Freed Up

Sebastian Mallaby says, “Globalization scares people. Security threats scare people.”
Do we need to be “scared” of globalization?

Globalization brings many changes, however a core concern is the following: The company reaps higher profits by laying off all the American workers and hires cheap, overseas labor. Today this scare seems to be morphing into a Chinese flavor. Until now, the post-NAFTA “scare” has come with a Mexican flavor.

There are a number of issues which have risen from this topic. The debatable topics have been;
1) trade deficits
2) unfair competition
3) job cuts
4) trade wars
5) tarriffs
6) protectionism

Every person and nation seems to have an opinion of how to stop the flow of jobs out of the United States. One must pose the most important question? Which economy has been time-tested by providing for it’s citizenry? This economy must have the ability to invent new jobs when others are lost. By using nearly all economic indicators the US economy has proven itself well.

What is happening on the global stage is a “freeing up” of trade. This freeing up of trade is growing the economy and per capita incomes of all participatory nations. According to the American Enterprise Institute, the North American Free Trade Agreement (NAFTA) has brought growing wealth to the three countries involved; Canada, United States and Mexico.

There is always going to be a trade surplus or deficit between any two countries. A trade deficit for one is a surplus for the other. A trade deficit is looked upon in this country with such disdain. Why?

A more wealthy economy will naturally have more expendable income per person than a country which is less wealthy. Because the United States has 260+ million population and the 4th highest per capita income of all nations, this combination allows for the largest buying power of any nation. Are we then predisposed to having trade deficits with other nations?

All economies must start somewhere. Again I say look at the United States economy and how it has progressed. 100 years ago we were heavily agrarian. With the industrial revolution and the invention of internal combustion, this allowed for fewer farmers to care for more land. This freed up more farmers to go to the factories. Factory work is now moving to automation or to third world countries. Once factory workers must find new work. Their sons and daughters then moved into services, chemicals, research and computer related industries. As we vet the factory jobs to other nations we gain more available bodies for technology jobs. The United States will continue to pass some jobs to other nations to free up Americans for the next generation of industry. This vetting will continue no doubt.

With regard to the low-wage Chinese taking high paying American jobs, let us use an example;
The year is 2006. The Barker family lives in a modest home with an half-acre of yard in suburban Atlanta, Georgia. The Barkers have decided to pay landscapers to mow their lawn.. The first landscaper contacted by phone is Jake. Jake explains his business opened in 2003. They do small to medium sized jobs. Jake quotes $116 for a 2 man crew at 2 hours labor to complete the ½ acre lot. This includes mowing the entire yard, edging the sidewalks and streets. Jake has a list of current and past customers very happy with his work.

Then the Barkers call a competing landscape firm, owned by George George immediately attempts to win the Barkers business. After listening to his pitch, it sounds as though George has similar equipment and capabilities as does Jake’s firm. George also has a list of happy customers, past and present. George is starting his second summer as a landscaper. George quotes $100 for the 2 man, 2 hour, ½ acre job.

Which landscaper will be Barkers hire? I believe most folks would hire George at $100.


Background to above:
Jake is a college graduate. He started his landscape company with two college roommates in 2003. They pooled their funds and opened up their landscaping business. They each earn $14/hour for labor. They must take into account the labor wage + supplies, fuel, wear and tear on the equipment in calculating their job quotes.

George is actually Jorge. Pronounced Hor-hay. George is originally from Columbia. He moved here with his family and needed to find work. He did so until he raised enough money to cover for a few months of wages and expenses for a landscaping company. He found a bank which entrusted him with a small business loan to purchase the equipment. He opened his business last summer, 2005. George does not have a high school education. He hired high school and college students to man his mowers. He pays them $10/hour.

All else equal, if we assume George and his workers do an effective job of mowing lawns, then he will likely maintain their current customer base. If they continue to provide an effective work product they may win new bids in the future as their reputation grows.

In the long term, if Jake’s firm mows lawns equally as well as George, then Jake and his roommates will lose their current customers to George. The eventual demise will be caused directly with either George’s decision to pay lower his labor costs, then making his product less expensive relative to Jake. Jake must then justify to his current customers and future customers why his work is worth $16 more per half acre job. If Jake is unable to justify the high costs, the business will suffer through lost clients moving to George.

Jake and his roommates agree they cannot cut the lawn of their customers any better then George. They also agree they are not willing to accept less than $14/hour in order to make their quotes more competitive.

Jake ends his business venture, sells his equipment and customer leads to George for a modest sum.

George is better off, with double the equipment, more customers and therefore the demand for his work justifying the hiring of 3 more workers. George’s reputation continues to build in the community and his phone begins ringing off the hook

At first look, Jake and his college friends are worse off while George is better off. Jake’s firm was well educated and they understood the risks of starting a business. To their discredit they would not accept lower wages to make their product more competitive. To their credit they have college degrees. They have recouped some of their capital through the sale of their equipment.

They found work at new employers while more funds are accrued for a new venture. They left the landscaping business with a failed firm. However they have gained invaluable business knowledge and this failed venture may have motivated the three to try it again…Next time perhaps in a different industry, better prepared. They were all degreed in computer programming. Maybe it will be in the computer science industry.

Here in lies the battle between American and China. The United States workforce is represented in Jake and China in George. It is obvious landscaping jobs are not being sent to Asia. But this example runs parallels of many industries once wholly contained in the United States. Chip makers, automobile manufacturers, many factory type jobs have left the United States.

The jobs have left due to the ability for Chinese workers to make a product equally as well or with near enough quality to find acceptance with the buying public. The scale tipper is the cost of each product made in China could be a fraction of a similarly US made product. If a company makes an equal product for less, or if they make an adequate product for substantially less, customers will gravitate toward this new supplier.

The important piece to remember; George continues doing what he does well and is satisfied with the income level he is receiving for his work. George hires 3 new students to work for his firm (this replaces the three jobs lost in Jake and his roommates.). Jake and his roommates would not work for less, therefore they are pushed out of an industry of which they are over qualified. They have the education and hopefully the motivation to take another risk in the future. Jake and his roommates were actually “freed up” to do something else. Something which potentially would be more financially lucrative and may require the education and skills they already have attained.

An economy can not have all the scientists and engineers “mowing grass”. Jobs should be filled, and in a free market are filled, by those qualified or accepting of the wage they will earn in a specific job. If they are not happy with the pay or it is not enough of a challenge, then eventually they will free up the job and search for something new.

Of all the nations, the United States should be least “scared” of globalization. Globalization is the free market finding the best use for all workers and resources. Before railroads there were parts of the nation segmented by geography. They could not actively participate in trade and the free market. This isolation changed with transportation improvements. The improvements caused a smaller version of globalization with the United States. If this economy is good for a state and a nation of states, why would it not be good for a world of nations?

The “freeing up” of a workforce to do something else is what drives an economy forward. Globalization is an opportunity for wealth. Wealth for developed and fledgling economies alike. It is a shame the nation is even debating the “China Card”. It is inquisitive and a shame Mr. Mallaby felt he had to spend his research and writing talent on a topic we should already understand.

Desirable Reading
Economics in One Lesson, Henry Hazlitt
Capitalism and Freedom, Milton Friedman
Wealth of Nations, Adam Smith
Google; “Austrian Economics” and “World Fact book”