Outsourcing: An Update

by Don Boudreaux on November 22, 2005

in Trade

Among the many histrionics of election year 2004 was the concern that free trade in general, and "outsourcing" in particular, would soon rid America of high-paying jobs.

Paul Craig Roberts, you might recall, joined with Sen. Charles Schumer to lead the chorus of those predicting that the alleged out-of-date ("no-think") opposition to protectionism would doom America to third-world status.

But now comes this report, entitled "Firms’ New Grail: Skilled Workers," in today’s Wall Street Journal (paid subscription required).  Here are the opening lines:

Difficulty in finding enough skilled workers is hampering the ability of many U.S. manufacturers to serve their customers.

Eighty-one percent say they face "moderate" or "severe" shortages of qualified workers, according to a survey by the National Association of Manufacturers and Deloitte Consulting LLP. More than half of manufacturers surveyed said 10% or more of their positions are empty for lack of the right candidates.

The shortfall is especially acute in skilled trades, for positions such as welders and specialized machinists.

And then a bit further on in the report:

The recent survey, based on responses from 815 U.S. companies of varying sizes, found that companies see the biggest shortfall in skilled production workers. Eighty percent of respondents expect those workers to be in short supply over the next three years, while 35% expect a shortage of scientists and engineers. More surprising, 25% said they expect a shortage of unskilled workers over the next three years.

So, those who predicted that high-skilled jobs are history are mistaken — as are those who predict that entry-level, low-skill jobs are history.

Looks like Adam Smith, David Ricardo, and we other "no-think" free traders still stand on solid ground.

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Camilo November 22, 2005 at 11:54 am

When I read the article earlier today, I failed to see the connection with free trade. Rather I saw it in terms of immigration: if there's a shortage of people with these skills within the U.S., relaxing some of the anti-immigrant measures enforced since 9/11 may be in order. I believe it was also the WSJ that recently reported that illigal immigration has been far less affected than legal immigration by these measures. The students and professionals that make up this second class of immigrants could help fill these gaps.

johndewey November 22, 2005 at 12:33 pm

The restriction of immigration forces companies to outsource or else fall behind those that can take advantage of global skills. But even unlimited immigration only allows us to tap a small percentage of the world's skills and talents. It seems to me that U.S. corporations, and the U.S. economy, will only continue to lead if allowed to take advantage of skills wherever they exist. Some skills can be imported, but not all. Strength (competitiveness) of our corporations is essential to protectiing our jobs. That corporate strength depends on both unlimited immigration and free trade. To me, the two issues seem very much connected.

Ivan Kirigin November 22, 2005 at 12:48 pm

Anger over poor immigration policies is simmering, and will boil over soon.

It isn't the likes of Camilo (and me), who complain that the US draw of foreign brains is excellent and not to be limited. No, they complain about illegal immigration of low education, poor people.

Perhaps the best response would be to stop the illegals (say, by building a wall), raise the caps on legal immigration, and just remove the caps on immigrants with a given level of education, skills, or IQ.

I wish politicians were a bit more realist when it comes to such policies, including outsourcing.

More talent coming to the US is good.
Using better production facilities off shore is good.

As an aside, I recently got an MS in robotics. A friend of mine in the program was in India over a Holiday break, and wasn’t allowed back in for 7 months. Apparently, robotics is equivalent to nuclear engineering with respect to security, and his having lived some time in Kuwait (which, I’m told, is very common for Indians), raised some flags. The problem isn’t that he raised flags. The problem is that it took so long to resolve. Ridiculous!

Bruce Hall November 22, 2005 at 1:27 pm

I'm sorry. What country was that again?

As reported in the Detroit Free Press:

"The Motor City is facing a fearful holiday season after three of the auto industry's biggest companies announced nearly 60,000 job cuts in the past week, with more to follow."
http://www.freepress.com/apps/pbcs.dll/article?AID=/20051122/BUSINESS01/511220317/1002/BUSINESS

There are plenty of highly skilled people being fired (let's not use euphemisms). Okay, blame it on poor management, high labor costs, etc. But the reality is that outsourcing has had a real and significant impact on this midwestern area.

The federal government declared Louisiana a disaster area with its hurricane damage and is pouring billions into it to restore and repair. What is happening to Michigan is far more insidious, but just as real.

Just wait until it hits home elsewhere and see how sanguine the rest of the country is.

The billions of dollars that the "baby boomers" retiring from Michigan spend in places like Florida may be at risk as companies like Delphi and General Motors collapse. Remember, "service jobs" are at the end of the money trail. A few new robotics plants or medical research facilities do not equate to the loss of U.S. owned manufacturing jobs and profits that get recirculated in the U.S. economy.

Ask yourself if our goal as a country is to restructure ourselves to be a source of low cost labor so that we can be "competitive." If not, ask yourselves what those reasonably-paid skilled people will be doing… they won't all be medical researchers or mechanical engineers.

John R. Saul is the author of The Collapse of Globalism

"At the heart of The Collapse of Globalism is a question that's fundamental to economics but often not asked explicitly: Are political decisions meant to be made in deference to the economy and markets, or can we use our political institutions to shield us from some of the harsher effects that markets can dish out?

The argument is that "globalization" isn't a homogeneous process, but is economic interaction that can be… and is… affected by political policies.

In short, in what's meant to be a "world without borders," it's been impossible for people to ignore just how much local economic conditions really matter. In response, some participants in the global economy have begun to realize and exercise some of their local power."

Chicken Little? Think again.

Ivan Kirigin November 22, 2005 at 2:01 pm

There is a difference between a bad company looking to restructure and fire some employees, and the industry and skill-set as a whole.

Bruce Hall November 22, 2005 at 2:11 pm

There is also the difference between a foreign company competing inside the U.S. with no "legacy" costs and significant "tax incentives" and an old-line U.S. company.

Yes, there are certainly cost problems with GM and Delphi… as there are with U.S. electronic manufacturers and U.S. universities with their significantly higher costs than foreign counterparts.

The problem is that "outsourcing" is more than replacing a few people with a few jobs overseas. It is "outsourcing" of supplies and even whole products that are imported and sold as "U.S." brand products by companies like GM and Delphi. Who needs Chevy when we can import "Chery"? Sure, we can gut our manufacturing capability and become a "nation of consumers."

For how long???

KirkH November 22, 2005 at 2:34 pm

How about a gold backed dollar to prevent inflation which would get the stupid amounts of money out of real estate and into stocks also leading to deflation making housing prices affordable even if we allow massive imigration which would solve the outsourcing problem and increase the tax base sufficiently to allow lower taxes.

John Pertz November 22, 2005 at 3:15 pm

How about this Bruce Hall, why dont we have the US government take over G.M that way they will never go out of existence and none of those plant workers will ever get fired? Or better yet we can keep G.M in the private sector and create a law that forces US consumers to purchase a certain amount of GM cars every year so then we can avoid having those nasty lay offs. The big three grew large in an era of protectionism. Now that they are exposed to competition they can not survive. The consumer has laid off the workers of G.M not the company. If I were a U.S auto worker working for an American car company I would really begin to look at doing something else with your life. The warning signs have been ominous for the last twenty years and I hope one day that people will begin to realize this.

Randy November 22, 2005 at 3:17 pm

A quick review of the jobs available on Monster.com tells the story. A multitude of job openings for specialists, and very few for non-specialists. I think it is going to be harder in the future to just walk down to the mill and apply for work. Finding a decent job will mean identifying a need, obtaining the skills to meet that need, and then marketing those skills. In other words, we will become entreprenuers – like it or not. For those who cannot, there will be little but McJobs.

Bruce Hall November 22, 2005 at 3:18 pm

Just posted on my site:

Rather than posting comments to comments, there are a few additional points I'd like to make regard today's earlier post.

There seems to be a tendency to view our economy as just a dynamic, free-wheeling, competitive marketplace where the weak competitors will be displaced by the strong. Well, yes… and no.

The marketplace doesn't exist in a vacuum. Certainly, there are always companies arising while others are disappearing. There are always new products replacing old products. Efficiency is rewarded; complacency is punished. This is a free market, after all.

Okay, and then there is the real world of currency manipulation, protected markets, government subsidized competition, child/slave labor, and a host of other "un-American" practices that directly impact U.S. manufacturing companies.

If you think Toyota became a powerhouse in the U.S. because they were a better company than U.S. competitors, then you don't understand how they sold their products here at cost (and avoided significant U.S. taxes) while enjoying a protected home market. You don't understand how China has grown its "competitive" manufacturing base by copying – outright pirating – U.S. intellectual property and then using that pirated capability to undermine U.S. competitors.

So, there is not a lot of sympathy for evil old General Motors now that it has fallen on hard time. Those "service economy" states sneer at the "wasteful" U.S. heavy industries. Okay, how about:

* textile quotas and restrictions protecting southern states
* sugar quotas and restrictions protecting Florida
* lumber quotas and restrictions protecting western states
* beef quotas and restrictions protecting central states
* corn subsidies for the plains states to produce ethanol

Hey, any wine producers fighting internet sales and imported brands? Is wine producing an industry or a service??? Oh, agriculture is different… we can't be dependent on foreign countries for our food and grown raw materials. Why not, Brazil and Canada are more cost "efficient".

Oh, come on. What would U.S. universities say if the government suddenly awarded research or service grants to foreign universities on the basis of competitive cost bidding? Plenty of good Indian PhDs out there who can work at half the price. And how "cost efficient" are U.S. universities… those bastions of our intellectual wealth… when they require double-digit percentage tuition increases for decades? Oh, yeah, we can't import those services.

Right, so a geographic oligopoly gives our intellectual industry the right to lord it over our manufacturing sector.

This isn't a "free market". It is many different kinds of markets that play by many different kind of rules. And rules can be changed. It is part of "economic policy"… or lack of one.

John Pertz November 22, 2005 at 3:39 pm

So it sounds like you are pro-free market, anti status quo? I guess the real question is who makes a better car? Irespective of other factors this is still the main determinant of survival for car companies. Sadly, for employees and owners of US car comapnies and luckily for consumers, the Japaneese and Europeans produce a safer, more efficient, and more reliable vehicle on the whole than the Americans. It still sounds like you want protectionism as a means of counteracting whatever measures the foreigners are taking?

RP November 22, 2005 at 3:53 pm

In other news, the well-fed fox reports that he expects to see a shortage of hens over the next three years. Film at 11.

Real wages are declining. Apparently the shortage isn't bad enough to increase real wages. So we've either completely run out of workers, or someone is talking their book.

Bruce Hall November 22, 2005 at 3:53 pm

John, my intent is to show that "nothing is ever as simple as it first seems." GM is an example of a company that has made bad decision, while at the same time being forced to compete against foreign companies that did not have to jump through the same competitive hoops. Toyota had access to our market and used a wholly-owned subside to "purchase" cars at virtually the same prices that they sold them to U.S. consumers. This gave the Toyota corporation the profits without the U.S. taxes that GM had to pay for the same profits. And guess what that allowed Toyota to do? Reinvest those tax-free profits into their vehicles to provide more content and technology than GM could do with after-tax income.

With regard to safety and reliability, most surveys now show that the Japanese brands, if they are better than the U.S. counterparts, are only marginally so. One well-kept secret is the policy of the Japanese manufacturers to fix a known problem without notifying their customers when the vehicles are brough in for service. (Incidentally, the Japanese brands REQUIRE that customers return vehicles to the dealership for very costly service or they don't have a valid warranty… not a practice of U.S. companies) The protected home markets allow the foreign competitors to subsidize their U.S. efforts which are very difficult for U.S. manufacturers to copy. Hence, the "more efficient, and more reliable vehicle(s)" you perceive.

Nothing is ever as simple as it first seems.

RP November 22, 2005 at 3:54 pm

In other news, the well-fed fox reports that he expects to see a shortage of hens over the next three years. Film at 11.

Real wages are declining. Apparently the shortage isn't bad enough to increase real wages. So we've either completely run out of workers, or someone is talking their book.

Randy November 22, 2005 at 4:05 pm

Bruce,

The problem I have with "economic policy" as you call it, is that I honestly can't think of an "economic policy" that doesn't benefit one group of Americans at the expense of another. How do you propose we apply an economic policy that protects the interests of car buyers as well as sellers? My suggestion would be to continue to let buyers buy from whoever they choose, but stop imposing regulations on sellers that drive up their costs and hinder their ability to compete.

JohnDewey November 22, 2005 at 4:19 pm

Bruce Hall,

Manufacturing jobs in the Midwest have been disappearing for the past 30 years. So what? The average real wage in the U.S. is higher, though educated workers do account for most of the gain. Unemployment is lower. Inflation is lower.

Some of those "highly skilled" union workers decided to acquire educations and find new careers. Some chose not to. But all of us enjoy better cars and better televisions that clearly came about through global competition.

If you are complaining about agriculture subsidies, I'll stand right beside you in protest. But if you are using interference in agriculture markets to justify the same in manufacturing, count me out.

Bruce Hall November 22, 2005 at 4:37 pm

Randy, I want to rebuild and enlarge my cottage. Present "economic policy" prevents me from buying Canadian lumber at prices they could actually sell. Instead, the supply is restricted by our government on behalf of U.S. producers.

It IS complicated, because there are competing strong interests. I really don't know why the Canadians should have a significant cost advantage over U.S. producers. Other things are quite a bit more expensive there. Some of it has to do with currency exchange rates, some with environmental policies, some with labor costs….

My point is that there is no segment of the U.S. PRODUCING economy that could not be undermined by foreign competition given THEIR protective policies and our OPEN MARKET approach or significantly different costs due to differing laws. While it may be good on a COST basis, it may ultimately be bad on a COMMUNITY (local, state, national) basis.

If GM can't sell cars in the Japanese market because of the roadblocks they set up, how can they effectively compete against the Japanese subsidized efforts in the U.S.? Want an example? There was a time, not long ago, that each U.S. car had to be INDIVIDUALLY inspected and certified as meeting all Japanese standards. In the U.S., the Japanese simply had to have a MODEL certified and they could freely import it. How about if you wanted to buy land in Japan to set up a manufacturing plant? Gee, no sellers. How about if you wanted a dealership to sell your vehicles? Gee, the dealership would lose their Japanese franchise so they couldn't do it.

Rather than penalizing GM for meeting the health, safety, ethical and environmental needs of their workers and community, why not penalize foreign companies who do not? Do you really want working conditions and local environments here to use China or India as a model… "stop imposing regulations"? I know, too complicated.

So let's just blame the U.S. companies for not being "competitive." Let's just wait for the Chinese to ship over their "Chery" which was a copy of a "Chevy" and buy it at a lower price. Hey, GM, get competitive!

By the way, I did not work at GM.

Randy November 22, 2005 at 5:02 pm

Bruce,

Re; "Rather than penalizing GM for meeting the health, safety, ethical and environmental needs of their workers and community, why not penalize foreign companies who do not?"

That does seem to be the heart of the matter. The regulations were applied before international competition was a player. We knew there would be a cost, but international competition has doubled that cost. So are we now willing to pay that doubled cost? And if so, who should pay it? Perhaps the first step should be to reevaluate the costs and benefits. E.g., do labor regulations produce net gains or net losses? – and to who?

Micha Ghertner November 22, 2005 at 5:09 pm

Hey Bruce,

It seems you are complaining that the Japanese governtment heavily subsidizes Japanese auto manufacturers, and this puts U.S. auto manufacturers at a disadvantage.

Assuming this is true (and you have presented zero evidence that it is), why should we care? The Japenese government is essentially giving U.S. consumers a free gift: subsidized cars. That's great!

As long as the Japenese government is willing to give us stuff for free, I say let them. U.S. auto workers can go find something else to do.

You got a problem with that, Bruce? Why do you care more about U.S. auto workers than U.S. consumers?

And given the direction of this discussion, it is the perfect time to introduce David Friedman's wonderful argument by way of Steven Landsburg:

"David [Friedman]'s observation is that there are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa. Everybody knows about the first technology; let me tell you about the second. First, you plant seeds, which are the raw material from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships, and sail the ships eastward into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them.

"International trade is nothing but a form of technology. The fact that there is a place called Japan, with people and factories, is quite irrelevant to Americans' well-being. To analyze trade policies, we might as well assume that Japan is a giant machine with mysterious inner workings that convert wheat into cars.

"Any policy designed to favor the first American technology over the second is a policy designed to favor American auto producers in Detroit over American auto producers in Iowa. A tax or a ban on 'imported' automobiles is a tax or a ban on Iowa-grown automobiles. If you protect Detroit carmakers from competition, then you must damage Iowa farmers, because Iowa farmers are the competition."

Whole thing here:
http://catallarchy.net/blog/archives/2004/02/19/the-iowa-car-crop/

Bruce Hall November 22, 2005 at 5:16 pm

JohnDewey, you stated that:
"Manufacturing jobs in the Midwest have been disappearing for the past 30 years. So what? The average real wage in the U.S. is higher, though educated workers do account for most of the gain. Unemployment is lower. Inflation is lower."

True.

Also:
"Michigan's median household income already has fallen by $9,914 — 19% — between 1999 and 2004, more than any other state, according to U.S. census data." http://www.freepress.com/apps/pbcs.dll/article?AID=/20051122/BUSINESS01/511220317/1002/BUSINESS

So, there has been an impact from the Outsourcing/Importing… at least in the manufacturing belt.

Lest you think this is a Michigan only problem, GM firings will go well beyond Michigan. In fact, only 10% will be in this state.

I agree that education is the key to the economic ills that face manufacturing states. And government bailouts are not realistic.

After all, if the government industry were to relocate out of Washington, D.C., there certainly would be no economic impact in Maryland and Virginia. Oops, didn't mean to let that slip into the discussion.

With the real cost of college significantly higher now than ever, that alternative for many is not available. Southeastern Michigan has six major universities within 60 miles of Detroit with somewhere between 150-200K students, plus several others within 1/2 day. But without major employers and reasonably-priced degrees, its quite a conundrum for those would-be entrepreneurs.

Large corporations, public or private, are the pillars of the economy… upon which those others of us build our businesses… directly or indirectly. Now I didn't say "manufacturers", but there are only so many software companies or medical research firms that can be the basis of our economy. And it doesn't take a lot of those college graduates to write the software or research those diseases for the rest of us.

And that software and medicine can be imported… more cheaply.

What has sustained the economy? How about a giant national debt and current account deficit. Hope your kids are one of the educated who can pay for this cockeyed approach to an "economy."

John Pertz November 22, 2005 at 6:02 pm

Bruce,

I am sympathetic to the plight of Michigan's economy due to declines in the manufacturing sector. However, the end result of what you are arguing for is to make everyone else in the United States poorer in order to help sustatin economic success within the state of Michigan. This pocily is dangerous for several reasons and the most important reason being, in my opinion, oppurtunity cost. Wealth and capital are scarce and therefore in order to grow wealth for the MAXIMUM benifit of society, we must find the most EFFICIENT means for allocating capital and resources. By taxing U.S consumers purchases of foreign automoblies, most notably the poor and middle class, and thereby chaneling their purchases towards domestic cars, which are on the average worse and less efficient than foreign cars, we are making the lowest rungs of the economic distribution within the United States worse off. I am just as angered by the CRONYISM that is free trade agreements amongst nations as you are and would like to see all restrictions on trade lifted so we can maximize the benifits of trade for our entire society and not just the special interests of a few.

Bruce Hall November 22, 2005 at 6:11 pm

Micha,

your comment:
"It seems you are complaining that the Japanese governtment heavily subsidizes Japanese auto manufacturers, and this puts U.S. auto manufacturers at a disadvantage.

Assuming this is true (and you have presented zero evidence that it is), why should we care? The Japenese government is essentially giving U.S. consumers a free gift: subsidized cars. That's great!"

seems to have misinterpreted what I said.

The Japanese government has insulated the Japenese manufacturers… not necessarily subsidized them… except that it did not tax profits on vehicles that were exported to the U.S. for a period of time. Actually, it is the Japanese people who subsidized the Japanese manufacturers because their market was closed to foreign competitors and they had to pay both higher prices and higher taxes as a result… so in a way, they subsidized buyers of Japanese products in the U.S.

What I said was that the selling practices used by Toyota to establish their U.S. presence and become an international powerhouse was an accounting subterfuge (transfer pricing from Toyota Japan to Toyota U.S.) that allowed them to claim "no profit" in the U.S. on goods sold here… and no taxes as well… which meant that the rest of U.S. business/consumers subsidized them with our taxes (no outrage on your part I gather). That was awhile ago and is does not play a part in the present situation… except that Toyota might never have become the force it has become without establishing itself that way in the U.S.

With regard to "two technologies" for producing products (automobiles… whatever), I refer you to the current account deficit. Obviously, we are not shipping enough wheat.

Bruce Hall November 22, 2005 at 6:33 pm

John,

While the focus of my comments has been GM and Michigan (by example), my larger issue was that there are non-economic forces (policy, manipulation, regulation, hindrances, piracy) that often place the U.S. business interests at a disadvantange… both globally and domestically.

I like a bargain as well as the next guy. But I have a bit of an ethical and moral problem with arguing "cost efficiency" as the only legitimate business viewpoint. If you can beat me straight up, fine. But if you rig things (tax avoidance, worker exploitation… no, I'm not a union guy… environomental destruction… no, I'm not a Greenpeace guy… or other means of stacking the deck), then I have a problem with "open market" and "free competition".

It is obvious that the U.S. is not going to be the best and cheapest in everything. But to say that anything outside of our boarders… other than prices… is irrelevant… that's just not right in my book.

The solution? Well, GM is selling cars in China to the people who are selling everything else to us, eh? How do you suppose they can do that when they are so inept here?

Micha Ghertner November 22, 2005 at 9:14 pm

Bruce,

"The Japanese government has insulated the Japenese manufacturers… not necessarily subsidized them… except that it did not tax profits on vehicles that were exported to the U.S. for a period of time. Actually, it is the Japanese people who subsidized the Japanese manufacturers because their market was closed to foreign competitors and they had to pay both higher prices and higher taxes as a result… so in a way, they subsidized buyers of Japanese products in the U.S."

Regardless of whether it was an explicit subsidy or a tax break, the effect is the same: it is a gift to the American consumer, who you don't seem to care much about. If you are so concerned that the U.S. has to compete with countries that tax their companies less, there is a very simple solution to that: have the U.S. lower its taxes as well.

Your conspiracy theory about Toyota does little to explain why GM and American cars in general suck in the eyes of the consumer; after all, Japan is not the only non-U.S. auto producing country out there. Does your conspiracy theory extend to European and other South-East Asian auto manufacturers as well?

"With regard to "two technologies" for producing products (automobiles… whatever), I refer you to the current account deficit. Obviously, we are not shipping enough wheat."

And I in turn refer you to the capital account surplus. Economists have long recognized that the U.S. trade deficit is a good thing: foreign banks and investors prefer to hold U.S. dollars because they have confidence in our healthy economy, our stable currency, and our stable political situation. The rest of the world is essentially giving us a free loan in the form of imported goods – goods we don't need to pay for as long as foreign holders of U.S. assets put their trust in our system. And if they ever do decide to use their dollars to purchase U.S. goods, the trade deficit will disappear.

But nice try changing the subject.

Micha Ghertner November 22, 2005 at 9:22 pm

Bruce,

"While the focus of my comments has been GM and Michigan (by example), my larger issue was that there are non-economic forces (policy, manipulation, regulation, hindrances, piracy) that often place the U.S. business interests at a disadvantange… both globally and domestically."

These are all economic forces. I don't know what made you think they weren't, or what made you think economists don't take them into account. They do.

"I like a bargain as well as the next guy. But I have a bit of an ethical and moral problem with arguing "cost efficiency" as the only legitimate business viewpoint. If you can beat me straight up, fine. But if you rig things (tax avoidance, worker exploitation… no, I'm not a union guy… environomental destruction… no, I'm not a Greenpeace guy… or other means of stacking the deck), then I have a problem with "open market" and "free competition"."

I have a bit of an ethical and moral problem with arguing that two wrongs make a right. The correct response to foreign countries that put up trade barriers is…to reduce our trade barriers as much as possible and continue to trade with them. It is sheer insanity to shoot ourselves in the foot merely to "get back" at the other guy for making their own country poorer through trade barriers.

Russell Nelson November 23, 2005 at 2:01 am

Go Micha!
-russ

Bruce Hall November 23, 2005 at 9:45 am

Last post I'll make on this:

"I have a bit of an ethical and moral problem with arguing that two wrongs make a right. The correct response to foreign countries that put up trade barriers is…to reduce our trade barriers as much as possible and continue to trade with them. It is sheer insanity to shoot ourselves in the foot merely to "get back" at the other guy for making their own country poorer through trade barriers."

???

Wow, kind of like "keep stabbing me in the back because it stops the itching."

Jeff Younger November 23, 2005 at 11:19 am

As usual, an economist misses the point. There is a shortage of skilled labor, but the US government’s response is simply to increase the H1b visa program.

H1b disadvantages US workers in four ways: (1) employers get huge tax advantages (up to 50% of the labor cost) for hiring foreign workers, (2) higher switching costs mean that employers have more bargaining power with foreign workers, (3) US workers are largely prevented from selling their labor in other countries, (4) where US workers can sell their labor in foreign countries, they are still subject to US income taxes, while foreign workers do not have this double taxation.

So-called free-market economists persist in the fantasy that the labor markets are free, but they are not free — the US government uses its coercive power to disadvantage US workers vis-à-vis foreign workers.

Most economists seem to be too stupid to realize that this situation is the very anti-thesis of Capitalism.

Randy November 23, 2005 at 12:03 pm

Bruce and Jeff,

The thing is, I don't really think we have a choice. The world is changing whether we like it or not. Our responsibility is to adapt, and to help others adapt. In my opinion, it is a waste of time to wallow in the romantacizing of the good old days. And honestly, I have no more desire to see a nation of factory workers than I have to see a nation of cowboys and dirt farmers.

Neal Phenes November 23, 2005 at 12:24 pm

No one has mentioned the effect of minimum wage laws on the dearth of skilled workers. The only way for workers to get skills is through work. But it is reported tht employers are keeping spots empty because of the shortage. By hiring unskilled workers at no or below minimum wage levels, manufacturers can create their own apprentices to handle the work. But with such min wage laws, where is the incentive to train new workers? We do not need laws prohibiting free trade, immigration law changes, limits on out-sourcing or government jobs programs. We do not need to coerce morality upon businesses. We need to hire the unskilled to learn on the job. Wal-Mart does it despite the min age laws. They get vilified by the press and others but serve as amodel to American manufacturers.

Jeff Younger November 23, 2005 at 12:26 pm

Randy, adaptation is best achieved by providing for maximal individual liberty. A government that disadvantages its own citizens for the benefit of large business interests, is hardly upholding free-markets. Economists exhibit an uncharacteristic cowardice by failing to confront the plain facts of government intervention in domestic labor markets.

Oh yes, one reads about the abuses which undeniably exist preventing businesses from free dealings with laborers, but rarely do we read defenses of individual capitalist actors, workers, who sell their labor in a domestic market rigged against them.

How is it rigged against them? Government serves the interests of big business at the expense of individual laborers who are really just small businesses. When large businesses use the coercive power of the government to gain an advantage over their suppliers (the workers), economists are silent. One might think that economists stupidly assume that capitalist activity only occurs in the context of international corporate commercial transactions.

American citizens sell their labor as capitalist actors; they are entitled to free exercise of their economic liberty, unfettered by unjust laws that pay employers to hire foreign labor.

We can get a free market by simply opening the US labor market, removing all restrictions on foreign labor and all advantages to foreign labor. But big businesses are the worst Capitalists — they like the cheap, skilled labor they get by the current system.

Economists should speak up for the economic liberty of workers as much as for any other business. The silence of economists on the economic liberty of domestic workers is tacit assent for anti-capitalist government policies.

Shame on the economists.

Micha Ghertner November 23, 2005 at 12:57 pm

Jeff,

What makes you think economists don't speak up for everything you just listed?

Jeff Younger November 23, 2005 at 1:24 pm

Micha, it is because I rarely read defenses of free markets for workers, yet I often read articles like the one above that celebrate the desire for domestic skilled workers while wholly ignoring government policies that deny domestic workers the ability to capitalize on those same market wants.

For example, the Cato Institute’s handbook says, “increase the number of H-1B visas and deregulate employment-based immigration to facilitate the entry of skilled immigrants and nonimmigrants.” They completely ignore the coercive market interventions of H1-B. I have no explanation why a free-market think tank would advocate massive government coercion in the labor market.

Is my economic reasoning flawed? Or am I just misinformed?

Noah Yetter November 23, 2005 at 1:47 pm

"Ask yourself if our goal as a country is to…"

Countries don't have goals. Individuals do.

Randy November 23, 2005 at 2:23 pm

Jeff,

If I'm reading you right, your assumption is that H1-B visas are costing native born Americans their jobs. I don't see the evidence for that. As I mentioned in a previous post, there are 1000s of postings on Monster for jobs requiring special skills. Presumably, these employers intend to hire anyone they can find who can perform these functions. I don't see the problem as one of immigration or immigration policy. I see the problem as a lack of entrepreneurial spirit in American workers.

DS November 23, 2005 at 3:00 pm

This whole debate is based on a warped premise:

Everybody is arguing from the viewpoint that GM controlling 50% of the US auto market and the Big 3 controlling 98% is "normal" and anything deviating from that state is "abnormal".

Automobiles are a low-margin, high-volume mature industry where the most profitable players (Toyota, if you believe their accounting) spend hundreds of billions of dollars in order to make a couple of percent back (if that). And that's the shining stars of the industry. There are something like 40 auto manuifacturers in the world, for any of them to hold onto 50% market share would be absurd.

The Big 3 auto makers achieved their state of dominance absent foreign competition and in an era where the government allowed them to blatantly collude with the UAW to pass 100% of their ever increasing labor costs onto the captive US consumer. Foreign competition ended that, and as a consumer that makes me happy.

Now a lot of the allegations against the Japanese are true, but somewhat beside the point. If Japanese citizens want to put suitcases full of yen in the trunk of every Toyota we buy, they are the ones that should be angry, not us. None of their mercantilist, protectionist market manipulation could save them from spending the last 15 years in an economic depression. None of what they do should be envied or copied.

Japan did have the "advantage" of building their auto industry from scratch after WWII with the help of some obscure Americans like W. Edwards Demming, while the US auto industry continued to do things just as it had done since 1920.

In the final analysis the auto industry is really just evening out market share of the major players. This doesn't mean that Toyota will eventually have 100% and GM will have 0%. It means that the competition will be much greater than the profits available would warrant, which means don't invest your money in any auto company, even the most profitable ones.

bbartlog November 23, 2005 at 3:24 pm

Can you (as an economist) explain why I should accept the notion of a 'shortage' of skilled workers when I don't accept it (absent price controls) for commodities such as oil? In general I can readily believe that the *demand* for skilled labor has increased, and that hiring skilled workers is costly; however, as in the case of a commodities 'shortage', the solution is to raise prices. Or in this case, wages. The use of terms such as 'shortage' appears to me a political or PR gambit undertaken by those with a vested interest in keeping wages low by whatever means they can.
I've seen many articles in a similar vein, including for example quotes from suburban restaurant managers who said there was a shortage of available employees. Well, yes, if we assume as a given that we can't possibly pay more than $7.35 an hour to start, there will appear to be a shortage of labor. But this is as ridiculous as it would be for me to complain that there is a shortage of soda because I am only willing to pay $0.15 for a can – it makes no economic sense.

Jeff Younger November 23, 2005 at 3:56 pm

What is the harm of H1-B? It is the loss of utility caused by government-distorted entrepreneurial decisions. Monster.com postings and observations about the “entrepreneurial spirit in American workers” do not count as evidence that an economic policy isn’t harmful. For example, the speculation bubble preceding the Great Depression had lost of “postings” in the form of stock offered for sale, yet the government-caused bubble burst with catastrophic consequences. The H1-B issue isn’t necessarily the loss of domestic jobs, but the overall distorting effects of government intervention, even while intervention probably does reduce the domestic employment numbers.

If you reject logical inconsistency as a criteria for falsifying an economic policy, then we are reduced to statistical comparisons. According to the Bureau of Labor Statistics, electrical and computer engineers are currently more likely to be unemployed than average Americans. In fact, they are more than twice as likely to be unemployed than other American professionals and managers. With all this unemployment in the engineering and tech sectors, how can there be a shortage of workers for companies? Obviously, there cannot be a shortage when workers are everywhere. Companies must be using some employment criteria not related to engineering or high-tech skills. Could it be huge tax breaks and enhanced bargaining power? It’s plausible.

Finally, the evidence you produce is utterly unwarranted. Companies routinely advertise for jobs that they have already filled with foreign workers in order to comply with H1-B and EEOC law. The general strategy is to post a job with such specific requirements that virtually everyone can be legitimately rejected, so you can hire the person you wanted in the first place. It is a standard HR strategy for hiring H1-B workers. Also, many companies post for jobs that don’t exist, but may or may not exist in the future. Lastly, many recruiting firms constantly advertise even if they have no business to fill, in order to maintain a current resume database.

Both economic logic and labor statistics seem to be on my side.

Jeff Younger November 23, 2005 at 4:32 pm

bbartlog, I'm afraid you will be disappointed.

So-called free-market economists seem to lose their logical bearings when discussing labor policy. The skilled labor shortage is a myth, fabricated to allow big companies to get favorable labor laws. It is about as anti-capitalist as can be. Economists should know better.

Shame.

FXKLM November 23, 2005 at 6:30 pm

bbartlog: There is an important difference between the labor market and other markets that allows temporary labor shortages to occur. Workers tend to have an irrationally strong aversion to decreasing wages. In most non-labor markets, when a temporary shortage develops, prices will rise in the short term and then go back down when supply recovers. In the labor market, employers know that they won't be able to lower wages in the future, so they are reluctant to increase them in response to a shortage.

Brian November 24, 2005 at 1:19 pm

Shame,
I run a small business and I can tell you we need more workers.
Here in Alaska, there is not only a skilled labor shortage the unskilled labor pool is virtually non existent. We have had a steady problem finding workers for several years. One of the main reasons is that we have an edcucation system sending everyone with an IQ above about 75 to college so there is no young, unskilled, native labor available to do trade work. Couple that with a State and Federal government hiring thousands of people with big pay and benefits to do useless things.

Many of the workers being laid off at GM are probably unemployable but if the young ones willing to work, can stand to pack up and move and do something where they might have to get dirty and start at the bottom they can find work in about 2 minutes.

Brian

Jeff Younger November 24, 2005 at 2:17 pm

Brian, that's just the point. You don't provide incentives sufficient to entice workers from alternative uses of their labor.

Of course, government employment is not a fair competitor. After all, they take your money to compete with you for workers.

Brian November 24, 2005 at 6:04 pm

Jeff,

The incentives that the market can offer are not sufficient when the out of work labor is:
1) not productive enough to produce positive benefits for the employer
2) Is paid by the state or paid in kind after being laid off

It should not be necessary to bring in immingrant labor to fullfill the need for workers but there are way too many programs in place that discourage workers from relocating or doing manual labor.

As much as the posturing is that there are lots of people willing to work in the jobs being done by Mexican labor; it is not evident in practice and where it is the quality of help is not adequate to cover the expense of employment.

Brian

Jeff Younger November 24, 2005 at 7:11 pm

Brian, I see. The theory of economics doesn't apply to labor. I guess that's one way to justify disadvantaging domestic labor with coercive government policies.

Nice chatting with you.

save_the_rustbelt November 25, 2005 at 2:29 pm

There are plenty of skilled manufacturing workers, but many of them are over the age of forty.

If you look at NAM's website (www.nam.org) there are entire sections devoted to recruiting YOUNG skilled workers.

NAM is angry because guidance counselors and parents are telling kids not to get involved in manufacturing, because the company will toss workers on the scrap heap whenever it is conveniennt (many young people have seen what happened to their parents).

Give 20 or 25 years to the company? Then get screwed.

JohnDewey November 25, 2005 at 8:19 pm

Jeff Younger,

Over the past 30 years I've worked with hundreds of U.S. citizens who claimed to be computer programmers. Many were simply incapable of doing the work required by U.S. industry. They just don't have the smarts.

Over the same period I've worked with dozens of foreign computer programmers – most from Asia, but a few from Africa and South America. Every one was fully capable of doing quality programming work.

U.S. industry will fall behind the rest of the world if it is restricted to the U.S. talent pool. We need the best brains to do our work, and it should not matter where those brains happened to be born.

IMO, many U.S. workers lose jobs to foreigners because they either lack the intelligence required or because the U.S. public education system failed them.

Jeff Younger November 26, 2005 at 12:27 am

JohnDewey, I ran a small high-tech consultancy in Hong Kong, and I experienced just the opposite with programmers from all over Asia including India. I had similar experiences while working in Houston with an operations research software company.

To me, Americans are ingenious and adaptable, while Asians have practiced a few techniques to perfection. I once gave a lecture in which I compared the situation to sports. Americans are good at boxing, which prizes adaptability and wide-ranging techniques; Asians are good at kata, which demands perfection of a few well-known actions.

I found Asians to be poor consultants, and Americans to be poor grunt coders. The relative strengths and weaknesses probably result from cultural differences, but you seem to think something is wrong with Americans.

Frankly, if you think perpetuating the "dumb American" stereotype is a compelling economic policy argument, then there's little I can say to dissuade you.

I do hope the economists are noticing a pattern here.

Jeff Younger November 26, 2005 at 12:43 am

JohnDewey, sorry, I forgot to respond to one part of your post.

Let's be clear, I'm not advocating resticting US employers to the domestic market for employees.

I am advocating that the government not use the tax system to INCENT American employers to hire foreign workers.

JohnDewey November 26, 2005 at 7:28 am

Jeff Younger,

I certainly do not believe Americans are dumb relative to the rest of the world, and I never said anything like that. But many U.S. programmers – not the majority, but a significant portion – lack the reuired intelligence and should be doing something else. It is the attempt to achieve equality of outcomes in our society that burdens us with unqualified programmers and technicians. Allow corporations to administer aptitude and intelligence tests and much of the problem is eliminated.

I believe that intelligent American workers make up only 5% of all the world's brainpower. Any limits that restrict American companies to using that 5% will harm the U.S. economy in the long run. Immigration quotas or limits have done exactly that.

I disagree with your opinion that Americans are more adaptable than Asians in general. I've worked with very adaptable as well as very structured individuals from both continents. My experience has been that intelligent Asians working for an American employer will become whatever is expected of them.

Apparently I'm ignorant of the U.S. laws that provide an incentive for hiring foreign workers. Please explain that to me.

Jeff Younger November 26, 2005 at 12:55 pm

JohnDewey,

Scroll up and examine my posts starting with Nov 23, 2005 11:19:33 AM.

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