Monday, January 10, 2005

Why Lou Dobbs Is Wrong, Part III

In my last article, I explained some flaws in Lou Dobbs’ anti-outsourcing book, Exporting America. These flaws were typical for protectionists (Lou Dobbs doesn’t claim to be a protectionist but as we will see, he is). Before that, I explained why outsourcing is good for the economy, providing evidence along the way. In Part III of Why Lou Dobbs Is Wrong, we will learn how wrong he is as Lou Dobbs throws out basic economic principle and pretty much makes an fool of himself.

According to Lou Dobbs, “insourcing”—when foreign companies employ American workers—is a myth. “The hiring of American workers in plants owned by foreign companies is not analogous in any way to IBM’s shipping 10,000 jobs to India solely for the purpose of paying lower wages.” (p111) [Emphasis added.] Mr. Dobbs justifies this erroneous claim because companies build and sell in the US, not just build.

There are three things wrong with this. First, it’s rather silly to claim that not one of these cars will ever be sold abroad. I simply don’t see how he can make that claim. Second, Mr. Dobbs calls this transfer foreign direct investment (which is partly true: only the construction of the factory is FDI) but he acts like that’s immaterial. In reality, it does matter. FDI is why the trade deficit doesn’t matter because net imports equal capital inflow. Capital inflow causes construction workers, machinists, plumbers and other economic agents to have work. Third, insourcing is the hiring of the workers, not FDI, and it creates real jobs for real people. It doesn’t matter where the goods are being shipped and it doesn’t matter why companies are hiring (whether it’s lower wages or better productivity). Insourcing is the reciprocal of outsourcing. Foreign companies hire American domestic labor just as American companies hire foreign labor. And it really does exist.

Lou Dobbs lists “myths” of outsourcing and free trade. Number seven claims that free traders say outsourcing benefits “everyone.” No economist in their right mind would say it’s good for every single person. People really do loose their jobs because of outsourcing—that’s the nature of competition. The key is that the economy as a whole benefits when jobs are sent abroad. Saying free traders assert that outsourcing helps absolutely everyone is the same as claiming protectionists believe the best thing for the economy is to withdraw from the international stage altogether. Both are equally deceptive.

Lou Dobbs claims companies defend outsourcing on the grounds of improving efficiency and productivity but they really do it to cut their expenses. To clarify, productivity is the measure of how many goods or services are produced per unit of input (usually labor). Efficiency is the ratio of output produced to input needed to produce it. If a person can create a thousand pencils a minute, he is very productive. But if he charges a million dollars an hour for his services, hiring him would not be efficient. Thus, corporations really do outsource to improve their efficiency. By saving money, they get the same for less. Thus they become more productive because they use the saved money on other things. They end up producing more with the same level of input. Cutting costs while maintaining the quality of a good is efficient, leading to greater productivity. In fact, Mr. Dobbs listed outsourcing (under myth number 2) as one of the reasons the economy witnessed increased in productivity over the years.

Lou Dobbs writes over and over again that there’s no empirical evidence whatsoever that outsourcing is good for the economy. I’ve provided such evidence over and over again. Mr. Dobbs vehement claims that such evidence—which is very easy to find—doesn’t in fact exist is comical.

Lastly, Lou Dobbs claims he’s not a protectionist yet he casually suggests that the government bar outsourcing until its benefits or perils can be unquestionably ascertained. This is his answer to the “myth” that companies have to outsource to remain competitive. He implicitly determines that if we outlaw outsourcing, companies could still compete. Of course this isn’t true—labor is a cost of doing business just like any other input. Inflating that cost for American companies in a world where firms compete on an international stage will cause problems for American companies. Many will severely downsize or go out of business completely. In a free market, this isn’t a problem because the failed company would leave because it couldn’t cut the mustard when someone else could. But creating such a protectionist barrier—even one that’s temporary and “merely” for gathering information—will push the economy downward and might cause a recession. If Mr. Dobbs isn’t a protectionist, why does he support trade barriers?

If I didn’t know Lou Dobbs is so wrong, I’d think I was taking crazy pills.

1 comment:

harbot said...

Now that 3 years have passed, perhaps you see the folly of your statements and beliefs.

I at 60, lost my IT job in 2001 and was out of work for 4 1/2 years and was forced to take early retirement. There were many more like me and those jobs never returned.

Lou Dobbs was right then and he's right now. You were wrong then and you're wrong now.