Filed under: Capitalism, Economy, Foreign Policy, Politics | Tags: Economic Illiterates, Free Trade Agreements, Outsourcing Misunderstood
A Wall Street Journal/NBC News poll (Sept. 28) found that outsourcing was the top reason cited by Americans as the cause of the country’s economic problems. And the same poll found for the first time in years that a majority (53%) of Americans say free-trade agreements have hurt the United States. Wrong villain.
That’s probably an understandable sentiment, but a very dangerous one. Democrats are facing what purports to be a “wave” election, and they are desperate to shift the blame for the financial crisis that has created so much unemployment from Congress — where it belongs — to somewhere, anywhere, else. They’re apt to pass legislation that will have dire consequences. Trade wars are not pretty, and once started, hard to control. Look up Smoot–Hawley!
The AFL-CIO produced a searchable database of more than 400,000 U.S. companies and their subsidiaries it says have shipped jobs overseas. Organized labor is trying to stir up anti-outsourcing sentiment to energize union voters for the election, and creating a plausible enemy is one way to do it. Politicians are happy to exploit an issue that seems to have some resonance with the public, even if it is economically stupid.
There are always unintended consequences. Actions taken against another country prompt retaliation, including retaliation from companies abroad that hire American workers.
In 2007, Matthew Slaughter, an economist at Dartmouth’s Tuck School of Business published a comprehensive study of the hiring practices of 2,500 U.S.-based multinational companies. He found that when U.S. companies hired lower-cost workers overseas, their parent companies hired even more people here at home to support the expanded operations.
Between 1991 and 2001, employment at foreign subsidiaries of U.S. multinationals rose by 2.8 million jobs; during that same period, employment at their parent firms in the U.S. rose by 5.5 million jobs. For every job “outsourced” to India and other foreign countries nearly two new jobs were generated here in the U.S.
These new U.S. jobs were higher-skilled and better-paying — filled by scientists, engineers, marketing professionals and others hired to meet the new demand created by their foreign subsidiaries. …
In 2002 those subsidiaries [of foreign-based multinationals] employed over 5.4 million American workers, nearly 5% of total private–sector employment. They also paid American workers 31% more than their American nonsubsidiary competitors — an average of $56,667 per year.
That’s why we need some familiarity with economics. So many things are counter– intuitive, just not the way you would at first assume. NAFTA has been a great success, because it is not just the goods we import into this country— but the goods and services that Mexico and Canada buy from us, and they buy a lot.
Politicians are reacting to antitrade sentiment by enacting protectionist measures. You cannot assume that a politician has much familiarity with economics. During tough economic times, people are apt to look for comfort in protectionism. This is true of other countries as well, and those countries may well put up barriers against American investment.
But it’s important to know that a job outsourced to India may well create two jobs in Indiana. Keep that in mind, and don’t fall for the boogeymen politicians create.
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Hear, hear! Voices in favor of free trade are far and few in America. There is so much misunderstanding. What bothers a lot of people (most of my relatives and in-laws, for example, irrespective of their political leanings) in particular is that “Made in China” label on so many manufactured items. That, for them, is as much as they need to know. Try to counter that simplistic impression with information of how much value added in an iPod (design and engineering in particular) is generated in America and it usually falls on deaf ears.
Comment by Subsidy Eye October 12, 2010 @ 7:01 amFree trade is the way to go. This does not mean that we should overlook human rights and labor abuses in places like Red China, but we need to approach these issues from a standpoint of free trade as the starting and ending point in economic agreements with other nations.
Comment by zeusiswatching October 12, 2010 @ 9:14 pm