Sunday, September 11, 2011

Offshoring of Jobs

I've read a lot lately about how the off shoring of jobs to China and other countries is hurting America. Most seem to feel that the corporations are greedy and unpatriotic for leaving. They feel that the issue can be addressed by passing laws that tax imports or otherwise punish such companies are the way to solve the problem. It seems they blame the free trade agreements that have been enacted in the last 20 years or so for the problem. I suspected that, as usual, the problem is more complex and the solutions are less obvious than the general populous thinks. So, I decided to examine the issues involved.

First, are corporations greedy? The answer is obviously that they are for the most part. After all, No one founds a corporation to lose money. In fact, the kind of people that start corporations are usually out to make as much money as they can. To stay in business they must achieve a number of goals. They must provide a product that people want. The price and quality of the product must be as good as or superior to those of its competitors. And, perhaps most important, they must be able to make money. Money is the life blood of any business and the business will not survive without it. Thus the desire to maximize profit is as fundamental to the nature of any business as self preservation is to the survival of any animal.

Are corporations unpatriotic? I think that the answer is that they are at least somewhat patriotic. After all, a company founded in a country is going to be composed of employees and stock holders that are mostly citizens of that country. They are therefore not likely to make decisions that they feel are likely to be a danger to their home or to their own jobs. However, patriotism is not necessary to a company for its survival. If a company cannot make a profit in one country it only has two choices, either move to another country or go out of business. Moving to another country is the only choice that allows the company to survive by fulfilling its fundamental purpose of making money. Likewise, if a company cannot compete with a foreign company that for whatever reason has advantages it may have no choice if it is to survive but to relocate to an area where it can pick up either the same advantages or others that are just as effective.

Given that corporations are greedy and at least somewhat unpatriotic, what are we to do? We can either accept them as they are or try to change them.

A powerful way to change them would be by changing their fundamental goal. We could put a cap on greed. We could say that you can only go into business if you agree to make a certain percentage profit and nothing more. Everything over the cap could be paid as tax. However, this option is fraught with dangers. It is not uncommon for a company to lose money for several years in a row. If potential profits are capped it may take much longer to recover from the losses. There may be extended periods of low or no hiring during the recovery. Some companies will shy away from innovations that would endanger whatever profits they are allowed to make further damping hiring. Once a company is making all of the money that it is allowed to make it will be unlikely to hire new people as there will be no benefit from it. Many people might even decide that they don't want to start a business at all because of the extra risk created by the profit cap. Capping business profit would thus most likely cap both business growth and new hiring. This may be perfectly acceptable price to pay for removing the greediness of corporations, but we must ask ourselves if the risks are worth the rewards. Capping business growth may result in as much or more unemployment as off shoring.  Also, capping profit still doesn't address the fact that business will be free to leave. Few businesses will stay around after the cap goes into effect.

Maybe we should recognize that the goal of business is to make money and try to use that goal to bring business back home. We could put high tariffs on imports. In this way companies might be artificially forced to move back to the U.S. in order to optimize their profits. What are the results of high tariffs likely to be? First, the price of every item that we import now will immediately go up. The items won't be any cheaper to make in their native land and someone will have to pay the tariffs. This will also mean that unemployment will increase among our trading partners around the world. This will mean that less money is available to buy U.S. exports. U.S. companies will have to fire workers. Second, most countries will immediately raise tariffs on goods from the U.S. This will quickly result in an additional drop in U.S. exports. Fewer exports will mean even more unemployment. One also must bare in mind that other countries are perfectly free to trade amongst themselves. The U.S. is not the only market on Earth and for many items it is not even the largest market. Companies that relocated manufacturing outside the U.S. are therefore not likely to relocate all of their foreign manufacturing back to the U.S. precisely because of the high tariffs that are likely to be placed on U.S. exports. The result will almost certainly be a world wide decline in the standard of living and the tariffs may destroy more U.S. jobs than they create. Furthermore, it is widely (though not universally) recognized among economists that tariffs do result in lower living standards and higher unemployment. See Henry Hazlet's "Economics in One Lesson," Chapter 11. Given all of this, are the risks of this course of action worth the potentially non-existent rewards?

Perhaps the solution is to recognize that companies are leaving for a reason. We should also recognize that the reason has to do with the fundamental goal of business to make money. Money cannot be made in the U.S. as easily today as it was in the past. We must re-examine the changes that we have made since the hay day of American economic might with an eye toward removing the ones that have made doing business here less profitable. Not all of the changes need to be eliminated. Some, such as clean air laws, may still be necessary. When it becomes possible for an American businessman to make a good profit staying in the country he grew up in you can bet that he will.

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