Who’s a No-Think Economist?

by Don Boudreaux on May 9, 2006

in Trade

Paul Craig Roberts is at it again, predicting that America will soon be a “Nation of Waitresses and Bartenders.”

Roberts’ mode of argument is so disingenuous, his name-calling and innuendo so unscholarly, and his economics so madcap, that I’m tempted to ignore him in much the same way that I ignore the antics of Lyndon LaRouche, Louis Farrakhan, and others who scream from the fringes.

But I resist the temptation.

First a sample of Roberts’ disingenuousness; here’s the second paragraph of his latest shriek:

Most of the April job gain –72%–is in domestic services, with education and health services (primarily health care and social assistance) and waitresses and bartenders accounting for 55,000 jobs or 42% of the total job gain. Financial activities added 26,000 jobs and professional and business services added 28,000. Retail trade lost 36,000 jobs.

He doesn’t say what he means by “domestic services,” even though the term is a synonym in the modern American language for maid and other household services. Clearly, he wants his readers to worry that nearly three-quarters of the jobs created in April are low-paying, dead-end, “domestic service” jobs such as waiting tables and schlepping drinks.

But because “domestic service” jobs sound so lamentable, Roberts — who for several years now has predicted that free trade is impoverishing America — wants to report that a large percentage of newly created jobs are in “domestic services.”  To achieve this gloomy-sounding result, Roberts classifies jobs in education and health-care as domestic-service jobs – so careers such as teaching computer science at MIT and working as an anesthesiologist at the Mayo Clinic are in “domestic service.”

I’m sure he’d defend his use of the term “domestic service” by saying that he means jobs in which services are provided domestically – face-to-face, mostly. And to this defense, I’d respond “So what?” So what if most jobs created are in services?

Service-sector jobs are the most desirable. Until his retirement, my dad had a manufacturing job: he worked as a welder in a shipyard. Like most parents, his dream was for his children to become doctors or lawyers and the like — that is, he longed for his children to work in the service sector.  Ever hear a parent say “I want my boy to grow up to be a pipe-fitter!” or “My dream is for little Suzy one day to operate her very own sewing machine in a clothing factory!”?

But to read Roberts’ disjointed hysterics you’d guess that manufacturing jobs are the ones that people long for, jobs that we should try to keep, jobs that are much, much better than icky and lowly service-sector jobs such as are held by physicians, lawyers, architects, college professors, accountants, bond traders, marketing executives, and professional pundits.

Moving on….

Not surprisingly, Roberts misunderstands the trade deficit, saying that the U.S.

pays its current account deficit by giving up ownership of its existing assets or wealth.  Foreigners don’t simply hold the $800 billion in cash. They use it to acquire US equities, real estate, bonds, and entire companies.

Well now.  First, it’s not true that when the U.S. current-account deficit grows that Americans necessarily give up ownership of existing assets or wealth. New assets or wealth might well be created.  Suppose that Mr. Chang in China earns $1M by selling clothing to Americans. Further suppose that Mr. Chang invests this $1M by building a new R&D facility in Texas.  America’s current-account deficit would increase as a result of this transaction no less than it would increase if Mr. Chang spent his $1M buying shares of Gillette Corp. from Warren Buffett. But Mr. Chang’s investment in an R&D facility in Texas creates an asset – it brings into existence an asset that never before existed. No American lost an asset as a result.

Second, even if foreigners are spending their dollars only “to acquire US equities, real estate, bonds, and entire companies” – as Roberts says – then Roberts’ fear that capital is fleeing America for low-wage countries is exposed as baseless. His fear, remember, is that

[w]ith first world technology, capital, and business know how crowding into China, virtually free Chinese labor is as productive as US labor. This should make it obvious to anyone who claims to be an economist that offshore production of goods and services is an example of capital seeking absolute advantage in lowest factor cost, not a case of free trade based on comparative advantage.

Overlook the meaningless talk about absolute advantage, and focus on Roberts’ insistence that capital is fleeing to places, such as China, where wage rates are much lower than in America.  If capital is fleeing so eagerly to China, why is it also flowing so eagerly into the U.S. – as Roberts himself (correctly) says it is?!

One problem (although hardly the only one) with Roberts’ twisted, internally inconsistent analysis is that he assumes that the amount of capital in the world is fixed.


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