Let’s Regulate The Weather!

I’ve had it with all of this cold. I mean, seriously? It should definitely be warmer.

I’ve had it with all of this economic malaise. I mean, seriously? There should be less unemployment.

Those above two quotes are ones I have made up from overhearing people of varying understanding opine about the two topics. To me, you can control the weather just about as well as you can control the economy. Understanding each, however, takes a lot of practice and study. Even then, it’s impossible to completely understand either.

It’s so cold out because of global warming.

Unemployment is so high because of outsourcing.

First off, it’s colder outside because of global warming is kind of a hilarious statement to make. Most people in the “climate change” industry call it that because arguing that warming is making it colder doesn’t tend to convince skeptics. Similarly, making a claim that our unemployment situation is the way it is only because of outsourcing is absurd. Yes, jobs do leave the U.S. for other countries. Some jobs disappear altogether when companies fail, merge, or utilize new technology. Other times, companies (like Pepsi) make their product closer to market due to shipping costs and degradation of goods.

Imagine if Pepsi were required by U.S. law to make all Pepsi products for global consumption in the United States, or we would tax the hell out of them — say at a 75% rate. Well, if Pepsi complied with the law, Pepsi would be pretty expensive to the French and Chinese, since getting it over there safely and quickly would make it really expensive. Foreign cola producers would dominate, and Pepsi would cease selling their products abroad. Less money for an American company, less Americans employed abroad, and all in all a bad policy.

But is this outsourcing? No. True outsourcing would be if Pepsi closed all U.S. plants and sold us Mexican or Canadian Pepsi, and that’s not the end of the world, either. We’ll get to that later.

Let’s take companies like Nissan, Toyota, Honda, and BMW as an example. All of whom are foreign companies that have plants in the United States that make cars. To the Japanese and Germans, they might consider those plants “outsourced” jobs that ‘belong’ to their people. But in reality, it’s those companies making the best decisions on how to go about producing and selling their products. If Japan taxed the hell out of Honda for making cars abroad like we did in our Pepsi example, Honda wouldn’t make cars in Ohio. As a result, the shipping costs, insurance, tariffs, and delays of bringing the product to market would make Honda a less viable alternative. People would buy less Hondas. American consumers would be priced out of a product that they might prefer to GM, Ford and Chrysler because of this policy.

Policies like these diminish consumer choice, and the freedom of people to make decisions in their best interest. Not to mention, these backwards policies hurt the companies they purport to help. If Pepsi is able to maximize profit abroad, that gives them more money to spend to improve production in the United States (even though we are one of a handful of nations that taxes foreign earnings doubly.) Similarly, if Honda sells a lot of cars in the United States, it enables them to invest more in Japan or Europe or anywhere.

But at the end of the day, what free markets are about is delivering to the consumer the best product at the lowest price they’re willing to pay, as this ad shows. If that means that GM or Ford makes parts or cars in Canada or Mexico, so be it. If everyone wants to “buy American” I posit this — what’s more American, a car from a U.S. company made abroad or a car from a foreign company made domestically?

The point is we’re a global economy. If we want to turn back time, we can adopt a “Cher trade policy.”

I earlier wrote this, and I feel it applies in this instance:

Ohio lost a lot of jobs to places like Texas, which had a better business climate. What’s the better solution? Levy a tariff on Texas-made products in Ohio? Or change our ways and compete to get those jobs back?

Clearly, the answer is the latter. Ohio hasn’t gotten that message. On a larger scale, America hasn’t gotten that message.

Embracing protectionism and shunning technological advancement are naive, costly ways to try and “turn back time.” The only real way you can turn back time is with Doc Brown and a DeLorean.

Ignore globalization at your peril. We can make things here, we do make things here. We make a ton of things here. If you want more manufacturing jobs and output, the best solution is to make America a better place to do business. Trying to tinker with protectionism forces equal and opposite reactions from trading partners that hurt other jobs.

And while true outsourcing does lead to lost jobs in the U.S. economy (I’m talking moving a factory from Elyria to Toronto in the middle of the night like the Baltimore Colts left) it doesn’t lead to economic mayhem. Per a recent CRS report:

By the end of 2007, there were more than 2,300 U.S. parent companies with more than 26,000 affiliates operating abroad. In comparison, foreign firms had about 11,000 affiliates operating in the United States. U.S. parent companies employed over 22 million workers in the United States, compared with the 11.7 million workers employed abroad by U.S. firms and the 6 million persons employed in the United States by foreign firms. Although the U.S.-based affiliates of foreign firms employ fewer workers than do the foreign affiliates of U.S. firms, they paid almost as much in aggregate employee compensation in the United States as did the U.S. affiliates operating abroad.

Which makes sense. We have the most productive workers in the world, at least from extrapolating our output per unit of labor. So, it would typically take less employees here to do what it would take more employees abroad to do. As a result, those fewer employees get paid more.

It’s like the following examples we alluded to earlier: Pepsi might make cola in Japan when they can make it here, but that makes no sense because it’s cost prohibitive. Similarly, Honda can make cars here instead of Japan because it, too, is in their best interests.

Just as it’s in the best interests of the livestrong bracelet maker to make them at the lowest cost. If the goal is raising money for livestrong, you can imagine their consternation if people aren’t as likely to pay $2 for bracelet that they could sell for $1 at a profit if it were made in China compared with the U.S.

At the end of the day, economics is all about the allocation of scarce resources: be they capital, labor, or intellectual knowledge. Any attempt to change the laws of economics is about as futile as trying to change the laws of nature. Sure, you can try, but if and when you fail, people are hurt because of it.

One of my meteorologist friends got wind (it’s a pun! get it?) of the idea for the blog post. I told him the idea was this:

Jim: the crux of my post is that you can regulate the economy just about as well as you can regulate the weather.

Weather expert friend: Sounds about right. The funny thing about both is that you can try, but you can never tell if you were successful because there’s no independent dataset. I could attempt to seed a cloud, but there’s no way I can be certain the cloud wouldn’t have developed had I not seeded it.

Speaking of which, I’d really like to regulate the weather. If you could keep it at a balmy 65°, I’d appreciate it. Now get to work.

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