchases of US treasuries and other investments. We exported debt to them. The large purchases of treasuries helped keep interest rates low domestically, and this allowed people to buy on easy credit. Wages have been stagnant for quite some time, but low-liquidity assets appreciated considerably during this time, and that made people feel rich. When people feel rich, they spend money, but since they were not liquid rich, they spent on credit. They bought lots of cheap crap from WalMart and other places.
It was inevitable that credit limits would be reached in a society that consumed more than it produced, and that limit happened to be triggered when non-liquid assets such as houses and 401k's lost a good deal of value. With no credit, people couldn't buy stuff, and that meant job losses. Job losses means no prospect of higher wages, and it meant greater job insecurity, so even people with jobs spend less and worry more. That does not help sales.
It creates this dilemma: there are no cheap labor markets that can deliver goods that people without jobs and credit can afford. Cheap is relative to income. Credit masked the continuous outflow of money and giant increase in debt. Now we are in the paradox of thrift, and there is only one way out: we have to produce our way out of it, but who is hiring?