Globalization

Have you ever wondered what an argument among economists looks like? (No? Are you ill? Are you sure?) If you follow it chronologically, it just might look something like this.

Due to my (and I believe everyone's) stake in globalization, this is an argument I've been following closely. It's time for everyone's favorite armchair economist — that's right, me! :) — to enter the fray. Gather 'round and cozy up with your neighbor, you'll be here a while.

My contribution is in two parts.

First, I have published a new essay presenting the general positive case for globalization. You should read that essay before reading the rest of this article.

Below, I make specific responses to globalization concerns.

Dr. Paul Craig Roberts, whose work I've linked to previously, is an outspoken and influential guy. In the pile of links above, more than half are things he wrote. Of particular note is the statement he made before the U.S.-China Economic and Security Review Commission on September 25^th:

I suggest for your consideration that comparative advantage … has been undermined by the international mobility of factors of production. Instead of sectorial adjustments from changes in competitive conditions, we might be experiencing the flight of factors of production to countries where their productivity is highest.

…

The solution, to the extent that there is one, comes from Sir James Goldsmith: One free trade zone for the first world, one for the second world, one for the third world. When countries move from one world to another, they depart one zone and enter another. Foreign investment could continue, only US investments in China would be for that market, not for displacing US production in the home market.

This would deal with manufacturing. But what about knowledge workers hired over the Internet who work in their home countries for US offices? One solution is an employment tax on foreign hires. Multinational or transnational corporations could evade this tax by assigning foreign hires to foreign payrolls. More costly regulation would be required to attempt to determine which entity is the recipient of the employee's work. [source]

His statements, and similar statements by others, place me in the uncomfortable position of trying to save capitalism from the capitalists.

Roberts laments the fall in U.S. manufacturing jobs:

The U.S. with its population of 289,000,000 only has 14,727,000 manufacturing jobs left. If the US continues to lose manufacturing jobs at the same rate over the next 28 months, only 12.7 million jobs will be left.

Question: Will the U.S. still be a superpower when it can no longer make anything and is dependent on foreigners for manufactured goods? [source]

Am I the only one who is impressed that the wealthiest country on earth has so little of its population devoted to manufacturing? Manufacturing is following the trend of farming, becoming more capital intensive and less labor intensive. There was a time when half our workforce was involved in farming, but today it's only 2% (which you can check here with a little math).

UPDATE 2003-10-22 14:49:43 UTC: Edited the following paragraph.

The people who used to farm have not starved to death under the heels of their capitalist oppressors, rather they have gone into other lines of work and have prospered. There's every reason to believe that ex-manufacturing (or ex-technology) employees would do the same.

Roberts goes on to say, about our income:

Allegedly, we are gaining it back in lower prices from cheaper foreign-made goods. But once the trade deficit drives down the dollar, the foreign-made goods won't be cheap any longer. We will have the twin evils of high prices and lost incomes.

A lower dollar also makes exports more competitive, raising employment and incomes in export industries. Roberts does not acknowledge this fact.

UPDATE 2003-10-22 14:49:43 UTC: New information: Via EconLog comes this data about manufacturing jobs. Manufacturing employment since 1995 has fallen worldwide while output has risen. The drop in Chinese manufacturing employment was substantially higher than average, though how much of that loss was just due to trimming waste is unknown. The overall meaning of this is that more labor is now available for other things, which enriches us all.

UPDATE 2003-11-10 05:40:42 UTC: The article linked above wasn't persistent. I changed the link to use Google's cached copy, but in case that goes away too, here's the relevant section:

One of our more interesting findings is that, taken on its own, China's job losses are double the average of the remaining 17 countries for the same seven-year period. Manufacturing employment in the 17 largest economies other than China fell a little more than 7%, from 96 million in 1995 to 89 million in 2002. In contrast, China's fell a whopping 15% in the period, from 98 million in 1995 to 83 million in 2002.

Roberts also worries about falling wages:

A Chinese person working with U.S. capital and technology is just as productive as an American. The Chinese worker can be hired for much less, because living standards and the cost of living are far lower in China.

The huge labor surplus in countries such as China and India means that wages are not likely to rise very rapidly in those countries. U.S. firms that substitute Chinese and Indian labor for U.S. employees are building in lower labor costs for years to come. [source]

The notion that there can be such a thing as a labor surplus in the face of unlimited human desires is sheer nonsense. (Unemployment in depressions is a monetary phenomenon and I don't discuss it here.) The reason wages are low in China and India is because the productivity of their labor is low. The higher wages they earn in technology jobs reflect their higher productivity in those fields. They are not and cannot be paid "less than they're worth" for any length of time in a competitive labor market, because they would be bid away by other companies, in the same industry or in others.

A rising total population of workers in a specific area will depress wages in that area, but this is a normal consequence of economic competition and will helpfully cause some of those workers to move into other fields; it is not caused by "surplus labor" in any kind of general way. Surplus labor is a logical impossibility.

Roberts thinks high-productivity jobs will be permanently lost:

Americans have to seek work in their next best alternative when they lose their well-paying manufacturing and high-tech knowledge and service jobs to foreigners. By definition, these are less productive jobs paying less.

On the contrary, globalization creates specialist, high-productivity jobs and does not merely move them overseas. The only barrier to obtaining these jobs is acquiring the necessary skills, and the United States has the best postsecondary education system in the world. (That's why foreigners come here to study.)

Roberts does not think it likely that displaced domestic workers will move into other high-productivity jobs; I do. It only requires retraining. A well-trained workforce is a productive workforce, and will therefore automatically command high wages provided the employment is distributed in a way reflective of economic desires. It is a serious misunderstanding to believe that the number of high-productivity jobs is somehow fixed and that they're either held domestically or by foreigners. Productivity is not a zero-sum game.

In personal correspondence (e-mail 8/19/03), Roberts said:

Keep in mind, too, that however the adjustment, lower real wages or dollar devaluation, the result is lower US living standards. I'm afraid there's no way to avoid declining living standards. US wages, due to existing mortgages, price level, accustomed living standards, cannot adjust downward to Chinese levels. As long as factors of production are mobile and China has an absolute advantage in labor cost, factors of production will flow to China.

A loosely-related point: A dollar devaluation would affect living standards, but it would not cause a debt crisis, because our debts are dollar-denominated.

A dollar devaluation relative to the yuan (or renminbi) is probably inevitable, but not because of globalization destroying our economy. It would happen due to the unraveling of the Chinese government's currency peg of 8.3 yuan/dollar. (The economic consensus is that this overvalues the dollar.) This means that China has been subsidizing American imports of Chinese goods, artificially raising our living standards. While I like the Chinese currency peg for exactly that reason, I would be very understanding if it ended.

(I wish knew more about the origin of the currency peg. Send me links!)

I've picked on Roberts enough. The last concern I'd like to address is the rate of economic change caused by globalization. Faster changes are more difficult to adjust to than slower ones, but they do cause the new and better economic structure to come into existence sooner.

I do not believe there is any particular reason to favor faster or slower changes in principle, and I would oppose efforts to set the pace of change through legislation. The changes we see today due to technology globalization have already taken several years. Globalization in manufacturing has been occurring for decades. This is clearly sufficient time for forwarding-looking people to make appropriate plans for their future.

My hunch ("hunch" because I cannot robustly support it with theory at this time) is that the same forces of economic competition that create the need for adjustments in the economy also, through their magnitude, determine the rate of change. Laissez-faire is my default position.