Thank you, come again?

Let’s be honest — Joe Biden has made much more offensive comments about persons of Indian descent in the past. However, this video did not offend me because of the off-color nature of the comments.  Rather, it offended me because it shows a poor understanding of economics and global trade. Not to mention  a poor memory regarding advertising — you gotta get the name right for the joke to work.

This is going to be a long post, so skip away if you don’t want to read it. If you do want to, make the jump.

Full disclosure here, I once worked in a call center for MBNA Bank in high school. I made a base rate of $8.25 an hour plus some commission, which wasn’t too bad for Cleveland, especially for a high school senior. I even had to wear a tie to work, which wasn’t a big deal given that I wore ties to school every day — I don’t even wear a ties to work now. Given our federal and state laws, there are price controls on wages — minimum wages. This is bad economic policy and do not work, but I know first hand that call centers did/do exist in the U.S. and they pay above the minimum wage (which was like 5 bucks back then). We have call centers.

Anyways — call centers and outsourcing. Why do I have a gripe with our Vice President’s train of thought? Let me explain:

Biden’s comment was a slightly off-topic aside from his main focus, which was bringing manufacturing jobs back to the United States. This is a key, red meat populist issue for the Democratic base and those with a poor understanding of labor statistics. These people actually believe the hackneyed, red herring refrain is that “we don’t make anything anymore.” This is something I have previously examined, and it is false.

We make a ton of things! We just don’t make the things that people think we should make, which is an absurd argument. Should we make everything? No. Let people specialize and let us reap the benefits.

My thought is let call centers be located where the comparative advantage exists. If we start trying to force them to locate in inefficient places that have higher costs, consumers suffer because they pay more. It reminds me of a recent news story about where our trinkets are made.

CATO’s Sallie James laments:

 “Why is it embarrasing that we no longer manufacture trinkets here? It’s not embarrasing to me that we’ve got better things to do with our human resources. We still manufacture plenty of stuff in America. It’s just not the stuff you see on the gift shop shelves. Aircraft, heavy equipment, semi-conductors — does he [Sen. Sanders] really want to regress us back to the days where American manufacturing sector no longer makes aircraft, it makes snow domes and baseball caps?”

Her comment was in regard to the fact that foreign-made baseball caps were 50% cheaper than domestically made caps in gift shops at Smithsonian museums, something that Senator Bernie Sanders made into a personal battle.

But what about call centers? Shouldn’t businesses have the ability to source their production where it is most efficient and provides the greatest value to the consumer at the lowest cost they are willing to pay? Yes, yes, a thousand times yes. This is what efficient markets are supposed to do.

Sadly, this example of comparative advantage was taught to us at a young age, and either promptly forgotten, or in some cases, ignored by politicians and voters. I remember Mr. Thompson, my grade school history teacher, explaining the theory to us, and it made sense. Why doesn’t it make sense 15 years later?

Probably because people cling to this antiquated notion of “buying local” which we’ve covered a lot here on the blog. Buying local, or even “buying American” for its intrinsic sake doesn’t make sense. Do you go down the street to your local computer manufacturer? What about your local pen maker? Paper maker? Ink manufacturer?

No — you buy these things from companies that have operations around the country and the globe. They deliver these items to you at the lowest cost possible. If we had to buy all of our worldly goods from local manufacturers, we would be immensely poorer. People in Wisconsin might pay less for cheese, people in Idaho less for potatoes, and so on. But what about the rest of us? We trade with each other because cities, states, and regions and people specialize. Some areas have good climates for cows, others good for potatoes. Others have a good labor pool to make steel or favorable weather to do a certain activity. Government plays a factor since there are different regulatory and tax climates in cities, states, and countries.  When choosing where to expand or locate a venture, individuals and businesses are rational actors, they go to the most propitious climate. If where they are becomes less beneficial, they move elsewhere.

I know many people wished the world worked differently, but it doesn’t. For the most part, this is the economic law of the land. Of course, there are examples of intervention that prop up markets or industries both here in America and around the world. Because in some authoritarian or communist governments there are state-sponsored industries, we somehow feel the need to counter-sponsor/subsidize our own industries. We’ve long sponsored steel (which really worked out well for Cleveland) and more recently, banking and auto making.

Why? No good reason. Other people do it too. It is like we’re applying the logic from the hit song from the Cranberries — “Everybody Else Is Doing It, So Why Can’t We?”  Subsidies are inefficient and harmful to efficient markets.

But politicians do it because it means jobs in their district. And they do not care about the costs or unintended consequences.

Riddle me this:

What’s better for the American economy? Losing steel jobs to foreign manufacturers who may get government help, or spending/costing the economy billions to subsidize our own steel plants?

The answer is obvious, but hard to accept. It’s better to lose jobs and have foreigners subsidize those things than to counter subsidize them.

Milton Friedman posited that:

 “There’s a big human cry about the steel industry, and about imposing higher tariffs or import quotas on [foreign-made] steel.  Now every ecologist in this country ought to be on the right side of that issue, which is the free trade issue. If Japan chooses to subsidize the export of clean air to the United States, why should we object? Isn’t that what it’s doing when it sends steel here? But here, we have this great human cry that we somehow or other subsidize steel — either by tariffs or quotas or in other ways — to enable steel to produce both its products and its pollution at home… Let us suppose for a moment that the Japanese flood us with steel. That will reduce American employment in the steel industry no doubt. However, it will increase employment elsewhere in America. We will pay for that steel with dollars. What will the Japanese do with the dollars they get for the steel? They aren’t going to burn them, they aren’t going to tear them up, if they would that would be best of all because there’s nothing we can produce more cheaply than green pieces of paper… They’re going to use those dollars to buy goods and services. They’re going to spend them… So the dollars that we spend for the steel will find their way back to the U.S. as demand for U.S. goods and services. You will have less employment in the steel industry, you will have more employment in the industries producing the goods we export. Overall, total employment will not be affected, but overall the American consumer will be benefited.”

And to get this out of the way, I’ve never bought into the rhetoric that we have to subsidize our industries because others subsidize theirs. Similarly, I think the fears that once domestic manufacturing closes or moves we’ll get hosed on prices. That’s not how markets work. If that happened, other markets would open to counter.

Friedman was right — if you look to the basics of comparative advantage, people are more prosperous when individuals specialize. To say otherwise is to force  people who aren’t specialists or the most efficient producers to do a job that could be done better and more effectively by others. That makes no sense, and pursuing that economic policy will make us poorer.

A final example: people love Apple products. I’ve had a falling out with Apple as of late, but I will still buy iPods for the foreseeable future, but most people really are obsessed with their macs and iPads. Now this hit close to home, but while Apple products are designed in the United States, practically 0% of them are manufactured here.

Is this bad? No. Apple has to compete with Android phones, tablets, Windows phones, PC’s and other competitors. You have a choice when picking a tech product and Apple knows it. Because of this, they have an obligation to get you the best product at the best price. If they don’t do this, they will not get money from investors, and people will not buy their product.

The late Steve Jobs got this. Reihan Salam noted in National Review that:

“And yet when Jobs returned to Apple in 1997, he returned as an angel of destruction. He fired over 3,000 employees, a move that helped swing Apple from a $1.05 billion annual loss to a $309 million profit. He shut down Apple’s manufacturing facilities and outsourced almost every aspect of production. He swung the axe pitilessly, since he was convinced that survival requires leanness. And in the 14 years after Jobs returned, employment levels at Apple soared. Apple’s manufacturing work force was eventually replaced by engineers, support staff, and — in a move that would have surprised many in 1997 — a vast army of retail employees. The destruction was a prerequisite for the creation, and for the transformation of a wounded technology firm into one of the world’s most valuable public companies.”

Is Steve Jobs some America-hating, outsourcing asshole? Not at all. Steve Jobs understood how economies evolved and took Apple to the heights of greatness.

But it raises an important question. What if Vice President Biden decided to make the focus on manufacturing? Never mind, that was his initial focus. Another question: If your Apple product of choice cost, say, 25 to 50% more, how much more likely would you be to buy a comparable product made in a country other than America? Some Apple devotees would give their left kidney to buy the newest and best thing, and those people are idiots. Rational people would compare the benefits and the cost and make the decision that works best for them.

But, if our strategy to make things in America is to use tariffs and other harmful gimmicks to artificially boost manufacturing or call center employment, consumers lose big. Why is it imperative that we have them?

The best policy should be to have the most competitive tax and regulatory climate in the world so businesses would be stupid not to locate here. Sure, we won’t manufacture or do everything, but we’ll do what we do best, and our consumers and the world will be a better place because of it.

Russ Roberts noted:

When I talk about the idea of “buying local” I often say that we’ve tried the “buy local” experiment, it’s called the Middle Ages. In the Middle Ages, we mainly bought local and pretty much everyone was poor.

That’s not to say that we can’t make anything these days. We do. But we don’t need to make everything. We’ve tried that, and life was horrible for those people. In the past,  I called these people advocates of Cher Trade Policy because they really want to “turn back time.” More directly, these people are unknowing luddites.

In closing, I will paraphrase Sallie James: “do we really want to regress us back to the days where Americans no longer design iPods, but it now assembles them and runs the world’s call centers?”


Heritage: Trade, Tires, and Jobs

WSJ: The end of Japanese Mercantilism

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