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Monday, April 15, 2013

An Exchange of Views on Off-Shoring

On February12, 2012 I posted an entry on Netcafe entitled "Those Who Ignore Economic History Are Doomed to Repeat It." The principal idea in that post was that there were similarities between the motivations for and effects of the enclosure movement in the UK, mainly in the 18th C, and off-shoring of manufacturing jobs from the US since the 1980s.  Recently I forwarded copies of that post to members of a 12 person discussion group in which I participate -- we are all retirees and have had careers in many different fields: journalism, economic research, diplomacy, law psychiatry, medicine, engineering, physics and intelligence. I only got a reaction from one member.  He is very well read and currently studying econometrics at George Mason.  This was an exchange of emails, but I have reversed the order so you can read through from here at the top:

 To John.. FYI I’ve run into ‘enclosure” type laws in the early 1800’s in my studies. Seem like there was a food shortage during the Napoleonic wars and common land was used to grow more “corn”. Ricardo et al realized that this land was more marginal than regular crop land and extensive musing on this lead to the “law of diminishing returns” in economics.  Not clear on connection of enclosure with globalization.

Reply:   I thought the connection was clear. Enclosure took away the use of common land from small farmers and turned it into higher incomes for large landowners; closing factories here and shipping jobs overseas takes away the ability of workers to earn decent wages in manufacturing and increases incomes for business owners. Both movements promoted growing inequality of incomes. Maybe the difference is that enclosure was tantamount to theft, while shipping jobs over seas was just greed, lack of social consciousness and failure to appreciate the long term consequences of the short term increases in income.

To John:   It's an interesting allegation that "shipping jobs overseas"is a manifestation of greed. I know we will not agree on this issue but I note that the idea of shipping jobs overseas basically ignores that idea that many US companies have become truly global. The following is from Wiki article on GM:

General Motors Company (NYSE: GM, TSX: GMM.U), commonly known as GM (General Motors Corporation before 2009), is an American multinational automotive corporation headquartered in Detroit, Michigan, and among the world's largest automakers by vehicle unit sales,[3] employing 202,000 people[1] and doing business in some 157 countries.

General Motors is divided into five business segments: GM North America (GMNA), GM Europe (GME), GM International Operations (GMIO), GM South America (GMSA), and GM Financial.[4]:p.12/13"

General Motors produces cars and trucks in 37 countries, and sells and services the vehicles through the following brands: Chevrolet, Buick, GMC, Cadillac, Baojun, Holden, Isuzu, Jie Fang, Opel, Vauxhall, and Wuling."

As far as I can see from a list of GM factories (also on Wiki), that US models are built in US (and Canadian) factories). Foreign models are built in foreign factories with foreign workers. Not sure I see any evidence of shipping jobs overseas..

Reply:  "Allegation" is at least as highly charged a word as "greed."  Besides that, thanks to Gordon Gekko, we know that "Greed is good."  I hope I didn't suggest that it was bad, and I did give two other possible reasons why reasonable people may ship jobs overseas, the last of them being by far the most important: failure to appreciate the long term consequences of the short term increases in income.  Just as you can't finance a government by taxing the rich, so you can't have a successful, expanding economy by selling only to the rich.  To create enough potential demand to match the supply generated in a modern economy, you have to pay the workers.  Right now we are not doing that.  The Germans are not perfect by any means, but they do have a formula that's working pretty well right now.  Workers sit on corporate boards and corporate decisions take into account the interests of both stock holders and workers.

As for your example of General Motors, it's fortunate that the onerous new USDA rules on harvesting fruits don't apply to this type of cherry picking.  Yes, GM for a couple of generations has operated as a global company.  When import duties were sky high everywhere, their formula made sense and presumably it still does, because as trade barriers have come down, GM resources have flowed both ways and GM has benefited from classical comparative advantage.  Their participation in the integrated US-Canadian auto market is a case in point.  GM's operations are quite different from many of the companies that followed them abroad in our "globalized economy."  Although it's hard to fault the decision of any individual company, it's also hard to understand why they didn't try harder to stay here.

(Why does GM's problem introducing the Nova into Spanish speaking countries keep popping into my head)?

To John:   Look up Mercedes on Wiki to see in how many countries they make cars.  Same story for BMW!

Reply:   Mercedes and BMW certainly strengthen the point you made with the example of GM.  Almost anywhere in the world except the US, when you jump into a taxi, it's likely to be a Mercedes.  There is no question, I think, that the economic and national interest results of off-shoring and out sourcing are a mixed bag.  I went to college in the 1950s in Worcester, Mass.  The town was a wreck.  All the industries had moved south to escape unions.  I gather that things are somewhat better now in Worcester and I know they are better along Route 128 around Boston, which also lost it's "19th C" industries to the Southern states.  On the other hand we have towns throughout the Midwest right now which aren't just dying; they're dead.  The factories that were the principal employers were disassembled and shipped to Mexico or China.  Perhaps this was the correct course for each and every corporation's individual interest, but there is still a social cost.  Who is to pay it?

I googled "off-shoring" and found reams of articles, including many which say "not to worry" or "it's over" or "economists are divided."  So I cherry picked a paragraph from Wiki:

"Impact on jobs in western countries

The Economist reported in January 2013 that: "High levels of unemployment in Western countries after the 2007-2008 financial crisis have made the public in many countries so hostile towards off-shoring that many companies are now reluctant to engage in it."[14] Economist Paul Krugman wrote in 2007 that while free trade among high-wage countries is viewed as win-win, free trade with low-wage countries is win-lose for many employees who find their jobs off-shored or with stagnating wages.[15] Two estimates of the impact of off-shoring on U.S. jobs were between 150,000 and 300,000 per year from 2004-2015. This represents 10-15% of U.S. job creation.[16] U.S. opinion polls indicate that between 76-95% of Americans surveyed agreed that "outsourcing of production and manufacturing work to foreign countries is a reason the U.S. economy is struggling and more people aren't being hired."[17][18]

The increased safety net costs of the unemployed may be absorbed by the government (taxpayers) in the high-cost country or by the company doing the offshoring. Europe experienced less off-shoring than the U.S. due to policies that applied more costs to corporations and cultural barriers.[4]"

There are no simple answers to complex problems.  Maybe in the long run, enclosures in the UK benefited the whole economy and not just the landowners and maybe off-shoring will have a long term benefit to more than just corporate managers and stockholders, but in both scenarios there have been serious social costs and dislocations.  It's a rare company that has paid some of that cost, and governments haven't done much better.

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