General Economic Policy International Trade US-China

Campaign Promises and Anti-Competitive Jobs Policies

Competitive Policy Obama Romney
Written by Steve Suranovic

Reposted from Aspenia Online.

As the US Presidential election enters its final month, both candidates are emphasizing how their policies will create more jobs for Americans, while at same time criticizing their opponent for either not creating enough jobs or actually destroying them.   President Obama criticizes Mitt Romney for having fired workers or having outsourced jobs when he was at Bain Capital.  Romney argues that President Obama hasn’t been tough enough on the Chinese and that has contributed to a loss of US manufacturing jobs.  With US unemployment uncomfortably high at over 8% for almost four years running, voters clearly want to hear ideas that will promote a rapid increase in employment.  Unfortunately though, the arguments being made by both candidates are unlikely to improve outcomes for most Americans and instead are symptomatic of the continuing influence of special interests over both political parties.

If politicians were really concerned with the general well-being of Americans they would spend more time talking about what is best for average households and consumers and much less about jobs.  They would explain how free markets, when subject to certain rules, can deliver the goods and services that consumers most desire at the lowest possible prices, thereby improving most everyone’s welfare.  And, they would argue that the best mechanism available to achieve that outcome is competition.  What government can do to help create prosperity is to implement policies that promote rather than restrict competition.  And yet many of the policies being suggested by both candidates will restrain competition with the promise of creating jobs.  This promise to create jobs via direct government intervention is a ploy by special interest groups that has permeated the political conversation for many years.  And voters are being duped!

Consider the argument that our trade deficit with China must be eliminated in order to create jobs.  Many citizens accept the notion that buying American goods is better for our economy than buying foreign goods.  Why do they believe that?  The argument is that when you buy a US made good you support a US worker, but when you buy a foreign product you help a foreign worker instead.  But this notion is incomplete because it doesn’t look far enough into the economic mechanisms at work.   When an American buys a Chinese made good, an exchange of currency must first occur.  A hundred US dollars, say, must be exchanged for 630 yuan.  The American then uses the 630 yuan to buy the Chinese made product, some of which pays the salary and supports a job for a Chinese worker.  But what happens to the one hundred dollars?  It is acquired by a Chinese resident.  If he were to purchase a US good for $100 then some of that will pay the salary of a US worker and support his job.  Trade would also be balanced and presumably everyone would be content: trade seems fair!

But what if the US dollars are acquired by the Chinese government and held as reserves.  In this case the money does not support a US export and an American job, right?  Well, this is wrong!  The reserves acquired by the Chinese government are saved in the US, mostly by buying US government securities.  When the US government borrows money it does so because it will spend it immediately on military, highways, education and transfers to other people. The borrowed $100 supports US jobs just like when it is spent on US exports, it just takes another step through an intermediary before it gets there.  The critical difference is that this job effect is hidden, non-obvious, and ignored by all the groups that want citizens to believe that buying American and eliminating deficits with China is good for the country.

Policies that restrict imports from China, or would force Americans to buy American products to reduce our purportedly unfair deficits, are not good for the average American.   Instead they are only good for a small group of special interests; these interests are the firms that compete directly with imported products and the workers who work in those industries.  However, these policies will also reduce competition and result both in higher prices and a reduction in product qualities for these goods.  Most Americans are consumers of these goods, not producers, and so the majority of Americans will lose.  The small minority who will gain from higher profits and enhanced job security will be obvious for all to see, but the losses felt by most Americans, though larger in total value, will be dispersed across a large number of US consumers and so will be difficult to see and measure.  This is how special interests capture the political process and fool average Americans into thinking that what is bad for them is good.

Or, consider the issue of outsourcing.  The popular opinion is that outsourcing is damaging to the economy because it involves laying off American workers and substituting them with less expensive foreign workers.  The immediate effect is indeed harmful to those American workers who lose their jobs.  However, if we consider the process more completely, a firm that outsources is engaged in a reorganization intended to make itself more competitive, which means finding ways to improve its products qualities and/or reducing costs.  It is true that the firm’s management, and the workers who remain employed, will profit from this adjustment.  But this is good profit because it achieves a better product with lower costs that are passed on to the benefit of American consumers.   Thus, the process of outsourcing will lower the cost for many American consumers, the sum of which can outweigh the losses incurred by the laid off workers.

The next part of the process is crucial though and not always fulfilled.  In a well functioning free market, workers that are laid off seek new jobs in other organizations and after a short period are re-employed in an industry where their skills are more needed than at the previous firms.   When an economy is booming, people don’t complain as much about outsourcing because workers find new jobs quickly.  So what should be done if workers can’t find new jobs because the unemployment rate exceeds 8%?  There are several approaches.

President Obama’s approach is to demonize firms who outsource and propose policy changes that will punish outsourcing firms with higher taxes.  In other words, change business incentives so they will hire more domestic workers.  The workers whose jobs are threatened by outsourcing welcome these policies.  However, this approach will also make the US firms less competitive and once the economy picks up again, the anti-competitive policies are likely to remain in place permanently.  Thus, the policies are pro-(potentially-outsourced)-worker but anti-consumer.  Nevertheless, because the potentially outsourced workers who benefit are small in number while the consumers who lose are large, it represents another example where a smaller special interest gains protection at the expense of a larger group of Americans.

An alternative approach is to seek to maintain competitive forces but solve the underlying market failure.  Outsourcing is not a market failure …  nor is a trade deficit a market failure. Instead the failure is the lack of alternative jobs for the workers who have been laid off.  In a well functioning market, as in boom times, workers in contracting industries would find other jobs quickly and the pressure for special protection would be mild.

Unfortunately, solving the underlying growth and employment problem is very difficult.  Richard Fisher, the President of the Dallas Fed bank and a member of the FED Open Market Committee candidly admitted at a speech at the Harvard Club last month that,  “Nobody really knows what will work to get the economy back on track.”  This statement applies to both Presidential candidates and to their economic advisors.  Nonetheless politicians know that they must propose something because of citizen pressure.  And so they propose a collection of policy options that respond to the loudest voter concerns and which they hope, and maybe even believe, will work.

The real problem though is that special interests, in this case import competing firms and their workers, are using the situation to convince voters and the candidates to rally around anti-competitive policies.  These policies are claimed to be effective in creating “JOBS” …  meaning jobs in the aggregate economy that will reduce the unemployment rate.  But that won’t happen!  Instead these policies will secure “jobs” …  meaning perhaps a few hundred thousand jobs in select industries that happen to be located in important swing states.  Politicians claim that these policies will punish the unfair actions of foreigners and help all Americans.  But they won’t!  The cost to secure these jobs will be paid by the vast majority of Americans who do not work in import competing industries and who will suffer a decline in the purchasing power of their already tight household budgets.

In Richard Fisher’s remarks he also noted that CEOs are refraining from expanding their businesses and hiring more workers in large part because of uncertainty about the future.  One source of uncertainty is the continual suggestion of bold new policies.  Will the next administration touch off a trade war with China?  Will firm reorganization decisions today result in higher tax liabilities in the future?

If Americans are lucky the Presidential candidates will forget about these promises once elected.  Possibly cooler, non-political heads in the US Treasury will prevent the declaration of China as a currency manipulator.  Possibly, export oriented US firms will use their influence to prevent the government from implementing policies that punish outsourcing and from declaring a trade war on China.   But on the other hand, maybe they won’t!

About

Steve Suranovic received his B.S. in mathematics from the University of Illinois at Urbana/Champaign and his M.S. and Ph.D. in economics from Cornell University. He has been a faculty member at the George Washington University since 1988. He has served several terms as the current Director of the International Trade and Investment Policy M.A. program at the Elliott School of International Affairs.

About the author

Steve Suranovic

Steve Suranovic received his B.S. in mathematics from the University of Illinois at Urbana/Champaign and his M.S. and Ph.D. in economics from Cornell University. He has been a faculty member at the George Washington University since 1988. He has served several terms as the current Director of the International Trade and Investment Policy M.A. program at the Elliott School of International Affairs.

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