We hear about US jobs outsourced overseas (or stolen), but what about the ‘insourced’ jobs we ‘steal’ from abroad?
AEIdeas
We hear a lot lately, especially from President Trump, about US firms outsourcing jobs overseas, along with accusations that countries like Mexico, China, Japan, Singapore, and India are “stealing US jobs” (see more than 50,000 Google search results for “Trump” + “stealing jobs”). Further, Trump warned in December that his government would punish US companies seeking to move operations and jobs overseas with “consequences.” But we don’t hear very much from Trump or others about the jobs that are “insourced” into every US state by foreign companies, even though those insourced jobs totaled more than 6.4 million Americans in 2014 (most recent year available) and represent 5.2 percent of all private sector US jobs based on the August 2016 BEA report “Activities of U.S. Affiliates of Foreign Multinational Enterprises in 2014.” Those BEA statistics and other data on insourced jobs are also available from the Organization for International Investment (OFII), a non-profit business association in Washington, D.C. representing the U.S. operations of many of the world’s leading global companies. Here are some key statistics on jobs insourced to the U.S., compiled by the OFII based on the most recent BEA report that summarizes some of the significant economic benefits the U.S. economy receives from the thousands of foreign-based firms that outsource jobs and production to the U.S.:
- U.S. affiliates of foreign multinational enterprises (MNEs) employed 6.4 million American workers in 2014, up 3.1% from 2013, adding 189,500 jobs. Employment by U.S. affiliates represented 5.2% of total U.S. private industry employment.
- U.S. affiliates invest heavily in American manufacturing, making up 38% of all insourced jobs in 2014. U.S. affiliates supported more than 2.4 million factory jobs, accounting for a fifth of total American manufacturing employment.
- U.S. subsidiaries’ share of American manufacturing employment made up 44% of the motor vehicles and parts industry, 45% of petroleum and coal products manufacturing, and 43% of the chemicals industry.
- U.S. affiliates of foreign MNEs supported an annual payroll of $510 billion in 2014—with an average compensation per worker of $80,041 (30% greater than the private sector average of $61,770).
- U.S. affiliates of foreign companies paid an average salary of $87,231 in the manufacturing sector (10% more than the national manufacturing average).
- U.S. affiliates of foreign multinational enterprises contributed $869 billion in added value to U.S. GDP (6.4% of the total).
- U.S. affiliates exported $425 billion in goods (26% of all U.S. exports).
- U.S. affiliates imported $724 billion in goods (30% of all U.S. imports).
- U.S. affiliates spent $57 billion on R&D in 2014 (17% of all U.S. R&D).
- Swiss affiliates in the U.S. spent the most on R&D—$10.6 billion in 2014, followed by Japanese, British, German, and French affiliates.
- U.S. affiliates spent $231 billion on new property, plant, and equipment (10% of the total).
- Foreign MNEs paid $62.3 billion in federal corporate income taxes in 2014 (14% of the total).
In other words, the insourcing of production and jobs to the U.S. has a significant and positive impact on our economy, and yet this huge economic stimulus gets almost no attention. All we hear about is the jobs that are allegedly being stolen from us by China and Mexico.
Update: As a separate state, the $510 billion annual payroll of Americans working for foreign insourcing companies in the U.S. in 2014 would have ranked that group of American employees as the eighth largest U.S. “state” for Personal Income, just behind No. 7 New Jersey at $516 billion and way ahead of No. 9 Ohio at $489 billion. (ht/Bob Wright)
The map above (thanks to AEI’s Olivier Ballou for assistance) shows the number of insourced jobs in each US state in 2014, and additional details on jobs and insourcing statistics for each state are available from the OFII here. For example:
Michigan. Nearly a thousand (950) U.S. subsidiaries of global companies have operations in the state, and those companies insourced 209,000 jobs (6% of total private sector employment) in 2014, including 131,000 factory jobs in Michigan. Examples of foreign MNEs doing business in Michigan include Honda, VW, Bosch, Nissan, Kia, Toyota and the Tata Group.
California. Nearly 2,000 (1,940) insourcing companies (e.g., Mazda, Shell, Kia, Nissan, BP, Garmin and Nestle) have operations in California, employing 631,500 workers in the state and writing paychecks to 5% percent of California’s private-sector workforce.
Texas. 1,500 insourcing companies have operations in Texas including Nissan, Rolls Royce, Toyota, Tata, Wipro, Honda and Kia, and those foreign MNEs employ 513,000 Texans, representing 5% of the state’s private payroll employment.
New York. More than 1,500 insourcing companies have operations in New York, and the combined payrolls for those MNEs account for 5.6% of New York’s private-sector workforce (428,000 jobs).
Bottom Line: In today’s highly globalized economy, multinational firms operate in a world marketplace that increasingly makes national borders meaningless and irrelevant, as firms capitalize on hyper-efficient global supply chains that add enormous value, and ultimately result in lower costs and higher quality for the goods that consumers buy here and around the world. In the recent Trump-era discussions on US manufacturing, the outsourcing of production and jobs overseas, and the supposed “theft” of our jobs by Mexico, China and Japan, we lose sight of another big part of the global picture: the insourcing of millions of jobs into America by the thousands of U.S.-based affiliates of foreign multinational companies that operate here and employ millions of our workers.
Q: How could it possibly make sense for Trump to accuse Mexico, China and Japan of “stealing” our jobs, unless he also admits that the U.S. is apparently then also “stealing” jobs from other countries, more than six million in 2014? A more enlightened and up-to-date view of international trade would recognize the economic reality that modern businesses today operate in an increasingly globalized marketplace for their inputs, parts, materials, supplies along complex, cross-border supply and value chains that include multiple dozens of countries. In addition, those global companies serve retail markets in hundreds of countries around the globe.
Just like it makes economic and business sense for thousands of foreign companies to outsource jobs and production from their countries to every U.S. state (perhaps because the U.S. is one of their major retail markets), it also makes economic and business sense for thousands of U.S. companies to outsource jobs and production from the U.S. to foreign countries, perhaps also because overseas markets now represent more than 50% of retails sales for many U.S.-based companies like Apple (65% of 2015 sales were in foreign markets), Procter and Gamble (63% sales were overseas), Hewlett-Packard (62% foreign sales) and Pfizer (56% overseas sales). Hopefully, Team Trump can move beyond a simplistic, outdated view of the global economy based on a fixed number of jobs where countries have to fight to “steal” jobs from each other in a zero-sum, win-lose world, to a more advanced and sensible view of a dynamic world of inter-connected, cross-border transactions where production and employment decisions are grounded in the reality of economics, and not politics.
(ht/Bob Wright)
Bonus: Venn diagram version below.
This is another excellent reason why the US should not get into trade wars with other countries.
http://voxeu.org/article/competition-china-reduced-innovation-us
” . . . production of innovation as measured by patents.”
1. Correlation is not causation
2. Innovation is not measured by patents filed.
*sarcasm*
But this just shows we’re slaves to foreign masters! We’re owned by the evil foreigners! This is why trade is bad!
\sarc
Yep. Let’s get even with those evil foreigners! Let’s nationalize their investments and businesses in the US and see all those Americans lose their jobs as incompetent bureaucrats try to run “for profit” businesses.
/sarcasm/
http://voxeu.org/article/competition-china-reduced-innovation-us
” . . . production of innovation as measured by patents.”
1. Correlation is not causation
2. Innovation is not measured by patents filed.
It would be one thing if all other countries bought into the the free trade system. However, as Alexander Hamilton pointed out in his Report on Manufactures, the free trade spirit “is far from characterizing the general policy of Nations. The prevalent one has been regulated by an opposite spirit”—a pattern absolutely no less true today than it was in 1791.
The other day I calculated the tariff on a container-load of Vermont cheddar cheese to the EU: it’s like 26%–not bad I guess. A thousand gallons of Vermont maple syrup to China: 52%. Chicken feet to China: 70%! Clearly these other countries are taking active protectionist measures to preserve domestic jobs and industries. The question is: Why aren’t we doing the same?
The Venn diagram is humorous, but I don’t experience any cognitive dissonance: it’s the government’s job to encourage domestic job growth, and to discourage outsourcing. If more jobs are outsourced than insourced, we are losing. A nation should be more than an arena for rational atoms to do business.
Trump is right: the ROW is playing us for chumps….
IMHO YMMV
Clearly these other countries are taking active protectionist measures to preserve domestic jobs and industries. The question is: Why aren’t we doing the same?
Why screw over our own people just because they are screwing over their own?
They’re only screwing over their own people if they had to buy those goods from us. They don’t.
It would be interesting to know if they apply that to all foreign companies or just the US.
Also, regardless… this reduces productivity of the entire market which hurts us all. Not just them.
They’re only screwing over their own people if they had to buy those goods from us. They don’t.
Why do people trade, Tom? The theory of trade you express here, while unique, seems counter-intuitive. I’d like you to expand upon it.
Not expressing a theory, just making a statement that if 2 people provide a similar product at the same price and one of them is taxed the direct damage to the consumer is small since they can buy from the other.
The damage may (likely) happen in the longer term due to reduced productivity gains from reduced competition driving improvements.
Not expressing a theory, just making a statement that if 2 people provide a similar product at the same price and one of them is taxed the direct damage to the consumer is small since they can buy from the other.
Well, that’s just false on its surface.
Let me be more specific. I object to the phrase: “the direct damage to the consumer is small.”
Presumably, since you claim you are advancing no theory, then you must accept the Theory of Trade. Given that, we cannot say with any certainty that the damage would be “small.” Too many factors play in here (and this is even with a ceteris paribus assumption).
“They’re only screwing over their own people if they had to buy those goods from us. They don’t.”
In other words raising prices for consumers and reducing choice is the best policy.
Because increased prices mean that businesses can afford to offer good paying jobs, of course.
If you don’t think things through, it almost makes sense.
Not
You’re right as usual. I’m probably overthinking this simple issue. 🙂
Taking what I said and extending it to mean something else is a straw man 😉
““They’re only screwing over their own people if they had to buy those goods from us. They don’t.””
“Their own people” are restricted from buying US exports. That means limiting their choices.
“Their own people” would only buy those US exports if they were cheaper than any other foreign or domestic product.
If there were no cheaper US exports, “their own people” wouldn’t buy any anyway, so a restriction wouldn’t be necessary.
Therefore they are screwing over “their own people” by limiting their choices and ensuring that they will pay a higher price than they otherwise would for a US export.
Imposing a restriction on imports = screwing over your own people, as you wrote. Nothing added, no strawman.
“The question is: Why aren’t we doing the same?”
Because jumping off the cliff is a bad idea even if other countries are doing it.
You’re assuming the US would have to buy those tariffs. They only would if the goods were still the best deal even with them… there are other suppliers.
To the extent that tariffs drive production into markets that are not manipulating price signals (and therefore reducing productivity) there is an argument to be made for them.
We shouldn’t care which market is producing the goods (foreign or domestic) only that it is operating in a free market so price signals can do their job.
“You’re assuming the US would have to buy those tariffs.”
The US does not buy tariffs. I’m not sure what you are trying to say here.
“They only would if the goods were still the best deal even with them… there are other suppliers.”
Again, your point does not make sense.
“To the extent that tariffs drive production into markets that are not manipulating price signals (and therefore reducing productivity) there is an argument to be made for them.”
No. Tariffs are taxes used to protect inefficient producers.
“We shouldn’t care which market is producing the goods (foreign or domestic) only that it is operating in a free market so price signals can do their job.”
No. We should not care if another country wishes to impoverish its own country by subsidizing people in other countries to buy their goods. We should allow people in our country to benefit from the other country’s stupidity. We should not try to impoverish our own citizens with tariffs like they are doing.
“No. Tariffs are taxes used to protect inefficient producers. “
Are they inefficient because they had to pay for their own R&D while the other producer stole theirs?
“We should allow people in our country to benefit from the other country’s stupidity.”
There it is. Leaving aside the desirability of losing US manufacturing jobs due to foreign dumping–you are mistaken if you think the German or Chinese or Japanese leadership are stupid. I can think of lots of words to describe them. “Stupid” is not one of them. Therefore, we should assume they have good reasons for whatever it is they do. If they impose import restrictions so they can protect their own markets, then they’re doing it probably because it must work. If it didn’t work, they wouldn’t impose tariffs etc.
If you’re in a poker game, and you gotta ask yourself who the sucker in the room is, it’s probably you….
Look at Germany: they employ fully 20% of their work force in manufacturing, and they are a modern, mature economy, and use the most advanced robotic technology that’s out there. So much for the automation excuse.
Then look at China: they’ve lifted out hundreds of millions of people out of abject poverty. THEIR wages are up big league, US wages are down over the same period. We have lost half of our manufacturing jobs; they have created over a hundred million new manufacturing jobs. Meanwhile, US has slipped to the number 2 economy, China is now #1.
Thus, if you look at the data, it’s clear that the antiquated Ricardoian theory of free trade is falsified. It just doesn’t work the way it’s supposed to. E.g., the US dollar shouldn’t be so strong after so many decades of huge, persistent trade deficits.
Indeed, the very existence of the Rust Belt falsifies the free trade theory. We no longer need economists to explain the effects of free trade. We can look out the window. Free trade created the Rust Belt. That was not the prediction. Therefore, the free trade theory MUST be false. Economics is a science, right?
Warren, you have to separate jobs lost to dumping to jobs lost to productivity improvement.
I spent almost 40 years in the same manufacturing plant.
We had around 1000 workers when I left and around 4000 when I started, and we shipped more tons of steel when I left than when I started there (and the jobs that killed/incapacitated workers before they were 30 or 40 were gone).
“Are they inefficient because they had to pay for their own R&D while the other producer stole theirs?”
No. They are inefficient because they cannot make a desirable product that consumers will willingly pay the price asked compared to comparable products offered by competing producers (including foreign ones).
Greg, it’s easier to offer a lower price when you steal the inputs and lower your up-front costs. Do you not think China’s government supports this as their common way to do business or don’t you care.
“We should allow people in our country to benefit from the other country’s stupidity.”
Yep. Who wants to pay more for lesser quality goods? No one that I know.
“Leaving aside the desirability of losing US manufacturing jobs due to foreign dumping–you are mistaken if you think the German or Chinese or Japanese leadership are stupid.”
Lots of people are stupid when it comes to economics. Why would a country want to tax its taxpayers in order to subsidize the citizens of other countries so they can enjoy better quality goods for lesser prices than otherwise available?
“Therefore, we should assume they have good reasons for whatever it is they do.”
No. Assumptions like that are how you impoverish your own citizenry.
“If they impose import restrictions so they can protect their own markets, then they’re doing it probably because it must work.”
In China’s case, they freed up their markets somewhat to create some prosperity so that the poor people are less likely to overthrow the leadership.
“If it didn’t work, they wouldn’t impose tariffs etc.”
The Chinese leadership’s goals are different than the goal of benefitting consumers and taxpayers. That goal is all America’s leadership should be concerned with. Not subsidies and tariffs.
“If you’re in a poker game, and you gotta ask yourself who the sucker in the room is, it’s probably you….”
If you are playing poker and feeling that you have to do what your opponent is doing without thinking it through, then you are going to lose.
“Look at Germany: they employ fully 20% of their work force in manufacturing, and they are a modern, mature economy, and use the most advanced robotic technology that’s out there. So much for the automation excuse.”
Germany’s economy has lots of problems if you have not heard.
“Then look at China: they’ve lifted out hundreds of millions of people out of abject poverty.”
Yep. That is what eliminating a lot of government control will do.
“THEIR wages are up big league, US wages are down over the same period.”
No. The vast majority of people in China make very little.
“We have lost half of our manufacturing jobs”
Because of government taxes and regulation. If you want manufacturing to make a come back in the US, we will have to cut corporate taxes and reduce regulations.
“they have created over a hundred million new manufacturing jobs.”
Yep. That is what happens when a communist nation frees up a portion of its economy.
“Meanwhile, US has slipped to the number 2 economy, China is now #1.”
No. The US is still number 1.
“Thus, if you look at the data, it’s clear that the antiquated Ricardoian theory of free trade is falsified.”
No. Freer trade works. Tariffs and protectionist legislation does not. See Smoot Hawley Tariff Act and the Great Depression.
” It just doesn’t work the way it’s supposed to.”
Sure it does.
“E.g., the US dollar shouldn’t be so strong after so many decades of huge, persistent trade deficits.”
The US economy is haven of safety and opportunity for investors all across the world.
“Indeed, the very existence of the Rust Belt falsifies the free trade theory.”
No. The Rust Belt was caused by high federal and state taxes as well as over regulation.
“We no longer need economists to explain the effects of free trade.”
Actually, we need more. There is a lot of ignorance out there.
“We can look out the window.”
Just don’t break that window in the false belief that it will improve the US economy.
“Free trade created the Rust Belt.”
No, it did not. Government created the Rust Belt. High taxes and excessive regulation.
“That was not the prediction.”
Yes, it was. Economists long ago predicted that federal and state government taxation and regulation would cause businesses to relocate to other states and countries.
“Therefore, the free trade theory MUST be false.”
Not if you consider the evidence. It works every time it is tried.
“Economics is a science, right?”
It is! You ought to study it sometime. It is much better than politically correct talking points.
Walt, no one likes to compete. And, they always claim that their competitors are unfair. Are you advocating for crony capitalism at the expense of American consumers and taxpayers? If so, shame on you.
Greg, I am advocating governments that make agreements and get caught violating those agreements should honor the settlements they agree to.
I am not just making the claim of China’s theft and cheating up unsupported, the evidence is at the WTO dispute Website.
Read some cases yourself and then compare how Mexico (NAFTA) reacts to getting caught with China (WTO).
Countries cheat on agreements all the time, Walt. Trade is not about government. It is about individuals. Thus, there should be no trade agreements except by individuals and companies.
“If it didn’t work, they wouldn’t impose tariffs etc.”
If, by “work”, you mean “enrich politicians (and their favored donors) and expand their power”, well… yeah, you’re right.
–“The US does not buy tariffs. I’m not sure what you are trying to say here.”
I mean the people in the US wouldn’t have to buy the goods that are tariffed. They could buy from other countries or local suppliers.
–“No. Tariffs are taxes used to protect inefficient producers.”
That is a common purpose but not the only purpose. They can be used in a reciprocal nature or to punish for bad behavior or to balance out a market manipulation.
–“No. We should not care if another country wishes to impoverish its own country by subsidizing people in other countries to buy their goods. We should allow people in our country to benefit from the other country’s stupidity.”
When a market is manipulated (subsidized etc.) it hurts everyone, not just those paying the subsidy.
“Countries cheat on agreements all the time, Walt.”
Yes, everyone cheats on just about anything. The problem is when a settlement is reached for that cheating through mutual agreement by all parties, it has to be honored or the entire process falls apart.
“Trade is not about government. It is about individuals. Thus, there should be no trade agreements except by individuals and companies.”
International trade is a treaty process. You can act as if it is not if you want to do so.
Walt
“International trade is a treaty process.”
And that’s the problem. It shouldn’t be. People have traded with distant others as long as humans have been on earth. They have made their own arrangements and agreements without any help from political meddlers. Trade treaties are a political game, and have little to do with actual trade, and pretty much nothing to do with economics.
I spent almost 40 years in the same manufacturing plant.
We had around 1000 workers when I left and around 4000 when I started, and we shipped more tons of steel when I left than when I started there (and the jobs that killed/incapacitated workers before they were 30 or 40 were gone).
Hi Walt! Unlike the ideologues here, it sounds like you’ve got a lot of real world experience in manufacturing. Please expand a bit if you don’t mind: Where was your factory? What did you guys make specifically? Is the place still in business? Historically, I think it’s the case that mechanization created more net jobs; but has that situation now changed?
To the extent that tariffs drive production into markets that are not manipulating price signals (and therefore reducing productivity) there is an argument to be made for them.
Yes, but it is a poor argument that rests on some extremely heroic assumptions.
“To the extent that tariffs drive production into markets that are not manipulating price signals …”
But driving production into markets IS manipulating price signals.
I can punch my country’s consumers in the face because those foreigners do it to theirs.
“I can punch my country’s consumers in the face because those foreigners do it to theirs.”
Maybe trade agreements should strive to make sure no one gets punched in the face?
And, there is no such thing as an international free trade agreement — they are just agreements. Grab NAFTA or any other trade agreement labeled free trade and read it.
Walt
“Maybe trade agreements should strive to make sure no one gets punched in the face?”
How would you go about doing that? The basic threat used in international trade agreements is to punch one’s own consumers in the face. What could you / would you use instead? For example the Bush steel tariffs punched the faces of tens or hundreds of thousands of US consumers’ and US workers’ who produce products from steel, while protecting a tiny number of US steel workers. Would you say the US won that round?
“And, there is no such thing as an international free trade agreement …”
Well of course there isn’t. No agreements between political entities would be necessary for people to conduct free trade.
“ Grab NAFTA or any other trade agreement labeled free trade and read it.”
Most government agreements, rules, and regulations are exactly the opposite of what their title suggests. There’s the “Affordable Care Act” for example which has caused care to become less affordable.
While NAFTA certainly isn’t anything like free trade, it is an improvement over what existed previously. Workers and consumers in all three countries have benefited from the agreement.
“While NAFTA certainly isn’t anything like free trade, it is an improvement over what existed previously. Workers and consumers in all three countries have benefited from the agreement.”
I agree, Ron. It’s a negotiated and ratified treaty that all sides should abide by and for the most part do. If only China would abide by their WTO agreement as well, but they show no intention to do so whatsoever.
–“But driving production into markets IS manipulating price signals.”
Yes, 2 wrongs make a right!
Walt
WTO is a joke. It is a self-sustaining mechanism for career bureaucrats, serves no useful function, and provides no benefit to anyone but lawyers.
“it’s the government’s job to encourage domestic job growth, and to discourage outsourcing”
I’m pretty sure that’s one of the main reasons the Revolutionary War was fought.
I’m checking my pocket Constitution for some reference to outsourcing as we speak.
The British manufacture of iron in the colonies :https://en.wikipedia.org/wiki/Iron_Act and tried to crack down on colonial manufacturing in general in order to help industrialists and merchants in the UK. Thus one of the reasons for Hamilton’s support of local manufacturing because it was one of the causes of the revolution. The British policy favored the home country over the colonies, plus the North American Colonies were less important to Britain than
Jamaica and Barbados where lots of high value sugar was grown. (For a while Barbados was the richest place in the empire, with plantation owners spending their money on buying land back in the UK)
“The British policy favored the home country over the colonies…”
And how did that work out for them? Suppose, instead, the British encouraged colonial manufacturing. That would have eliminated one of the causes of the revolution…
“Thus one of the reasons for Hamilton’s support of local manufacturing because it was one of the causes of the revolution.”
and perhaps, the American colonies would have remained a part of the British empire rather than revolting and going their own way.
Seems to me, imposing a policy that resulted in losing the American colonies in order to protect local manufacturing is a bit like cutting off your nose to spite your face.
But then, that’s just me.
But at the time the sugar colonies were regarded as more economically important than the north american colonies (plus harder to police due to size) The sugar colonies were in the mind of the time the ideal colonies producing a desired good that could not be made in the UK and importing lots of stuff from the UK. (North America at the time was a source of food and wood products to the sugar colonies)
If the desired good (sugar) couldn’t be produced in Britain, why would Britain have any reason to crack down on production in the colonies that were able to produce sugar?
I’m not seeing how this has anything to do with limiting production of iron in the colonies, that might compete with domestic (British) production.
“If more jobs are outsourced than insourced, we are losing.”
Then, tell the federal and various state governments to reduce corporate taxes and reduce a lot of regulation. Businesses move to where they can best operate. If they are moving to other countries despite the huge initial cost in moving, then government taxes and regulation is much too onerous in the US.
“A nation should be more than an arena for rational atoms to do business.”
We are not a collective. My goal in buying a pair of shoes is to get good quality for a lesser price. It is not to pay more than necessary to make sure others have a job.
“A nation should be more than an arena for rational atoms to do business.”
Sounds like you’re not on board with the idea that other people should be able to make decisions you don’t approve of. So- what’s a nation for, then?
The EU average applied tariff rate is 1.5 percent. But yes, they protect a few strategically important industries, like cheese.
U.S. in-quota butter exports to the EU face a 26% tariff. The EU by contrast faces only a 2.5% tariff when shipping butter to the United States. And the US has a $1 billion/yr. dairy deficit with the EU.
TTIP was going to address this, but then came Trump…
An analysis by the U.S. Dairy Export Council and the National Milk Producers Federation shows Free Trade Agreements (such as NAFTA & CAFTA) helped bring an additional $8.3 billion to the industry from 2004-2014.
it’s the government’s job to encourage domestic job growth, and to discourage outsourcing.
God save us from such a government! God save us from a government who favors scarcity over abundance!
If your argument were true, then the policy prescription is simple: we must ban all labor-saving devices. No washing machines, no toilets, no stoves, no electric lights, no automatic doors, no elevators, no shovels, no cars, etc. That alone will create hundreds of thousands of jobs. It will accomplish both your goals: foster domestic job growth and discourage outsourcing.
Note that some of the jobs are the companies doing the same thing to workers in their home countries, such as the auto companies. When the US market gets to a certain size the auto companies decide its cheaper to build locally than ship.
Second you have foreign companies aquiring US companies such as BP buying first Sohio (because of deal for Prudhole Bay) and then Amoco and Arco. Other examples might be US companies that inverted their structure to become a non us company but with mostly us employees (one example might be Burger KIng)
The business / tax / regulation / economic circumstances in the US is not the best in the world. The US is not in the top 10 of economically free nations of the world and yet foreign companies are investing here. Why? There are at least a dozen countries where it would make more “pure economic sense” to invest. US.
Because the US is still one of the better options out there.
A lot of it is cost savings in regards to logistics and “cash to cash” (time value of money and speed to react to market changes) in putting production closer to demand.
The intellectual consistency of your Venn diagram is plain to see: America First. We should promote policies that encourage US companies to grow in America, and entice foreign companies to expand in America. I guess it’s just a Deplorables thing…
If that’s the “intellectual consistency,” then America First is intellectually inconsistent (which it is, but for more than just this reason).
KenG453
“… and entice foreign companies to expand in America.”
Of course increased foreign investment in the US, by definition, requires that US consumers send more dollars to foreigners for goods and services than those foreigners spend in the US on goods and services, right?
Why?
Balance of payments?
Current account imbalance means equal and opposite capital account imbalance and vise versa?
That helps, but it is not, as he said, “by definition.” Nothing about increased investment requires a trade deficit. A trade deficit is one way of doing that, but not the only way.
Jon, what Ron said is right.
If we receive an investment from the rest of the world then the US must balance that with an equal USD investment, donation or goods/service purchase to the rest of the world.
Tom:
That is incorrect. FDI need not be offset by an “equal USD investment” elsewhere.
Only the trade account and capital account need to balance. The capital account feeds into FDI, but it is not the sole area of FDI.
A simple example: you can get FDI from a foreigner borrowing money from a US bank, buying US property, and building a factory that sells only into the US.
–“A simple example: you can get FDI from a foreigner borrowing money from a US bank, buying US property, and building a factory that sells only into the US.”
The purchase of the property would be a capital account surplus. How to account for building the factory depends on many factors (i.e. is it from profits from a US subsidiary or require further investment from abroad, or a loan, where are they buying the materials and labor to build it etc.). Most likely in your scenario the cost to build the factory would be a combination of a capital and current account surplus to the US.
These need to be offset.
Jon
“A simple example: you can get FDI from a foreigner borrowing money from a US bank, buying US property, and building a factory that sells only into the US.”
This is where I start to lose track. Please help me out. As I understand it, The bank has created the capital with which the foreigner will buy an asset in the US. This is new money and the bank holds a new financial asset in the form of a note (IOU) securing the loan.
For the blink of an eye the foreigner holds the cash, there is a capital account surplus which will be offset by the purchase of a US asset.
In essence the foreigner has exchanged a note for a US asset which satisfies the balance of payments.
Am I overthinking this?
As a practical matter, only a few US banks will loan to foreigners, and they have strict terms including, typically, a 30% down payment which would come from a capital surplus account.
Ron,
When the foreign entity got the loan in USD they sold debt. This would be a capital account deficit to the US (the US invested in the foreign debt).
When the foreign entity took the money and bought property this is a capital account surplus (they invested in the US with the money).
It depends on where they borrow the money from, who held the property (US or foreigner etc.)… that’s why I answered Jon the way I did… his example left a ton of variables open.
I have to agree with KenG on this one. This is the worst Venn diagram Dr. Perry has ever posted. It doesn’t compare apples to apples. It’s more apples to rotten apples. Importing companies is obviously good. Exporting companies? Not so much.
Importing companies is obviously good. Exporting companies? Not so much.
And there the intellectual inconsistency rears its ugly head.
That’s a circular argument. A logical fallacy.
Pointing out a mistake when it happens is not “circular logic.”
Only 6.4 million jobs “in-sourced” by foreign companies? Compare that to the 10s of millions that have been ‘out-sourced’ by US companies to other countries.
Financially many Americans are getting a great deal in this ‘swap,’ but MILLIONS of Americans are NOT getting a great deal (I’ll trade a cheap cell phone for well paying job any day of the week; don’t need the cell phone for one thing).
“I’ll trade a cheap cell phone for well paying job any day of the week; don’t need the cell phone for one thing.”
Since you’re okay with that deal, you think everybody else should be forced to go along? Don’t they get to choose, too? Or is it just you?
According to statisticsbrain.com, the US has outsourced 3.2 million jobs over the past 20 years. So, positive on net.
But here’s the thing: you don;t want to look at just “insourced” vs “outsourced” jobs. That’d give you an incomplete picture.
A simple example: Let’s say that a steel company moves their manufacturing plant to China. 2,000 Americans are out of work. However, since the cost of steel is much lower now, the demand for cars and steel architecture rises. To meet this rising demand, auto manufacturers add 4,000 workers and construction firms add another 6,000. On net, the country would be up 8,000 jobs. However, looking only at your analysis, the country would be down 2,000 jobs. If protectionist measures like Trump wants to implement were passed, and lets say it prevents the company from outsourcing, then according to your estimate the country is at no job creation/loss. But in reality there are 8,000 fewer jobs!
In short, you need to look at both sides of the ledger, not just one side.
Jon,
It’s also a matter of concentrated cost vs diffused and indirect benefit.
The people losing their jobs are going to complain a lot more than the masses will notice slightly lower prices/better products or that they got a new job that was very indirectly related to the trade policy.
You’ll never convince someone who is close to people who lost their jobs that it’s good using that approach…
While true, it is irrelevant to the argument Scott was making, thus why I didn’t bring it up.
Just saying… you should be trying to convince people who disagree with you, not trying to score points for the choir and cheerleaders…
Or I could refute the argument they put forth and not waste my time on other matters that won’t work anyway.
Time is scarce. By refuting his argument, it does more damage than trying to change the topic.
Your making the false assumption that the person you’re arguing against has the same goals as you do and complaining they are not arguing for things that would reach the goals you think they have.
Huh? That’s the logic behind your argument, not mine. I simply answered his question.
Your statement In short, you need to look at both sides of the ledger, not just one side implies you know what his goals are.
He may not care about new jobs for other people and just want the people he knows to not lose their job.
You need to find out what his goals are, you’re assuming he thinks like you and then telling him he needs to look at both sides of the ledger… that only applies if he thinks/cares about the big picture.
That’s all I’m saying.
implies you know what his goals are.
It implies no such thing. It is a statement of fact about why his analysis is incomplete.
A lot of people who argue against free trade are not against it because they care about the big picture or full analysis.
They are doing it because free trade has affected them personally in a negative way.
It’s difficult sometimes to convince other people plan A is better than plan B when they don’t want to believe it for whatever reason.
Often, if you are paid/elected to represent people, you have to fight for plan B against your better personal judgment because that is your job.
People have a right to be wrong as long as you have provided them information and analysis they might not have.
Walt
“Often, if you are paid/elected to represent people, you have to fight for plan B against your better personal judgment because that is your job.”
That’s right. Some people are paid /elected to be amoral liars.
“People have a right to be wrong as long as you have provided them information and analysis they might not have.”
Absolutely! But they may not pick my pocket from that position.
“That’s right. Some people are paid /elected to be amoral liars.”
Ron, that’s possible. It’s also possible people pay other people for things they can’t or don’t want to do themselves and have some say in how it is done. I think that’s called trade.
Walt
“ It’s also possible people pay other people for things they can’t or don’t want to do themselves and have some say in how it is done”
That’s right. Some people don’t want to get heir hands dirty so they hire or elect amoral liars to do it for them.
And yes, it’s trade. If I hire you to kill my neighbor, we are both better off after I pay you money and you perform a service for me that’s too unpleasant for me to do myself.
“You’ll never convince someone who is close to people who lost their jobs that it’s good using that approach…”
That’s absolutely correct, so it’s pointless to waste a lot of valuable time trying. Pointing out with logical and valid economic arguments that they are wrong is sometimes the best one can do, then it’s time to move on.
Or you can argue how trade will affect them personally and those they know in positive (or negative) ways… i.e. their shopping bills going up, their interest rate for their mortgage going up etc.
Some people don’t care about the big picture because it’s hard to imagine how it will ever affect them.
All you guys seem to be against any restrictions in trade; ok smart guys and gals, what do you suggest to get millions of Americans working again? Millions of (mostly) men have apparently dropped out of the work force for good–how do we get them wanting a job and then of course educating themselves for that job?
Millions of (mostly) men have apparently dropped out of the work force for good–how do we get them wanting a job and then of course educating themselves for that job?
Well, part of that will be impossible. A good amount of the people dropping out of the workforce are retiring. A good many more (like myself) are going back to school. Others voluntarily opt out to be stay-at-home-parents, etc etc. According to the BLS, the folks not in the labor force but who want a job account for just under 6% of the total amount not in the labor force.
That said, how we “we” encourage them to get back into the labor force? Number of ways, but the general idea is the same: free the damn markets.
How do you get them wanting a job? You might consider not paying people not to work. The more payments people get from government while not working, the more people you will have not working. We pay people not to work (or to work less) in 57 different ways. Then if they do work, we punish them through taxation, making them pay for their own food and medical care, child care, school lunches etc. In some states, you would have to have a job paying $40,000 per year to equal the same benefits you get by working a few hours part-time and being eligible for the 57 varieties of subsidies.
That’s why universal income is starting to grow on me… get rid of all safety net programs (welfare, unemployment compensation, medicare/medicaid, social security) and replace it with a single payment made to all Americans regardless of their situation.
Start it at $500/month per person over 18 and see what happens 😉
Tom, I have to agree that basic income is coming, if the bureaucracy can be reduced considerably. This is being proposed even by some conservatives.
Actually IMHO basic income had its first use in Rome and Constatinople to keep the mobs quite (Bread and Circuses) In history in fact reveals that Rome relied on Tunisia for its grain and when Tunisia was taken over by the Vandals Rome lost the source of grain and the Western 1/2 of the empire quickly died.
Cool history lesson, thanks!
Ignoring the moral arguments against theft, do you really believe taking resources from those who are productive and giving it to those who are not is the most efficient use of those resource?
Aren’t you the guy who is all about efficiency and productivity? Isn’t it you who condemns market manipulation?
Ron, it depends what your goals are… if you’re trying to maximize wealth then universal income is a bad idea.
If you are trying to create a base that no american will be below (starving etc.) then it’s by far the best way (better than the social programs that are corrupt and inefficient and full of unintended consequences).
I’m conservative but I think a basic income of $5-10k per year so no one can possibly be starving and has a chance to better themselves is something we can afford and is way better then what we’re doing.
Tom
“Ron, it depends what your goals are… if you’re trying to maximize wealth then universal income is a bad idea.”
My goal is to maximize wealth and opportunities for as many people as possible. That requires allowing those who have demonstrated that they are productive, those earning high incomes and acquiring wealth, to continue to make good use of resources, and to provide more wealth and more opportunity for others by allowing them to keep what they have earned so they can provide more and better products and service for all of us, while providing jobs for many who do not otherwise have them.
Transferring some of those valuable resources by force to those who have demonstrated their *inability* to make good use of them seems foolish and wasteful.
You must be assuming that people aren’t, for the most part, generous and compassionate , and don’t feel morally obligated to help others who are struggling or who have suffered misfortunes. Instead you are advocating mugging people to provide for the less fortunate as the only way their suffering can be alleviated. That’s a pretty dim view of human society and requires a belief that you, and a few others, know what is best for everyone. Such hubris!
Besides, a basic income creates as many disincentives, moral hazards and dependencies as the current batch of poorly conceived and administered programs.
–“My goal is to maximize wealth and opportunities for as many people as possible.”
Then universal income works against that goal. Universal income reduces overall wealth and opportunity but increases the poverty floor as a trade off…
Some people are willing to make that trade… I personally am if it’s a small amount and as I said it’s far more efficient than what we’re doing now.
–“Besides, a basic income creates as many disincentives, moral hazards and dependencies as the current batch of poorly conceived and administered programs.”
No it doesn’t because ti doesn’t reward any behavior. All are treated the same no matter what. If you have no job you get $500/month, if you make a billion a year you get $500/month.
By removing requirements to receive it you remove the vast majority of unintended consequences of people trying to game the system etc.
Tom
“Then universal income works against that goal.” [maximize wealth and opportunity]
That’s right. That’s why it’s a bad idea.
“Some people are willing to make that trade… I personally am if it’s a small amount and as I said it’s far more efficient than what we’re doing now.”
You have no problem stealing from people what is rightfully theirs because it’s only a small amount?
That’s a hell of a compromise for those of us who have ethical and moral principles.
“No it doesn’t [ creates as many disincentives, moral hazards and dependencies] because ti doesn’t reward any behavior. All are treated the same no matter what. If you have no job you get $500/month, if you make a billion a year you get $500/month.”
You must have a poor understanding of human nature. If I can support myself minimally by working 171 hrs/mo at $10/hr, and if that is good enough for me, then with your subsidy I can support myself minimally by working 121 hrs/mo. I get 50 more hrs of leisure, and the economy loses 50 hrs of my productive work every month.
That is called ‘disincentive’. People who don’t have that attitude are those who are already doing better than that and don’t need the $500 subsidy.
On the other end, you will take $2000.mo from me in taxes and send me back $500. Does that seem ridiculous or what?
“By removing requirements to receive it you remove the vast majority of unintended consequences of people trying to game the system etc.”
But you don’t eliminate the suffering you’re trying to alleviate. What do you tell a crack addicted teenage mother of two who has spent her $500 in the first week and now has no money to feed her children until the next monthly handout?
“Tough, you brought this on yourself” sez Tom. “Us Robin Hoods have done everything possible to help you.”
This used to be a problem all the time, now it’s only a problem for most of the month.
–“You have no problem stealing from people what is rightfully theirs because it’s only a small amount?”
I want to be very careful how I respond to this because I am mostly for free markets, low taxes and no regulation…
That being said there is some amount of wealth we owe to society because we would not be able to make our own wealth without the infrastructure created by society that we benefit from (military and police protecting our ability to trade, infrastructure like roads etc.).
Others contributed their taxes to this as well. The wealthy are getting a much higher return on investment these shared expenses.
You could look at it like investing in a company… the executives make much more than you do but you get a return on their success because you invested in their success to provide the capital to make it happen.
–“You must have a poor understanding of human nature. If I can support myself minimally by working 171 hrs/mo at $10/hr, and if that is good enough for me, then with your subsidy I can support myself minimally by working 121 hrs/mo. I get 50 more hrs of leisure, and the economy loses 50 hrs of my productive work every month.”
I completely disagree with this entire line of thinking. Humans are greedy and envious and always want more. It’s the basis of our wealth and success.
What is a legitimate issue is that benefits based on income cause people to work less because they create a floor to how much they need to earn to be better off working than not working an leeching from the state.
That’s why universal income works, there is not incentive not to work… as soon as you make it income or wealth based it falls apart for the reasons you say (diminishing or even negative returns on working harder).
Scott
“ Millions of (mostly) men have apparently dropped out of the work force for good–how do we get them wanting a job and then of course educating themselves for that job?”
If that is their choice, why would you force them to want jobs and get educated?
Choice is good.
“Bonus: Venn diagram version below.”
It is not intellectual consistent to consider U.S. production by foreign owners as outsourced, when it is consumed in the U.S. — only when used in the foreign owner’s country.
Invoking a John Venn in this case would have to exclude U.S. consumed production, because that is insource production.
cit
I’ve tried my best, but after 3 readings I still don’t understand your comment. Could you reword that somehow?
Outsourcing = sourcing out of country for eventual domestic use.
Insourcing = sourcing in country for domestic use.
Foreign ownership of domestic production is insourced, if used in the country of production.
A Venn diagram of intellectual consistency would show those who are opposed to outsourcing being in favor of insourcing, regardless of foreign or domestic ownership.
Cit
Ahh. I think I’ve got it now. Let me know if this is correct:
Outsourcing is anything made outside of the US that will be offered for sale in the US. This would include US companies importing from outside the US for sale in the US as well as foreign companies exporting to the US for sale in the US.
Insourcing is anything made and sold in the US by a company located in the US without regard to company ownership.
What if a US auto manufacturer builds a car in the US using some imported parts because they are cheaper, thus allowing the price of the car to be cheaper for US buyers? Isn’t that a good thing even though it involves outsourcing?
Is a Toyota Camry, a US made car built in a foreign owned factory by American workers – and containing more American sourced parts than any other car made in America by anyone – a foreign car or an American car? I’m confused.
What’s wrong with outsourcing to lower costs and thus prices for consumers?
Ron, whoa, I did not state outsourcing was “wrong”.
Also, I’m not placing a value judgment on insourcing vs. outsourcing.
I’m simply stating that foreign concerns gobbling up domestic companies for production is not outsourcing.
It is only logically consistent to call foreign ownership production outsourcing if that production leaves the country. Otherwise it is insourcing, correct?
Cit
“”
I guess so. 🙂 I’ve always used the words outsourcing and insourcing as verbs: the acts of moving production offshore or the act of moving it back onshore.
America’s not the only country that has economists and money-hungry politicians. So, if doing what we’ve been doing by not charging tariffs on imported goods was such a good idea, all the countries who do charge high tariffs would switch to our way of doing things. Or, to look at it from another perspective, our founding fathers intended for the federal gov’t to get all of its revenues from duties & tariff’s. But……along came the progressives who replaced those revenues with the thousands of taxes & fees we now must pay – all of which add tremendous costs to the economy and push jobs overseas. Bottom line, we need to return to a gov’t that derives the preponderance of its income from duties & tariffs – but good luck with that. So, what we’ll end up with is a continuation of our current tax system and new hidden taxes disguised as higher duties & tariff’s.
Dallas
“So, if doing what we’ve been doing by not charging tariffs on imported goods was such a good idea …”
Why do you say that?
http://www.businessinsider.com/americas-biggest-tariffs-2010-9?op=1/#n-specific-dairy-products-20-tariff-on-imports-1
Because of this?
http://www.businessinsider.com/deindustrialization-factory-closing-2010-9#
And yet manufacturing output is at an all-time record high:
https://fred.stlouisfed.org/series/OUTMS
Not to mention exports.
Would be interesting to see per capita
Tom
“Would be interesting to see per capita.”
Your wish is Google’s command.
““http://www.nationmaster.com/country-info/stats/Industry/Manufacturing%2C-value-added/Current-US%24-per-capita
Thanks Ron! That chart, though tiny, looks like we’re down since 2007/8 and not the highest ever per capita…
Tom
Manufacturing output per worker is meaningful, manufacturing output per capita is not.
Um, sir, looking at your chart, it appears real manufacturing output is up 0.5% since the prerecession high 9 years ago. Even looking year-over-year, it’s up a paltry 0.046%.
Warren
“Um, sir, looking at your chart, it appears real manufacturing output is up 0.5% since the prerecession high 9 years ago.”
Yeah, recessions have a way of slowing things down. What about the increase since the post-recession low in 2009?
What level do you believe US manufacturing should have reached by this time, and what growth rate would you find acceptable?
And why are those the correct numbers?
“Yeah, recessions have a way of slowing things down. What about the increase since the post-recession low in 2009?
Um, well, if you look at the chart, there was a fairly fast dead cat bounce, but then it plateaued.
“What level do you believe US manufacturing should have reached by this time, and what growth rate would you find acceptable?”
The trade deficit is something like $0.8T; therefore, manufacturing output should be $0.8T higher than it is.
“And why are those the correct numbers?
Because Ricardo’s theory of comparative advantage depends on balanced trade?
Warren
“The trade deficit is something like $0.8T; therefore, manufacturing output should be $0.8T higher than it is.”
Why? Serious question. It’s apparent you don’t know the answer and that’s why I’m asking. Please explain why manufacturing output should be higher instead of some other change that would balance trade.
Of course as we all know, trade actually is balanced. A current account deficit is offset by the capital account surplus, right? The surplus dollars held by foreigners may be used to purchase financial and physical assets in the US. It’s all good.
“Because Ricardo’s theory of comparative advantage depends on balanced trade?”
Ummm … No, that’s not it. Try again. We all understand that Ricardo used simple examples of two countries producing the same two goods in which trade balanced, in order to illustrate the principle of comparative advantage, but everyone knows the real world is far more complicated than that, although the principle holds.
Ricardo understood, as did others of his time, that trade balances (at that time) were self correcting because a surplus country would acquire specie, leading to rising prices that priced its goods out of world markets, while a deficit country would find its goods increasingly competitively priced. With modern fiat currencies, the excess currency of a country with a trade deficit that is held by another country with a trade surplus must eventually be returned t the originating country to purchase goods and services capital investments.
It’s puzzling that you now use Ricardo for support after originally proclaiming that the theories of all economists from Smith and Ricardo, to Friedman had failed because … rust belt. How has your thinking changed to account for this 180 degree reversal?
” How has your thinking changed to account for this 180 degree reversal?”
Because I decided to actually read Ricardo? Imagine that! And in my reading of the last several days, I do not find a defense of laissez faire free trade–what I find are several reasons to be cautious with it.
E.g., in the original two country-two commodity model, the only thing that prevents England from outsourcing everything to Portugal are the benevolent feelings of freakin’ capitalists that cause them to accept lower profits!
And here is another good one: Ricardo’s theory predicts that cheap imports do not in fact improve the standard of living of low-wage workers. Bet you haven’t heard of that one! Why? Because all cheap imports do is lower the price of labor, allowing capitalists to extract higher profits!
So when all you free traders get all sanctimonious about the plight of all those poor consumers at Walmart, that now comes across to me as really disingenuous IMO. Just sayin… 😉
Warren
“Because I decided to actually read Ricardo? Imagine that!”
So you previously condemned him without knowing what you were talking about. Imagine that.
“And in my reading of the last several days, I do not find a defense of laissez faire free trade–what I find are several reasons to be cautious with it.”
We, tell me. Did you read randomly or did you search for things you believe supports your view? I know you haven’t read everything Ricardo wrote and actually understood it in just the last few days.
You know, there is no one, and I mean no one, who is correct about everything. That includes Smith, Ricardo, Hayek, Friedman … No one.
Ricardo had especially good insight into the theory of comparative advantage, for which he is best known. Other , lessor well known theories, including his theory of wages relied on the Malthusian notion that as workers’ wages rose, they had more children so that the supply of workers rose, thus again reducing the higher wages worker could demand. Is that the theory you are desperate promoting as a rebuttal to Ricardo’s reputation as a free marketeer? That and his tendency toward the labor theory of value are things he got wrong.
If you actually read the whole context surrounding the quotes you have picked to demonstrate his belief that wages deceased as prices for basic necessities decreased, you would understand the mechanism by which that might possibly happen. Otherwise, you have no mechanism explaining a connection between lower prices and lower worker wages instead of lower business profits, which is what we would expect from downward pressure on prices due to competition.
Since you are a voracious reader these days, perhaps you would find this piece interesting.
https://mises.org/library/many-errors-david-ricardo
Warren
I should elaborate somewhat on my previous comment. The Iron Law of wages held true when the supply of labor continually increased, due to population growth at a faster rate than the supply of capital in a given economy. This was the case in much of the world prior to the industrial revolution, but since then, worker productivity due to ever increasing amounts of capital invested, has increased pretty much continually in many parts of the world so that subsistence wages are a thing of the past for a majority of the world’s population.
This is an ongoing success story of the spectacular accomplishments of capitalism that doesn’t get nearly as much attention as it deserves, IMHO.
We would no longer say, as Ricardo did, that the increased purchasing power of workers due to the availability of lower priced basic necessities, would cause populations to rise and thus reduce the wages of workers through greater competition for jobs.
You misunderstand Ricardo’s theory. It is just as true today as it was then. The Iron Law per se had nothing essential to do with birthrates. You are mistaken if you think the natural minimum wage is potatoes and a mud cabin. Labor markets are either tight (market wage > natural wage) or normal (market wage = natural wage) or flooded (market wage < natural wage). How markets get flooded or tight depends a lot more than the birth rate–Ricardo noted the same thing saying mass immigration could serve the same function as excessive reproduction….
Warren
“You misunderstand Ricardo’s theory. It is just as true today as it was then.</i."
Sez the guy who just read about it at Wikipedia in the last few days.
"Labor markets are either tight (market wage > natural wage) or normal (market wage = natural wage) or flooded (market wage < natural wage)”
Labor markets are subject to the immutable laws of supply and demand, just like every other scarce resource in the world. Who knew?
Yes, fluctuations in the supply and demand for labor crate a corresponding change in the price signal.
“We would no longer say, as Ricardo did, that the increased purchasing power of workers due to the availability of lower priced basic necessities, would cause populations to rise and thus reduce the wages of workers through greater competition for jobs.”
Ron, Ricardo said there are two factors that determine wages:
1st. The supply and demand of labourers.
2dly. The price of the commodities on which the wages of labour are expended. (5.18)
Emphasis in the original. So it’s not just supply and demand. The least skilled workers will always bid down the price of labor until it gets down to what he called the “natural” minimum wage. This does not require 25 years of breeding like rabbits to make this happen; it is “speedily effected.” Thus, lower priced necessities DO NOT in fact increase the purchasing power of low-end wage earners: all it does is reduce the money price of the minimum natural wage, and the market rate soon gets bid down to the new rate. So the unskilled worker is not made better off from free trade. Not according to Ricardo’s theory at least. I got to give him credit: he was very clear-eyed about 2nd order effects of free trade.
Warren
Did you read my link? My point, in my response to Dallas, was that the US imposes tariffs of various amounts on dozens of imports, contrary to his suggestion that the US doesn’t charge tariffs on imports.
Thanks for the link to “19 facts”. I found it to be a mixed basket of a few incomplete or misleading claims about manufacturing in the US, many for which the only reasonable response is “so what?”, and a few to which the correct response is “Great, that’s a good thing.”
The one important fact not mentioned for obvious reasons is that most US manufacturing jobs lost in the US in the last few decades have been lost to automation and increased productivity. As Dr. Perry points out once again, US manufacturing output has risen pretty much continuously, and is now higher than it’s ever been before. That wouldn’t be possible if jobs were being lost to foreign competitors.
More and more manufacturing jobs in the world today require low skill levels and are low paying as a result. Many are mind numbing, repetitive assembly jobs that are better done by foreign workers who don’t have all the better opportunities US workers have available to them. Good riddance to them.
So, if doing what we’ve been doing by not charging tariffs on imported goods was such a good idea, all the countries who do charge high tariffs would switch to our way of doing things.
This assertion rests on a common misunderstanding, that countries and their governments trade. But this is incorrect: countries don’t trade; people do.
Once we realize this, then we get to ask the more appropriate question: if tariffs are so poor, why do governments keep initiating (and raising!) them? The answer to this question is much more interesting and important. The answer is: diffused costs and concentrated benefits. The benefits of tariffs are concentrated on a few: those in the protected industries. The costs are spread out over many (the consumers of those products). It’s much easier to see the benefits than the costs, which leads to the incorrect conclusion that the benefits exceed the costs.
When trading with a country that has government ownership in some form of almost all business, then individuals are not trading with individuals, but instead adding with a proxy for the government, correct?
Not really, no. You’re still dealing with individuals.
Jon, have you ordered anything over the Internet from individuals in a foreign country and found that it is your job to get it through customs? A family member ran into this problem last Christmas. International trade isn’t easy sometimes.
https://www.cbp.gov/trade/basic-import-export/internet-purchases
Walt
I’ve never had a problem with international orders. Many of the small electronic accessories I’ve ordered come directly from China, books from the UK, yarn from Lithuania …
My anecdotal evidence nullifies your anecdotal evidence.
Actually I did have a slight glitch with the yarn from Lithuania, but I only had to say that I know morganovich, and they expedited it right through. 🙂
Ron, the high school is still trying to get their 30 sweatshirts out of New York Customs from last November (they seem to be misplaced). I don’t personally know the details.
Walt
And of course that problem with customs is a government problem, not a problem with international trade itself.
Why should customs even exist?
“Why should customs even exist?”
Ron, I’ll let you ponder that with however much of your time and resources you want to expend. I’m just going to assume Customs does and will exist and plan accordingly.
Maybe I spent too long trying to engineer things to work with what I had at hand and don’t dream well (that is, I have this, so how do I make that without something I need but I am not going to get?).
Walt
“Maybe I spent too long trying to engineer things to work with what I had at hand and don’t dream well …”
Well maybe that, or maybe there’s a boulder in your path that you must climb over each day and you just do it without ever wondering why the hurdle is even there – what purpose it might serve other than to annoy you.
Some of us realize the boulder serves no useful purpose, and work to remove it.
Ron, feel free to throw your effort and money behind eliminating Customs or imagining life without Customs or something similar to our current governing process.
It’s always a judgment call whether to try to fix something or have a work around and move on to something more value added.
I also don’t think “there should not be a Customs” will get those kids their sweatshirts that were mistakenly ordered from a company in China and now supposedly held somewhere in the U.S. (the Website did not say the company was in China).
Walt
If everyone had your level of imagination and curiosity, I suspect we would all still be picking fruits and berries and digging up roots with our bare hands to make a living.
Cit
Not correct. In those cases all citizens are owners of the business.
There are no sentient beings called “government” or “business” or “country”. It’s always some person or group of people.
Ron, I disagree.
How can you, Ron, rail against government control, if it’s just individual yokels? No, it’s the force of a government over individuals and individuals are only proxies for the gubmint ownership.
You must be sitting in on some of the lectures with Jon at that learning place of his, because he agrees with you. 🙂
Cit
“You must be sitting in on some of the lectures with Jon at that learning place of his, because he agrees with you. ”
I wish I was!
Cit, the only interactions anyone will ever have with government, will always be with people. You can call them proxies if you wish, but there is no government existence without people assuming roles within that government.
“How can you, Ron, rail against government control, if it’s just individual yokels?”
It is various collections of individual yokels who have assumed authority they don’t legitimately have, and who take actions that would land a non-government person in prison.
UNCSD hails the discussion on outsoursing and insourcing in one common & interdependent planet for peoplepeace progress and prosperity.
Here we go again only telling one side of the story. The data you are looking at is data for the past few recent years. What about the 6M jobs lost and 70,000 factories that closed over the past 20 years ? You mention nothing about that huge loss of wealth and growth to GDP. I suppose you also think that the job stealing and job robbing of many H1B visas as shown on 60 Minutes over the week end is ok also. The affiliates access our markets for free, use their workers to do the work and then take the profits back home out of the country to build wealth and surplusses in their country back home. Hm, Why didn’t I think of that? perhaps America might be far better off economically if it was a surplus country rather than a deficit country.
Maybe we should shut down international trade altogether, close the borders and be totally economically self-sufficient to “Make America
GreatPoor Again” and bring back all of those stolen jobs.The US also added approximately 30 million jobs over 20 years and approximately 8.7 million new firms since 2001. It’s unlikely those numbers would be higher (in fact, likely lower) with protectionism (see why here: https://force4good.me/2017/03/21/on-bananas-fish-and-trade/).
then take the profits back home out of the country
How do they earn those profits?
“How do they earn those profits?”
Why is that so often ignored?
I’d say it’s because it doesn’t fit their narrative, but I’m not even sure they ever thought about it
William
“. What about the 6M jobs lost and 70,000 factories that closed over the past 20 years ? You mention nothing about that huge loss of wealth and growth to GDP.”
What loss of wealth and growth to GDP is that?
https://fred.stlouisfed.org/series/TNWBSHNO#0
https://fred.stlouisfed.org/series/GDP
“ I suppose you also think that the job stealing and job robbing of many H1B visas as shown on 60 Minutes over the week end is ok also. The affiliates access our markets for free, use their workers to do the work and then take the profits back home out of the country to build wealth and surplusses in their country back home. Hm, Why didn’t I think of that? perhaps America might be far better off economically if it was a surplus country rather than a deficit country.”
You’re just babbling, William. Try to make a coherent point.
William, I saw the 60 Minutes report you mentioned.
I felt bad for the U.S. workers who lost their $120,00 jobs and were replaced by those who make $60,000 from another country.
On the other hand, many of those jobs are in the health care field where labor is a huge part of the medical costs we all face and need to lower.
I guess the question is if we are willing to cut labor cost to reduce health care cost. As often the case, it probably depends on if is your job cut (and realizing it could be your job next time).
Since MFG is about 1/2 of the GDP out put that it use to be we have fastly become a nation of takers rather than makers even though the out put is at an all time high. Iit is being done with half the workers as before as more automation will surely decrease the labor participation rate not just in MFG but soon in many other industries. Then we can just let China and Mexico make everything for us so the few at the top can hoard all profits and prosper from. At least Trump knows what side his bread is buttered on and is attempting to do something about the lowest wage disparity of American workers. The greedy oligarchs who own and control everything. Perhaps we can have China make all our tanks and planes for us in the future, what a great thing that will be for our national security as we save all that money by letting them make them.
Since MFG is about 1/2 of the GDP out put [sic] that it use to be we have fastly [sic] become a nation of takers rather than makers even though the out put [sic] is at an all time high.
Not sure what you mean here, but if you are saying what I think you’re saying, you’re making the fixed pie fallacy.
Iit is being done with half the workers as before as more automation will surely decrease the labor participation rate not just in MFG but soon in many other industries.
No. Fixed pie fallacy, this time with labor.
However, if this were the case, then it would be fantastic. It would mean we would have become like gods, living in Eden. A world of super-abundance. not sure why this would be bad.
Then we can just let China and Mexico make everything for us so the few at the top can hoard all profits and prosper from.
how do they earn said profits?
william
Are you complaining about automation? It’s not at all clear what your point is here.
Greg wrote:
“‘Meanwhile, US has slipped to the number 2 economy, China is now #1.’
No. The US is still number 1.”
This. This is what I’m talking about. You free-trade true believers will never let actual data get between you and your ideologies. I know this won’t change anybody’s mind, but, for the heck of it, here are the facts: 2016 China GDP = $21.27T; US GDP = $18.56T, a difference of close to 15%. According to my calculations, China GDP will be twice the size of the US in about 10 years. Here’s the spreadsheet:
2016 18.56 21.27 1.15
2017 18.84 22.76 1.21
2018 19.12 24.35 1.27
2019 19.41 26.06 1.34
2020 19.70 27.88 1.42
2021 19.99 29.83 1.49
2022 20.29 31.92 1.57
2023 20.60 34.15 1.66
2024 20.91 36.55 1.75
2025 21.22 39.10 1.84
2026 21.54 41.84 1.94
2027 21.86 44.77 2.05
(Respective growth rates: 1.5%, 7%). You can quibble about the actual growth rates, but unless something really structural happens–like a major hot war–the overall picture isn’t going to change much.
There you have it guys: this is what all that free trade bought you, courtesy of the theories of Smith, Ricardo, Friedman, and every other Nobel Prize Winner: you’ve lost Cold War 2 before you even realized you were in one. Thanks! 🙂
https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html
“note: because China’s exchange rate is determined by fiat rather than by market forces, the official exchange rate measure of GDP is not an accurate measure of China’s output; GDP at the official exchange rate substantially understates the actual level of China”
GDP is not a great measure of economic wellbeing. It’s not surprising the nominal level is much higher; the population is significantly higher, too (about 3x). Adjusting for PPP and making it per capita (a marginally better measure of the average standard of living per person, although not without its own flaws, the figure falls considerably. The US is around $57,000. China is $15,000, a difference of approx 280% (from your CIA link).
You shouldn’t use the PPP numbers… they are completely arbitrary and silly… also useless in comparing the relative output of 2 countries. They are only used to determine the fuzzy “quality of life” and are really only useful on a per capita basis since it’s a measure of quality of life which is highly dependent on the number of people that need to split up the PPP value.
You should use an GDP at USD exchange rates when comparing countries…
You shouldn’t use the PPP numbers… they are completely arbitrary and silly
What makes you say that?
They are defined by whatever a bunch of economists decide is important to measure and how to measure it.
For example… PPP might look at the price of a hamburger and say a hamburger in China is 50% the price of a hamburger in the US so their we need to adjust their GDP to account for this.
But then there are a million other factors… was the restaurant clean, inspected and safe? Was the air conditioner working? Was the trip to the restaurant safe or did you get mugged? Were the streets pot holed so you damaged your car on the way?
An infinite number of variables that can only be interpreted by judgments of the economists determining the variables and their fallibility in doing so.
GDP based on currency exchange does all this for you and is a free analysis done by the invisible hand…. PPP is a human’s attempt to do the work of the markets in determining relative value and just like human’s fail at central planning they fail at interpreting relative value for the exact same reasons.
Summary, PPP is stupid.
While I agree there are other factors than just the indexing the PPP captures that affect quality of life (thus why I said it’s marginally better and without its flaws), the matter of exchange rates has the exact same issues. PPP is an exchange rate calculation, with an added element to try and account for the fact a dollar in the US doesn’t buy the same amount as a dollar in China (just like a dollar in Manhattan doesn’t buy the same as in Des Moines).
Is PPP perfect? Heck no. But your proposed simple exchange rate method doesn’t capture any of the things you mention either so I don’t think it’d be an upgrade.
Exactly, since it costs about $1 get your hair cut in India, and $20-30 in the US for the same service, it makes sense to attempt to adjust for that difference using PPP.
–“(just like a dollar in Manhattan doesn’t buy the same as in Des Moines).”
You’re not getting the same thing in Manhattan as you’re getting in Des Moines. That’s why it’s more expensive in Des Moines.
I’ll take the free market’s valuation over a persons any day. The free market takes all of these factors into account and people pay what they will pay based on their determination of the value to them.
The only issues in GDP exchange rates are a) market manipulations and b) bubbles and crashes (markets aren’t perfectly effecient).
But with those issues GDP exchange rate is orders of magnitude better at determining relative standards of living than PPP.
PPP is a stupid idea and invented to make some economists feel like they know value better than the free market. They should try their hand at it and see how well they do.
–“Exactly, since it costs about $1 get your hair cut in India, and $20-30 in the US for the same service, it makes sense to attempt to adjust for that difference using PPP.”
Ridiculous. When I get my hair cut in the US the cost is what it is because of infinite other variables that aren’t accounted for in PPP that make living in the US better (including the experience of getting a haircut).
“That’s why it’s more expensive in Des Moines.” should be “That’s why it’s more expensive than in Des Moines.”
–“Is PPP perfect? Heck no. But your proposed simple exchange rate method doesn’t capture any of the things you mention either so I don’t think it’d be an upgrade.”
Yes, it exactly captures and measures those things. To the extend you think free markets work and are more accurate than a person or small group of peoples’ judgement.
Are prices perfect? No. Are they orders of magnitude more accurate than any person could ever dream to hope to calculate? Yes.
PPP is people disagreeing with the free market and thinking they can price things better. Comical that someone who claims to believe free markets are perfect is now arguing that some small group of trusted economists do a better job.
Sorry Tom, but it’s statements like yours on PPP that are why I really can’t take you, or anything you say seriously. Sorry for that.
Here’s why we adjust for PPP, as an alternative to using unadjusted GDP:
PPP exchange rates help to minimize misleading international comparisons that can arise with the use of market exchange rates. For example, suppose that two countries produce the same physical amounts of goods as each other in each of two different years. Since market exchange rates fluctuate substantially, when the GDP of one country measured in its own currency is converted to the other country’s currency using market exchange rates, one country might be inferred to have higher real GDP than the other country in one year but lower in the other; both of these inferences would fail to reflect the reality of their relative levels of production. But if one country’s GDP is converted into the other country’s currency using PPP exchange rates instead of observed market exchange rates, the false inference will not occur. Essentially GDP PPP controls for the different costs of living and price levels, usually relative to the United States Dollar, thus enabling a more accurate depiction of a given nation’s level of production.
For example… PPP might look at the price of a hamburger and say a hamburger in China is 50% the price of a hamburger in the US so their we need to adjust their GDP to account for this.”
Aren’t you the guy who rails against China’s currency manipulation? And yet here you want to use the exchange rate in a straight up comparison.
You cant have it both ways.
You’re not getting the same thing in Manhattan as you’re getting in Des Moines. That’s why it’s more expensive in Des Moines.
Um…PPP adjusts for that. That’s the whole point of PPP: ceteris paribus comparisons. Exchange rates alone do not do that.
When I get my hair cut in the US the cost is what it is because of infinite other variables that aren’t accounted for in PPP that make living in the US better
If its not included in the PPP then, by the virtue of the fact the PPP is constructed from the exchange rate, it’s not included in the exchange rate either.
Are you guys really paying $20-$30 for a haircut. I hang out in the Midwest and South and never pay more than $12.
–“Sorry Tom, but it’s statements like yours on PPP that are why I really can’t take you, or anything you say seriously. Sorry for that.”
Can’t take anything I say seriously? That’s a reflection on you, not me.
–“Since market exchange rates fluctuate substantially, when the GDP of one country measured in its own currency is converted to the other country’s currency using market exchange rates, one country might be inferred to have higher real GDP than the other country in one year but lower in the other”
Market exchange rates are the free markets determination of the relative value of the money supply of countries.
You can go on listening to an anointed group of economists who tells you how much the currencies should “really” be worth. I’ll just be over here continuing to listen to what the free market tells me they’re worth.
–“But if one country’s GDP is converted into the other country’s currency using PPP exchange rates instead of observed market exchange rates, the false inference will not occur”
Ha!!! Because some basket of goods determined by some all knowing tells them so? Sorry, once again I’ll listen to the market, not some tea leaves.
–“Essentially GDP PPP controls for the different costs of living and price levels, usually relative to the United States Dollar, thus enabling a more accurate depiction of a given nation’s level of production.”
Oh? And who determines these controls and how to apply them? Where do they get their special knowledge that the rest of the world doesn’t know as expressed by the invisible handle of the free market?
–“If its not included in the PPP then, by the virtue of the fact the PPP is constructed from the exchange rate, it’s not included in the exchange rate either.”
I’m not sure what you’re saying here… PPP is determined by a basket of goods and services arbitrarily decided by some economists. They then compare those goods and services in different countries to get a relative price and put those all together to get a multiple to apply to the calculated real GDP.
If something isn’t in that basket of goods it isn’t counted… see the problem?
Who chooses the basket of goods and how do they determine they are truly equal in both regions? Hmmmm…
They then compare those goods and services in different countries to get a relative price
Yes, and that’s where the exchange rate comes in. It’s how you compare those goods and services in other countries to get a relative price.
Are you guys really paying $20-$30 for a haircut.
Nah. I’m paying about $12 ($15 with tip). Heck, if there was a barber college around, I’d go there.
–“Aren’t you the guy who rails against China’s currency manipulation? And yet here you want to use the exchange rate in a straight up comparison. You cant have it both ways.”
I rarely mention their currency manipulation, I don’t think it’s that big deal. I rail against their massive subsidy complex.
I’ll take currency manipulation over arbitrary price adjustments any day. Same reason I take raw weather data and don’t trust climate “scientist” adjustments to the data to account for what they decide is wrong with it.
–“Are you guys really paying $20-$30 for a haircut. I hang out in the Midwest and South and never pay more than $12.”
And I pay $40… but we’re all getting the same thing so must be that the GDP where I am should be adjusted down to 1/3rd to compare to Walt… uh huh… makes a lot of sense.
I’m sure Walt and I are getting the exact same thing for our money… there just haircuts right? Gotta be the same… I mean they have the same name after all!
China’s 2016 GDP per capita was about $15,400 (adjusted for PPP), which would be equivalent to US GDP per capita (in 2016 dollars) back in about 1947. So China is still almost 70 years behind the US when measured in real output per person.
And that’s if you actually believed PPP was a relevant number 😉
Tom
“ They are only used to determine the fuzzy “quality of life” and are really only useful on a per capita basis …”
What, pray tell, do you believe is more important than quality of life?
As fuzzy and subjective as it may be, it seems to me that the only reason to analyze and compare any of these numbers is to try to understand what kinds of things affect quality of life. Otherwise it’s all just a pointless diversion on which to waste our spare time.
I don’t think a 3rd party can tell me the value of my quality of life… do you?
That’s what PPP is. Someone else telling you how much you should value something instead of what you’ll actually pay for it.
It’s stupid and I’m surprised you’re defending it considering your previous statements!
Someone else telling you how much you should value something instead of what you’ll actually pay for it.
No…that’s not what it is at all.
Jon-
I find most objections to a theory stem not from actual criticisms of the theory, but from ignorance of the theory itself.
I find most objections to a theory stem not from actual criticisms of the theory, but from ignorance of the theory itself.
True dat
No…that’s not what it is at all.
Yes that’s exactly what it is. You’re not even just a little bit wrong but 100% polar opposite of reality in that statement.
You could not have made a more factually incorrect statement if you tried.
Booker, that’s interesting… I have my own theory.
I find that most people who criticize what others say without addressing it in any way have no value to add and just like to hear themselves talk…
What do you think of that theory?
What do you think of that theory?
Reading your comments, it makes perfect sense to me.
But, I think I did address your comments, albeit not directly. As Jon Murphy has pointed out, you seem to lack the understanding of how PPP is calculated. Your objections stem from this ignorance, not any underlying criticism of the method itself.
-You say PPP doesn’t account for prices. That’s not true: PPP is a price index.
-You say PPP is “arbitrary.” That’s not true: it’s a “basket of goods” method (similar to CPI).
-You say PPP isn’t comparing like and like. That’s not true: it’s a basket of goods. They’re holding the same goods constant (with quality adjustments when necessary) across countries.
-You say exchange rates count things PPP does not. This is not true: PPP is derived, partially, from the exchange rates.
Your objections, thus, stem from a lack of knowledge about the statistic, not any inherent issue (and there are many) with the statistic itself or the theory behind it.
Booker, see that’s how you debate. No insults (you did stick one in there but I’ll let that slide), just make your points. Now to my response…
–“-You say PPP doesn’t account for prices. That’s not true: PPP is a price index.”
Huh? What did I say that gave you that impression?
–“-You say PPP is “arbitrary.” That’s not true: it’s a “basket of goods” method (similar to CPI).”
It is arbitrary, just like CPI. And guess what… CPI is wrong too. It’s a rough guess. But it’s a better guess because they are at least comparing apples to apples! They’re just guessing which apples to compare. PPP compares apples to bolts (allowing for oranges would be to kind to what PPP is).
–“-You say PPP isn’t comparing like and like. That’s not true: it’s a basket of goods. They’re holding the same goods constant (with quality adjustments when necessary) across countries.”
Ohh, who makes the determinations for “quality adjustments” and how to they make those determinations? Maybe they have help from a higher power to figure out the value better than the free market? Certainly no human is up to the task…
–“-You say exchange rates count things PPP does not. This is not true: PPP is derived, partially, from the exchange rates.”
Yeah, they take the right answer and change it. Kind of like climate scientists!
–“Your objections, thus, stem from a lack of knowledge about the statistic, not any inherent issue (and there are many) with the statistic itself or the theory behind it.”
No, my objections stem from somebody using their judgement to determine value instead of trusting the value set by the market.
PPP is gospel from the priesthood. Sorry, I’ll take the facts. Things are worth what the market says they’re worth. You’re free to continue to base your values on faith.
Again, Tommy, your criticisms come from a lack of knowledge:
What did I say that gave you that impression?
Multiple places:
-“[PPP numbers] are completely arbitrary and silly.”
–“That’s what PPP is. Someone else telling you how much you should value something instead of what you’ll actually pay for it.”
-[referring to Jon’s correction] “Yes that’s exactly what it is. You’re not even just a little bit wrong but 100% polar opposite of reality in that statement.”
-“You prefer fantasy over reality? ”
The damning one is the one I’ve put in bold.
Moving on…
It is arbitrary, just like CPI.
Except it’s not, as you noted elsewhere: “Basket of goods and services they are weighted by roughly how much of the economy they represent.”
PPP compares apples to bolts
Except, as noted elsewhere (even by you), it doesn’t.
Ohh, who makes the determinations for “quality adjustments” and how to they make those determinations?
Given your current comments about PPP, I’d suggest reading up on how they make the QAs, and when they’re necessary (hint: it’s only when the exact same product isn’t available, which is decently rare). They do make apples-to-apples comparisons. Exchange rates do, nay, cannot.
Yeah, they take the right answer and change it.
Except the reasons you ascribe to the “right” answer don’t apply to exchange rates. Further, as Ron noted, exchange rates are highly manipulated. Without some attempt to correct for that (like, say, a PPP) they are even less useful.
No, my objections stem from somebody using their judgement to determine value instead of trusting the value set by the market.
So…you’re back to not understanding what PPP is.
Again, your objections are from ignorance, not insight. Do not confuse the two, Tommy.
–“Multiple places:”…
You’re just not following what the formula is telling you. You’re stopping at, it’s a formula to adjust exchange ratios….
But what does that mean?
1) It means you are adjusting the output of the country (GPD)
2) Output is a calculation of the price of goods generated by the economy.
3) You are not increasing the number of goods with the PPP adjustment so you are therefore increasing the price.
I can see how if you don’t do the logical steps to understand what PPP is claiming that you would not understand my statements, especially the one you put in bold.
–“Given your current comments about PPP, I’d suggest reading up on how they make the QAs, and when they’re necessary (hint: it’s only when the exact same product isn’t available, which is decently rare). They do make apples-to-apples comparisons. Exchange rates do, nay, cannot.”
It doesn’t even matter if the exact same product is available. It’s still wrong to adjust because the price of the product is determined by infinite other variables, not just the product itself.
I’ll pay more from certain stores because I know they’ll help me if I need help, I know the goods aren’t stolen or fake, I know they will swap it out if I don’t like it, I know they will warranty it without hassle, they are convenient to drive to, the store is clean and bright, I won’t get mugged on my way out, I can grab dinner at the great restaurant next door and on and on and on to infinity….
You can’t calculate these things. Only the invisible hand can. It’s folly and hubris to try.
–“Further, as Ron noted, exchange rates are highly manipulated.”
Yeah by a few percent here and there temporarily… compare to PPP?!? Ha!!!
–“So…you’re back to not understanding what PPP is.”
Nope, you just haven’t thought deeply enough about what the PPP formula is actually saying.
Tom
“I’ll pay more from certain stores because I know they’ll help me if I need help, I know the goods aren’t stolen or fake, I know they will swap it out if I don’t like it, I know they will warranty it without hassle, they are convenient to drive to, the store is clean and bright, I won’t get mugged on my way out, I can grab dinner at the great restaurant next door and on and on and on to infinity….”
Those are all attributes of the merchant, not the product. You will pay one merchant more for the same product because of the additional perceived benefits provided by the merchant.
Tom
[exchange rates are highly manipulated.]
“Yeah by a few percent here and there temporarily… compare to PPP?!? Ha!!!”
Wait! That’s not what you said when you were raging at China for manipulating currency.
Either that IS a problem or it ISN’T. Which is it?
Ron, you’re making that up. I never raged about China manipulating currency. You’re debating what you think I think instead of what I say.
Tom…how do you think the PPP is calculated? You needn’t give me the actual formula. Just an example would do
Basket of goods and services they are weighted by roughly how much of the economy they represent. Take the relative difference between the cost vs the US in another country. This weighting is then is applied to the GDP in USD of the other country to determine the PPP.
Then you surely see why your comments are incorrect.
I should say “criticisms” are incorrect, not comments.
No, let me explain another way.
2 condos, exact same floorplan in the same building. Both on beaches.
One condo sells for $3 million the other for $300k. Why? They are the exact same thing right?
Except they aren’t. The one for $3 million is around a better school system, less crime, cleaner beach, better restaurants and night life etc.
You can’t compare the good itself. There are infinite other things that affect the value because those other things represent output (production) of the society the increase the price of that good.
The best way to determine what is the real value of the output is to let people tell you by how much they will pay for it.
Trying to figure out how much each of the apartments should be worth by criteria you decide is doomed to failure.
That is the same issue as PPP. Goods are not the same in different countries for all of the surrounding reasons that are not reflected directly in the good itself.
That is also why water costs $8 in a hotel and $1 at your local convenience store. You’re paying for more than the water.
PPP is stupid.
“Except they aren’t. The one for $3 million is around a better school system, less crime, cleaner beach, better restaurants and night life etc.”
All this difference is between two identical condos min the sme building? That must be one hell of a big building.
As in your other example you are paying for different package, not different goods.
Ron, same building design.
–“As in your other example you are paying for different package, not different goods.”
Exactly. The goods they select are what they thought should be selected. That’s the problem.
Tom
“I don’t think a 3rd party can tell me the value of my quality of life… do you?”
Of course not. All value is subjective. But a third party can assume that at the point of exchange, you will value a Big Mac in Paris about as much as you will value what is essentially an identical Big Mac in New York. That imperfect assumption allows a comparison of Euros to USD.
Otherwise you have nothing but manipulated currency exchange rates for your comparison. If all exchange rates were perfectly and instantaneously free floating you might be right, but they are not.
“That’s what PPP is. Someone else telling you how much you should value something instead of what you’ll actually pay for it.”
No it’s not. It’s someone observing what people are willing to pay for something in different currencies, therefore estimating the relative exchange rates in human terms of the two currencies. The big Mac may be considered a common, global form of money just as gold once was. Opportunity costs may be measured in terms of that common currency.
It doesn’t so much matter what governments determine a currency is worth relative to another, it matters what individual consumers believe the ratio is.
Spot on
–“Of course not. All value is subjective. But a third party can assume that at the point of exchange, you will value a Big Mac in Paris about as much as you will value what is essentially an identical Big Mac in New York.”
Absolutely wrong. In Paris I could be looking art at the Louvre while eating my Big Mac. Let alone the differences in the restaurant, food, regulations about what can go in the food, service, convenience, safety, environment and on and on and on.
I guess you think eating a Big Mac that’s made with horse parts in a 3rd world country in a restaurant that’s 110 degrees and dirty is the same as eating it in your local Mc Donalds…
That’s the problem with PPP… it is an arbitrary selection of goods and services and ignores EVERYTHING else. The everything else is 90% of the value.
–“Otherwise you have nothing but manipulated currency exchange rates for your comparison. “
Better than random decisions by humans on what’s important to count. I’ll take the market thank you very much.
–“No it’s not. It’s someone observing what people are willing to pay for something in different currencies, therefore estimating the relative exchange rates in human terms of the two currencies.”
Yes it is. It’s someone saying “that hamburger in NY for $5 is really only worth what I could have paid for it in China at $2.50… so I’m going to claim that Chinese hamburger is really worth $5 instead of what the market will pay for it and increase their GDP. Maybe there’s a reason the hamburger is half the price in China…hmmmm…. could it be. Nah… right?
You just don’t get it, Tom, do you?
It’s someone saying “that hamburger in NY for $5 is really only worth what I could have paid for it in China at $2.50… so I’m going to claim that Chinese hamburger is really worth $5 instead of what the market will pay for it
That’s not what PPP is…
Ummm…. yes that’s exactly what it is. You just need to follow the logic of the math. If you adjust the exchange rate my the relative value of selected goods then you are claiming those goods represented more output then what they actually were.
GDP is output measured in currency. To increase GDP you are increasing output. To increase output you are saying the price paid for something did not represent the output so you need to multiply it.
You are looking at the formula and not thinking deeper about what the formula is saying.
Btw, did you ever notice that PPP increases the GDP of poorer countries and decreases the GDP of richer countries? Sometimes multiplying the GDP of very poor country 5 times or more….
Hmmmm, suspicious…. I’m sure that’s just random distribution and happen to work out that way… nothing massively flawed with the approach…. right?
Yeah, because that’s the whole point of adjusting GDP and GDP per capita for the differences in purchasing power. In a country like India, the unadjusted per capita GDP is about $1,600 vs. US at $56,000 vs. Switzerland at $80,000. But that’s not a fair comparison because goods/services are cheaper in India vs. US and more expensive in Switzerland. For example, a haircut that costs $10-$50 in US only costs $1 in India. A textbook that costs $300 in the US costs $10 in India. A prescription drug that costs $20 in the US costs $2 in India. Therefore, adjusted for PPP, the per capita GDP in India is $6,200 and in Switzerland it’s $58,000 (because goods/services are MORE expensive in Switzerland than the US).
Although not perfect (what is perfect?), the PPP adjustment is useful when we compare GDP per capita among different countries with different prices for consumer goods/services. In a way, the PPP adjustment is like a “cost of living” adjustment, similar to the adjustment we would make to compare $100,000 annual income in Manhattan to $100,000 annual income in Manhattan Kansas. In NYC, the cost of living is 80% above the US average, and in Manhattan Kansas the cost of living is slightly below average.
Bottom Line: The adjustment for PPP is such a basic and non-controversial topic that it’s a distraction for the blog to have such a non-productive discussion about something so basic and non-controversial. At some point, there has to be a limit to the nonsense and nitwitery that is allowed in the comment section from certain commenters, and we are asymptotically approaching that limit.
Tom
I’ve previously learned my lesson. I’m stopping now before I waste any more time in this pointless discussion with you. Your ignorance isn’t my problem.
–“At some point, there has to be a limit to the nonsense and nitwitery that is allowed in the comment section from certain commenters, and we are asymptotically approaching that limit.”
That sounds like you’re threatening to ban me.
For executing my right to free speech without insulting or threatening anyone, even taking insults (nitwitery) and not reciprocating… because… you don’t like what I have to say?
Maybe I’m misinterpreting… I hope I am. But if not you just made a mockery of every post you you’ve made about free speech with that threat. As I said, your actions are a reflection on you, not me.
I have no interest in being somewhere I’m not wanted.
If I feel like it maybe I’ll come back. Probably not.
Tom, there is no free speech at someone’s house, or place of business, or blog. The owner determines what speech or behavior is allowed, and those who don’t follow the house rules will be refused entry. .
I guess you can add “free speech” to the list of things Tom doesn’t understand.
Tom said, “I have no interest in being somewhere I’m not wanted.”
Tom, it is not that you are not wanted. It is about limiting “a non-productive discussion about something so basic and non-controversial.”
There are a lot of conversations that are non-productive because one party insists the law of supply and demand do not apply in certain situations, others want to put a point to an extreme that makes no sense, some want to pretend their opponents said something they did not, and a few “progressives” like to name calling and make disparaging comments. That are not okay either, but no one wants to spend a lot of time talking about noncontroversial issues like PPP.
Warren
From your source:
GDP (purchasing power parity):
$21.27 trillion (2016 est.)
$19.95 trillion (2015 est.)
$18.67 trillion (2014 est.)
note: data are in 2016 dollars
country comparison to the world: 1
GDP (official exchange rate): (nominal rate)
$11.39 trillion (2015 est.)
note: because China’s exchange rate is determined by fiat rather than by market forces, the official exchange rate measure of GDP is not an accurate measure of China’s output.
Both yes and no answers are correct in this case. I prefer PPP comparisons, so I would agree with you that china has the largest economy in the world based on GDP PPP.
But as others point out, that’s only $15k per capita. far behind the US and many other nations in the world.
This is one of these comparisons to which I can only respond with a big “so what”. Who cares if one region of the world has a higher GDP than another?
“. According to my calculations, China GDP will be twice the size of the US in about 10 years. Here’s the spreadsheet:”
That seems to alarm you, but that’s actually wonderful news! Hundreds of millions more people will be lifted out of poverty and those poor, long suffering folks will be, on average, 2/3 as well off as we are now in the US. Good for them.
“Hundreds of millions more people will be lifted out of poverty and those poor, long suffering folks will be, on average, 2/3 as well off as we are now in the US. Good for them.”
If you’re a Fixed Pie aficionado, “Good for them” (whoever “them” are) means “Bad for us” (whoever “us” is).
If not, it’s all good.
Exactly
It should be obvious that most people on earth are much better off than they were 50 years ago, 100 years ago, 200 years ago … how could the pie NOT be growing, even as populations have exploded?
Exactly… I make this point to fixed pie people all the time.
100 years ago we live to 50 if we were lucky and lived in sewage.
Make that 200 years ago 😉
–“Both yes and no answers are correct in this case. I prefer PPP comparisons, so I would agree with you that china has the largest economy in the world based on GDP PPP.”
You prefer fantasy over reality? Interesting…
I’ve addressed that elsewhere, as have others.
Wow–just saw all this: didn’t mean to stir the pot with PPP! but you all are missing my main point: there are strategic implications to the fact that China has a bigger PPP GDP than US because the size and power of a nation’s military depends on absolute GDP, not GDP per capita.
For example, Qatar has a per capita GDP of ~$130K, but their GDP is only $335B. So guess who’s navy it is that ensures their tankers get out to market?
Do you see the problem? If China spends 3% of GDP on war materiel, then in about 10 years, the US would have to spend 6% to keep up. If there was another doubling, US would have to spend 12%. If China bumped their’s up to 6%, US would have to spend 24%. At that point, there’s not enough golden statues in the Parthenon to cover the cost of more gallies.
Basically, the US is in the same boat as the USSR in the 1980s, or even worse, Germany in the 1930s–and here is the dangerous part–IF there is to be war with China, it is to the US advantage to have it out sooner, rather than later. Time is no longer on our side. A classic Thucydides trap.
Sure, it’s possible that China could soon hit the wall economically like Japan did, but that is a hope, not a strategy.
And don’t tell me this all a separate question unrelated to free trade. Regardless of the effects of free trade on consumers versus workers (as if they are somehow separate), if free trade places the nation in an existential risk, then pursuing free trade is treasonous.
China should have been given the Cuba treatment until such time as there was a regime change to a friendly democratic government.
IMHO YMMV