Sending jobs overseas

“What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.”

― Adam Smith

Lots of people, politicians in particular, make a big hullaballoo over the idea that many large U.S. companies are sending our jobs overseas.  In so doing, we see only the most visible part of this transfer and ignore important hidden components.  So, let’s explore this with an example.

Imagine you have a choice of two grocery stores: one nearby owned by John; the other a bit further away owned by Yuri.  Even though they sell the same brands, Yuri’s prices are lower than John’s.  John believes he has a significant obligation to his employees, so he pays them well and has chosen not to deploy some technology because it might worry his loyal employees about job stability.  Yuri has taken advantage of every technology improvement available and has thus been able to reduce his total labor cost.

Because of that, Yuri’s prices are 10% lower than John’s.  Let’s also assume you know John personally and your kids attend the same school so you want to support his business.  But, for a family spending $1000 per month on groceries, this means $100 per month in extra cost for shopping at John’s.  How long would you continue to shop there?  In other words how long would you continue to make your $100 monthly charitable contribution to John?  Not long.

So you change grocers.  But once you do, what happens to that $100 you are no longer spending at John’s?  Does it simply disappear?  Of course not!  You are free to use that money in other ways, such as for clothing, schoolbooks, etc., even savings for some future investment or purchase.

Now let’s change the picture slightly.  Imagine that John’s and Yuri’s businesses are not groceries but are, instead, parts suppliers for an appliance manufacturer.  This appliance manufacturer will save money by buying from Yuri.  Like you, the owner can put this savings to other uses, such as lowering her prices or investing in plant and equipment to further improve productivity.  Her savings would be a net benefit to her customers and employees alike.

Now, one last change.  Imagine that Yuri’s plant is not in the U.S.  How does that change anything?  If you would buy your groceries from the low-cost grocer, why should any business not buy its components and supplies from the low-cost supplier?  Even if the supplier is “un-American”?  If another manufacturer, foreign or domestic, can make a product less expensively than we can, why should we object?  Let’s take the savings and invest it elsewhere just the same as you would for your own family.

A simple way of looking at all of this is to think of money as nothing but a yardstick which measures productivity.  If someone else can do something more efficiently (less costly) than we can do it our selves, why not let them?  That, in turn, by our money yardstick, makes us more productive because we have accomplished the same with less money.  And he who is the most productive will be the most prosperous and will enjoy the highest standard of living.

But is this true if we look at it from a national perspective?  If we draw a figurative fence around America, doesn’t John’s loss of business result in a net loss to our economy?  After all, we could either keep $1000 inside the fence or send $900 to someone on the other side of the fence.  When stated that way, it is a clear net loss.  But that only looks at one side of the transaction, the monetary side.  In exchange for the 900 dollars going over the fence, we have $900 worth of goods coming back in.  It is an even trade.  In fact, considering that the other option was to pay John $1000, we are, in a way, bringing in $1000 worth of goods for only $900.  In reality, we are trading 9 small portraits of Benjamin Franklin for $1000 worth of goods, so who, really, is getting the better end of the deal?

This should also make it clear that this talk by all political hucksters and their comrades in the boardrooms about trying to keep our jobs from being shipped overseas is utter nonsense.  We should make our business purchase decisions the same way we would make our personal purchase decisions – buy from the low cost supplier (assuming product equality, of course).  There is separate argument, of course, that the high income tax rates politicians impose on successful businesses does drive jobs overseas, which in fact does hurt our economy, but that’s a topic for another day.

If you are like most people, it probably still feels a bit counterintuitive to send our jobs overseas.  It feels to us that we would be better off by keeping jobs here; there is a gut feel that we should protect “our” jobs.  But where do we get that feeling?  That gut instinct is inherited from our tribal ancestors.  They spent hundreds of thousands of evolutionary years learning that cooperation within the tribe benefitted both the individual and the tribe.  They trusted those they knew in their own tribe and distrusted – rightly so – those potential marauders from other tribes.  So, intuitively, instinctually, we believe we should protect the “us” and distrust the “them”.

But, can we set aside the tribal instincts and look at the facts?

If China can make some things more cheaply than we can, even if they have to manipulate their currency to do so, why should we object?  If China can produce some goods at a lower cost than we can, why not just take that dollar-measured improvement in our productivity and go on to other things?  If we so strongly believe in free market capitalism, why would we be afraid of China’s command economy?  If we truly believe the cumulative intelligence of free people acting in their own best interests is far superior to the combined intelligence of those few bureaucrats driving a command economy, why spend one millisecond of concern on China?  A free market economy will always outperform a command economy.  Always.  China might pass us in total GDP but – as long as we remain free – it will never pass us in per capita GDP.  Never.

Let’s just take the savings China is providing and invest it somewhere else, which will turn into other jobs in other industries, and we will all be the better for it.