John Kerry has been attacking Dean on the issue of trade lately accusing Dean’s trade policies of theatening to "send our economy into a tailspin"
Kerry is actually right on this one, and Bush’s record on trade issues is hardly stellar. Kerry is also right that trade barriers and protectionist measure hinder rather than help American workers.
However, the Democratic Party has all but abandoned the open trade policies that were one of the few success stories of the Clinton Administration in favor of the AFL-CIO’s misguided love of protectionism and American economic isolationism. Dean represents the core constituency of the Democratic Party, and that rabid core wants to see America close its doors to foreign imports. While Kerry is quite correct in pointing out that the subsequent raise in prices would destroy the lives of millions of Americans, that message is falling on deaf ears.
Indeed, Kerry is rapidly in danger of becoming political roadkill. He’s now finding Wesley Clark abrogating his position as the Democrat’s national security candidate and his campaign is finding it difficult to emerge from the limelight of Dean and Clark. The Democrats want a hard-core anti-war, anti-trade, and rabidly anti-Bush candidate, and Kerry’s vote to authorize force in Iraq and his trade policies mean that the party’s activist core will deny him the momentum he needs to break from the pack.
Interesting how its the “raise in prices” associated with protectionism that you suggest will destroy millions of American lives, not the millions of American jobs that will (or rather have) be destroyed by selling out to the globe’s lowest bidders. The long-term problem for you and your ilk on “free trade” is that the consequences of globalization have now reached the suburbs. When it was only a “blue collar” problem, nobody cared. As people who wear suits to work are now losing their jobs by thousands, the “open markets” crowd is gonna have a much harder time fear-mongering about “protectionist-driven higher prices” wiping out the economy and making millions of Americans suffer. There are no easy answers, but accelerating the pace of policies erasing job after job after job in America will hardly be popular or sensible.
Let’s say it costs $8 to pay a living wage in this country, and $1 to pay a living wage in Elbonia.
If I’m company X, and it costs less than $7 per widget to have those widgets made in Elbonia by Elbonians and have them shipped here, why am I going to keep making widgets here? (Especially if my “widget” is actually data, like phone tech support or programming.)
What part of this math am I doing wrong? With such a disparity of wage conditions across the world, how can free trade not cost American jobs?
OK, let’s run with that example.
First, we’ll deal with physical widgets. Obviously, it costs money to bring the raw materials in to Elbonia to build those widgets. It also costs money to ship the complete widget back to the United States. Let’s be conservative and assume that costs an addition $1/per widget. Your margin is down to $6/widget.
Of course, like many Third World governments, the legal situation is unstable. It costs several hundred thousand dollars to bribe the right officials, and even then there are frequent problems. That erodes your margin even more.
Then again, you find that a good third of your widgets are defective due to shoddy workmanship. They have to be replaced. There are also a few lawsuits over the issue. Suddenly your margin is only a few cents per widget – and that’s without taking into account the costs of moving the factory, getting the right permissions, and the other ancillary costs.
In other words, there’s nothing that stops American companies from leaving the country in droves right now. Ford could build every single car they make in Mexico or India. Why don’t they? Because the costs of labor are only one small part of the equation. It costs money to import raw materials, ship the finished product back to the states, and set up the factories in the first place.
Let’s extend the hypothetical to an Elbonian call center, which seems to be a more efficient move. Except the same legal hassles apply. It still costs money to set up a reliable phone and power system. Also, while most Elbonians speak English… sort of… not all of them do. There’s another hastle added to the mix. Given that call center operators in the US don’t make all that much to begin with, the difference in margins are so small that it doesn’t matter.
Programming is even worse. Elbonian programmers don’t have a clue, and software release dates slip because American programmers have to be brought in on contract to deal with all the bugs. Suddenly those margins in labor aren’t all that attractive anymore. (Indeed, this backlash is already taking place in the IT industry.)
Even if we argue that outsourcing is problem, there’s always the question of solvency. However, that’s a question I was about to write about, so you’ll have to wait a moment for that answer…
All these reasons why American job defection is not economically beneficial….yet it continues to happen…at a suffocating pace.
Keep in mind, that labor in itself is only a part of the cost of doing business in America. Funding all the benefits, taxes and especially the flawless and incomparable employer-financed health care system drive up the price of employment even more. Thus, the 8-1 ratio previously discussed is at least 15-1 when addressing the cost of employee maintenance alone…if not more.
Given that call center operators in the US don’t make all that much to begin with, the difference in margins are so small that it doesn’t matter.
I made $9.50 an hour in a call center. If the same person can do the job for $1 in Inda, and since the infrastructure is already there, again, what prevents American jobs from shooting straight overseas?
You’ve identified a lot of hidden costs of oursourcing, but what if you add those up and it’s still cheaper? What prevents American jobs from being lost?
If we establish that labor costs are the sole determinant of where a company is going to go, why aren’t companies already employing Indian or Chinese labor? It’s not as though India and China were just discovered, and it’s not as though there’s any law that has prevented this.
The reason is that while labor costs are one part of the equation, it isn’t the whole equation.
Consider this: the costs of labor in a place like South Dakota are dramatically cheaper than in Minnesota. Taxes and overall wages in South Dakota are both far, far cheaper than in Minnesota. The cost of living in Sioux Falls is a tenth of what it is in St. Paul. (Believe me, for the price of an apartmemt in St. Paul I could be getting a mortgage in Sioux Falls.)
So why isn’t South Dakota the business center of the United States? – After all, the labor’s markedly cheaper.
Because you can’t attract a strong enough work force in South Dakota. Gateway used to have its headquarters in North Sioux City, SD, but moved to San Diego because they couldn’t attract the kind of workforce they wanted, and the incidental costs of transportation and logistics quickly made up for any savings in labor.
The same factors apply to places like India and China, but even more so. Granted, your labor costs are cheap, but your incidental costs will kill you. You’re going to have less service dealing with people who are less educated than the average American workers, who are going to be less reliable just because they have worse living conditions and will get sick more, and you have to deal with a country where some politician can get a wild hare up their ass and make your life a living hell.
There are certain jobs that can be outsourced, and it’s a lot easier to outsource a call center than to outsource a factor, but even then businesses have to look at the bottom line. If cheap labor were so attractive then you would see businesses flocking to cheaper states in the US – yet that’s simply not the case.
Even if we accept that outsourcing is a sufficient drag on employment, what then? Do you ban the practice, meaning that companies might decide that it’s cheaper to stop offering phone support for their products? If you can’t afford to hire workers at nearly $10/hour you’re not going to just magically be able to do so because the government tells you that you cannot look overseas for a better deal. You’re going to take one look at the bottom line and say that phone support costs are too much to be bothered with and simply stop offering the service.
That’s the thing about protectionism – it’s a lie to the workers who think that their jobs are just going to magically reappear because Howard Dean will tell those evil capitalists to stop sending jobs overseas. If a company can’t afford to pay their workers, they can’t afford to pay. No amount of tariffs or barriers are going to change that fact. The government can’t subsidize every single industry in the country, and anyone who says otherwise is simply lying through their teeth.
The only way to fix the employment problem is to grow the economy, and you can’t grow the economy the same time you’re screwing over workers who depend on trade to save someone else’s job.
Comparing the cost of doing business in South Dakota with Minnesota cannot be realistically paralled with the cost comparison of doing business in India compared to America. One would account for about 25 cents on the dollar in potential labor cost savings while the other would account for more like 80 or 90 cents on the dollar.
Jeez: For more than 250 years now, the protectionists have been saying that America is going to “export” all our jobs. Somehow, we keep getting wealthier as a nation. Somehow, people keep finding jobs.
Protectionism is a religon. Those who adhere to it will never be sidetracked by facts.