Friday, March 05, 2004

The Orlando Merry-go-round

Trying to have a reasonable discussion on an emotional subject like free trade is very difficult. I imagine it’s just as difficult as discussing mechanization was two hundred years ago. We now accept that even if a new manufacturing process makes some jobs obsolete, it makes the product cheaper and is a boon to the economy. There was a time however, when many people believed that mechanization would (absolutely) destroy jobs and destroy the livelihoods of those who did not already own the means of production. Those people were lead by Marx and Lenin and for all their emotion and bluster, they and the Luddites are now just regrettable footnotes in history.

With the advent of outsourcing (a new way to make more things with less money) a whole new batch of Luddites and wanna-be-Marxists are being torn from the thigh of Zeus. As you can see from my discussion with Anti-free trade David Orlando, they never let logic get in the way of a good argument.

Try this one out for size: Orlando argues that expensive labor induces companies to invest in R&D, so switching to cheap foreign labor is bad. One wonders why he doesn’t just argue that expensive labor induces companies to invest in R&D, so switching to cheap mechanized production is bad. The arguments are exactly the same. Orlando pretends that if a company’s owner doesn’t invest in its own R&D the money will just disappear. In reality, the original profits (along with the savings from outsourcing) if they were to be invested at all, will be invested in whatever R&D looks most profitable regardless of the situation. Yes, mechanization and outsourcing make products cheaper and investment in that sector less profitable, but this just means the money will be better invested elsewhere. In both cases the economy benefits. There’s more money to invest, and cheaper products to buy.

The second argument he makes is very weak, but at least its logic is internally consistent. He argues that outsourcing decreases national production. The phantom factory mental experiment proves that this is no problem in and of itself so Orlando has to find a reason to worry. He refers to an article that argues that relying on other nations to make our products is dangerous because production in those countries may be disrupted someday.

Again, this outsourcing question can be rephrased as an automation question: What if the factory’s computer program has a bug and production gets halted? If you believe in Capitalism like I do, then you agree that companies are better equipped and have greater stake in correctly calculating a country’s instability then the federal government. Orlando doesn’t trust companies to safeguard their production chains and would rather socialize that decision. Even a big government liberal like me doesn’t like the sound of that.

Interestingly, his argument can easily work the other way: By incidentally helping other countries, we decrease the chance of dangerous interruptions to their politics. Capitalists have a wonderful way of easing a country into a reasonable and safe democracy that doesn’t want war because it’s bad for business. Furthermore, since America will always have a much more varied economy than other countries (just by reason of our diverse environment and large habitable area) we will have more leverage than other countries. An embargo on India would be cheaper and less bloody than ground troops.

The economic growing pains brought by outsourcing, like the difficulties wrought by mechanization, should not be belittled. Outsourcing and automation creates winners and losers and the government should not ignore those who lose their jobs. I believe that programs to support and retrain workers whose jobs have been outsourced or automated is only fair. Perhaps, as John Kerry proposes, such programs could be funded by a small tax the outsourcing companies themselves. What we shouldn’t do is close the door on any way to absolutely increase efficiency. It doesn’t take a genius to see what would have happened to England had the Luddites won out and the industrial revolution taken place somewhere else.

Update: I let the horribly wrong arguments distract me from the one that’s just really wrong. Yes, the difference between the phantom factory and a real one is that the phantom factory shuttles money over to foreigners, but this isn’t a problem if the foreigners spend money on our goods. Free trade is when two countries drop tariffs on each other at the same time after all. So while we outsource some things to India, (and India outsources some things to us) Indians purchase more American products. The reasons why this cancels out is detailed by another great economics thought experiment. I’ll probably have to walk Orlando through it later so stay tuned.

posted by Tommaso Sciortino at 2:18 PM

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