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THE SUCKING SOUND AND YOU
Part 6
Lower Cost vs. Higher Income
On the surface it seems that the two goals of cost-reduction and income increase are contrary to each other. Free trade seems to always favor cost savings, while "protectionism" puts the importance on rising incomes, especially rising wages. The idea of rising incomes is not a naive notion based on nominal dollar values, but rather on figures adjusted for inflation; in other words, it is real income increase which matters.
So when Ravi Batra argues that real earnings of wage-earners have declined, he intends to take into account all the benefits of free trade, such as lower prices, which those wage-earners gained, and he concludes that after all is taken into account, their net income has decreased. And so the benefits of free trade must have been less than the cost (in lower incomes adjusted for inflation) for those wage-earners.
If his argument is to be accepted, then it means that cost savings is not always good. Perhaps the argument would be something like this: cost savings is good if it results in a net increase in the incomes of a majority of the population, but it is bad if the result is a decline of income for the majority. This majority, according to Batra, are almost all wage-earners, and they constitute about 80% of wage-earners in the U.S.
Though we could argue with his figures, it isn't necessary to do that here. His figures might be correct for the early '90's. By many accounts, the real incomes of wage-earners did improve in the later '90's. But many unionists continue to complain that wage-earners' incomes on the average are falling behind inflation, or perhaps just barely keeping pace with it. Let's assume that Batra's factual description of the "plight" of wage-earners is near correct. Let's even assume that the number of wage-earners who are "suffering" is so large as to constitute a majority of the working population or of all income-earners.
Does it then follow that something must be done to boost wages, such as imposing high tariffs on imports, or anything else it might take to force the average wage upward? No, the information Batra gives us, even if all correct, is not enough to justify any such policy. We still have to ask why this particular group (wage-earners as a class) are "suffering" this result.
We should not force up the income of any select group, even if they constitute a majority, if the only reason for doing so is that they are suffering an apparent income loss. We must know why they are suffering the income loss and then consider whether somehow the system has been rigged against this group, in which case the system should be corrected, or if this group is simply a normal victim of competition, in which case the only solution is for them to become more competitive.
If normal competition is the explanation, then the group in question should not be protected, but must be expected to do what everyone else must do, which is improve and become more competitive in the marketplace. Any action to protect the group is a subsidy which all the rest of society must pay; in other words, the competitive are forced to subsidize the uncompetitive. This will only forestall the ultimate solution to the problem, because it will reward the uncompetitive and penalize the competitive.
The fact that the uncompetitive group (the one with declining income) is large is no reason to make an exception and subsidize that group. Whether small or large, the uncompetitive group needs the incentive to improve itself. If it is a large group, then the benefit from the improvement will be all the greater, and any delay of this improvement will only be the more damaging to society in the long run. Furthermore, as was pointed out before, to subsidize this group simply because it happens to be a majority of the population would be no more appropriate than to subsidize all right-handers (at the expense of left-handers) simply because they happen to be a majority.
Lower cost -- always good
Higher income -- sometimes good, sometimes bad
So, in the argument of lower cost vs. higher income, it is the lower cost which has the primary value. Whenever there is a seeming conflict between these two, it is always the lower cost which should receive the priority. Lower cost is always good (as long as we include all cost), even though it comes at the expense of someone (certain wage-earners?). In every case where someone is hurt by lower cost, it is their responsibility to change and become more competitive, and not the obligation of the company or consumers or anyone else to absorb the higher cost in order to accommodate the less competitive who fail to adjust.
On the other hand, higher income is justified only if it does not come at anyone's expense. Anyone at all. Why should anyone receive a wage or profit increase at someone else's expense? At whose expense would it be justified to gain an income increase? Your employer's? No, the employer should also gain, because the only reason to increase your wage would be your improved performance, which benefits the employer; or perhaps the increase is necessary to retain you, and your loss would make the employer worse off. So the employer also should gain from increasing your wage.
So at whose expense should anyone be entitled to an income increase? No one's. An income increase should come to a person at no one else's expense. Or, if you define a cost saving as an income increase to the one who pays that cost, then this kind of income increase, and only this kind, may justifiably come at someone else's expense, namely, at the expense of the less competitive.
An income increase in the form of a cost saving (and lower price) benefits consumers and so is good, even though it comes at the expense of the less competitive. This is the only form of income increase which can justifiably come at someone else's expense. Even a cost savings should come at no one's expense, except that of the less competitive.
No matter what form it may be, whether subsidies to farmers, protection of wage-earners or companies through tariffs, corporate welfare -- whatever form the subsidy takes, any increase of someone's income at someone else's expense, except that of the less competitive, is parasitic and unjustified. Not because of abstract morality, but because of practical economics. Society will be stronger economically if the less competitive are prevented from ever gaining at the expense of the more competitive.
Is this a "universal law" with no exceptions? What would be an exception? What about gambling income? Admittedly, this might be an exception. Nevertheless, in a free society we must assume that those who make choices, such as choosing to gamble, are acting in their own interest and benefit from the activity even when they lose money at it. If they gained no benefit, they would stop doing it. Perhaps this "universal law" could be qualified to exclude forms of gambling in which the chronically addicted are taken advantage of. The philosophy of free trade could be accommodated to differing views about the ethics of gambling.
Is there any other possible exception to this rule? Let's restate the rule again: The only time it is justified to gain an increased income at someone else's expense is when this is due to that someone else's being less competitive. Otherwise, it is never justified to gain higher income at someone else's expense. Even if the ones gaining happen to be a majority of the population.
Even if this rule is not perfect, it is a good rule which ought to be applied 99% of the time. And it explains why cost savings is always good, but income increase is not always good. Where the two conflict, the cost saving is always of primary value and should get priority over income increase. The total gains outweigh the total losses. This is what justifies Ravi Batra's statement that "society is better off" even though the incomes of farmers were adversely affected. And the rule still applies even when those hurt happen to be a majority of the population.
Raising the income of anyone constitutes a cost increase to someone else. So does that mean that a cost-controller or free trader must be absolutely against anyone's income ever rising? No, a higher income is sometimes justified (as explained above) and is a kind of necessary evil. It is a practical necessity.
Ideally, if it were possible, everyone should work for free, and we should all perform at our highest level of efficiency, just because it's the right thing to do. But since this will never happen in a million years, we need the incentive of incomes -- wages, profits -- to prod us to do the right thing.
But where an income increase for someone is justified, is this not a cost increase to someone else and thus an income decrease for them? such as consumers having to pay a higher price? What about the rule that an income increase may not come at someone else's expense?
The way to understand this is to consider what would happen to the buyer (the one paying the income) if the producer (receiver) should suddenly disappear. If the producer/wage-earner did not exist, would the buyer/consumer be better off or worse off? In other words, taking into account the price which the buyer/consumer must pay, even if this price increases, is this party made better off or worse off by the existence of the producer/worker who has to be paid more in order to produce?
If the buyer/consumer is better off than s/he would be if the worker/producer did not exist (even at the higher price to be paid), then it cannot be said that the increased income to the worker/producer comes at the expense of the buyer/consumer. This is not a subsidy. In other words, if the buyer needs this particular producer/worker, and cannot get the value sought after from any other source at a lower price, then the higher price is a necessary and justified cost increase to the buyer.
This is an important principle. Are you valuable in the economy because you offer a service or product which cannot be gained elsewhere at lower cost? If you were to be snuffed out, would your customers then be made better off or worse off by your absence? If the latter, then you are genuinely valuable. But if your disappearance would then clear the way for your customers to find a better deal, then you are not valuable but are a liability to your customers.
Your goal as a worker/producer must be to make others (customers, employer) better off, so that your existence in the economy increases their income over what it would be if you didn't exist. Then, any income increase you gain, which they must pay, is not really at their expense, in the sense that without you their expense would be even greater still. So you are still a net gain for them, even though they must pay you a higher price than before.
This kind of income increase is totally different than the kind enjoyed by a company or workers protected by high tariffs. The latter forces consumers to pay more, thus reducing their real income, by interfering with their access to the market and making the existence of the protected company or workers into a liability to consumers rather than an asset. In other words, the consumers would be better off if that company or those workers did not exist.
So we have a simple formula for judging whether a particular income increase is good for the economy or not. We simply ask about the producer/worker who gains this increase: If they didn't exist, would their customers be better off or worse off? If better off, then that producer/worker is gaining at the expense of others and is a parasite; but if worse off, then that producer/worker is not gaining at the expense of others (despite a price/wage increase) and is an asset to the economy.
There is such a thing as "shoulds" or "ethics" in economics, and cost savings is one. A good rule would be: any time a cost (income to someone) can be reduced without reducing the value they produce, that cost (income) should be reduced, and the resultant cost saving constitutes an effective income increase to buyers of that value. Such a rule is justified for practical, not moralistic, reasons.
The above is a good rule in at least two ways: 1) it allows people to exercise their free choice, because the free market enforces this rule with the minimum of coercion or government intervention; and 2) it extracts the maximum performance from producers/workers. We all benefit from this rule as consumers, but individually as producers/wage-earners we are continually tempted to circumvent this rule by any means.
Whatever the argument is against free trade, more often than not the answer to it is cost savings, if not better service to consumers; and these two are about the same anyway. Why the relocation of factories abroad and hiring of cheap labor? Cost savings. Why is it better to let consumers buy the cheap foreign imports rather than protect U.S. producers with equalizing tariffs? Cost savings.
Lower prices to consumers is only part of the benefit. Those lower prices reflect lower cost of production, and that in itself is also a benefit. If you can disprove the value of cost savings, then you are well on the way to debunking free trade.
Without the economic principle of cost saving and service to consumers, the only remaining basis for free trade is the libertarian ideal of individual freedom and sovereignty over one's own life and property. This libertarian ideal is attractive and is a fundamental part of the free trade principle.
But free trade does not rest upon only this one ideal as its premise. Rather, this premise is accompanied by the further premise that freedom to trade across political or national boundaries does not lead to net economic injury (though it may hurt some who are less competitive in the market), but rather is bound to improve the total economic condition for most people, just as free market competitive capitalism within national boundaries will improve the country's total economic performance.
And the principle of cost savings is a major part of this economic premise. Those who crusade against free trade not only disregard the principle of cost savings, but even seem to imagine that higher cost is good and is to be equated with higher value.
Snake-oil Economics Lesson: Higher Cost = Higher Value Gus Stelzer makes an argument on pp. 129-130 which completely discounts the value of cost savings and actually assumes that a higher cost of production is desirable and makes a product more valuable. He presents a hypothetical example of a product ("widget") which would cost $30 to produce in the U.S. but only $6 to produce in China. The total tax on that product if made in the U.S. would be $13.80, or 46%, because that is the average hidden cost of government contained in the price of everything produced and sold in the U.S. (according to Stelzer). But that same product made in China and shipped here would pay a tax (tariff) of only 18 cents, because its "value" is only $6 (instead of $30) and the tariff would be about 3%. In other words, the tax on that import would be "less than 2% of the amount the U.S. would earn if the product were made in America." (Note the word "earn.") Now to Stelzer this savings of $24 in production cost is not a good thing at all. Rather, it represents a tragic loss of $13.62 (earnings?) out of the U.S. treasury, and explains "why red ink is spilling all over the floor of our Treasury Department." Everything Stelzer says here gives a preference to a higher cost of production over a lower cost. The injustice he perceives here, the loss of revenue to the U.S. treasury, is caused by the lower cost of production in the foreign country, and the higher that cost can be raised, the less is the injustice to America. He says, ". . . the average product imported by the U.S. bears a cost factor of less than one-half of costs in the U.S. . . ." And so if those goods instead were produced in America ". . . they would carry significantly higher dollar values by a factor of at least 100%. Therefore, in terms of U.S. values the $1.5 trillion trade deficit reflects the loss of nearly $3 trillion in production revenue . . ." Notice that Stelzer equates higher production cost with higher value. That's what he means when he says the same goods produced in the U.S. at twice the cost would carry "higher dollar values" by a factor of 100%. Double the cost means double the value. So if higher value is a good thing, then higher cost must also be good, because higher cost is what produces higher value (according to Stelzer). And this reasoning is the case against free trade! Perhaps instead of "values," he should have used the word "prices." But even with this correction, the argument is ludicrous, unless the premise is that higher production costs and higher prices to consumers is the goal of economics. His argument here about taxes is easily debunked by noting that U.S. consumers are made better off by the imports, and gain an effective real income increase as a result. And because of this they have more wealth and can pay higher taxes than they could if they were forced to pay five times as much in prices. But Stelzer's fundamental error is his failure to appreciate the benefit of cost savings. Does Stelzer truly have a desire for higher cost of production? How else can his language be interpreted? Doesn't he lament "the loss of nearly $3 trillion in production revenue" reflected in the so-called trade deficit? Of course he laments this -- it's a national disaster in his view. But what could have brought down that "loss" and made it less tragic? A higher cost of production to the foreign producer. Oh, if only those foreign producers didn't save so much on costs! Think how much lower would be our "loss" of production revenue (according to Stelzer). What kind of logic is this? Look what he's saying: If the U.S. cost of production is higher, then the "loss" caused by the cheap foreign imports is greater. And therefore (are you ready for this?), the higher the cost of production in the U.S. and the lower it is in the other country, the more desirable it is to produce it in the U.S.!! And so to minimize these "losses," we must give the most protection to those U.S. producers or industries which have the highest costs of production. The higher the cost, the more we must protect it! Are you listening, American industries? Want some protection against your foreign competitors? To qualify you must first drive up your costs, waste all the money you can, pad those expense accounts, install plush carpeting, buy a fleet of limousines. By Stelzer's logic, it makes no difference what causes the higher cost of production. The fact that the production cost in the U.S. is high makes it more desirable for that production to be done in the U.S. His objection to that widget imported from China is based on the wide gap in production cost ($30 in the U.S. vs. only $6 in China). That cost gap is the problem -- the wider it is, the worse the problem (if it's produced in China instead of the U.S.) and therefore the greater is the need to produce that widget in the U.S., where it generates more tax revenue (50 times more in the example). But bring that gap down by lowering production cost in the U.S. and what happens? That reduces the need to produce the product in the U.S. because it reduces the cost gap and thus the harm inflicted by it being produced abroad. Of course Stelzer totally ignores the obvious fact that the consumers will not buy as many widgets if the price is made five times greater. Consider this: If Stelzer is right, there must come a point, if the U.S. cost of production comes way down while that of foreign production goes way up, where it would finally be preferable for the product to be produced abroad, because the much higher-cost import would finally generate more tax revenue than the low-cost American product. In fact it would even be desirable to ban the more competitive U.S. production in order to gain the benefits of that extra tax revenue generated by the overpriced import. So how is the case against free trade doing? What is free trade guilty of? It is guilty of moving production to wherever it can be done at lower cost. And the accusers argue for the opposite: all high-cost production should be done in America, but especially that high-cost production which could be done elsewhere at low cost. The more it costs to produce it in America, the greater is the benefit of producing it here; and the only production that need not be done in the U.S. is that which can be done here at very low cost, and in fact if the cost goes below a certain point, it may be preferable to move that production abroad, perhaps to Borneo or Antarctica, where production cost might be exorbitantly high and thus generate more U.S. tariff revenue. So there's the case against free trade. If you don't understand it, just take a course in Moonbeam Economics -- that's what it's based on. "Jobs" = babysitting slots? The free trade debate is strange in at least these two respects: 1) the denouncers of free trade say things which defy common sense and are so preposterous, you have to wonder if there's not something else going on in their mind, perhaps even subconsciously, that they can't/won't bring out into the open; and 2) the proponents of free trade are running away from the debate, refusing to answer the nonsensical arguments of the Perots, the Buchanans, the Batras and the Stelzers. Is there something both sides don't want to talk about? The proponents of free trade should be talking about the desirability of saving on labor cost. But perhaps they can't bring themselves to do this because they think wage-earners typically can't handle such subject matter. And this is why the free-traders run away. And in the absence of any opposition, the free-trade bashers move in with their humbug economics and dazzle their audiences unchallenged. Consider again Batra's emotional appeal: ". . . if a policy shifts high-wage manufacturing jobs abroad or workers into low-wage services at home, the country cannot but lose." How does he get away with it? How does such rubbish go unchallenged? If this statement makes any sense, we should just abolish the jobs (the work) and pay the high wages. Only the high wages matter, but not the work performed. (If the work per se does count, then shifting the high-wage jobs to cheap foreign labor is an improvement, because more of that work now can be done than before because of the savings in labor cost.) The statement makes no sense unless we assume that it's only the wage level that matters and not the work being performed. Furthermore, if Batra's statement makes sense, then so does the following: If a policy shifts high-wage manufacturing jobs to robots and the workers into low-wage services, the country cannot but lose. Labor-saving technology and cheap foreign labor both cause the same consequences to the U.S. economy. Yet no one is condemning the robots and computers. It's politically correct to condemn the replacement of U.S. workers by cheap foreign labor, but not their replacement by robots and computers. Xenophobia seems to be part of the explanation for this. But it's more than that. It's also politically incorrect to speak of saving on labor cost. There are pressures to preserve those labor costs, as though the jobs provide a service to society other than getting the work done. Who's paying for those high-wage manufacturing jobs (which are really no longer worth those high wages and could be done for a fraction of the cost by cheap labor)? Who's paying? The company? Yes, but so are the rest of us. We are all paying that extra cost of business. How? Not just in higher prices, but in the wasted time and energy of those high-wage workers. We don't need them to do that work! They are going to waste in that factory job. That energy and time should be spent elsewhere in the economy where they offer more value and the need for them is greater. There can be only one excuse to keep them in that factory and waste them in those jobs we don't need them for. And that excuse is: THEY'RE NOT GOOD FOR ANYTHING ELSE! This is the true bottom line of all the crusaders against free trade. I.e., most of our wage-earners, especially the factory workers, are worthless rabble who would only become a burden on society if unleashed from their workstation. It's cheaper to keep the scum where they are! Either we stick 'em in that job, or we stick 'em on welfare. Isn't that what Stelzer is saying: ". . . the responsibility for resolving the welfare mess should be placed on employers. We should stop subsidizing, out of tax coffers, the substandard wages of those employers who exploit employees and who then leave taxpayers to foot the costs of repairing the social damages they created." (p. 28) Is there not hidden in these words a greater contempt for the employees than for the employers? Obviously these employees are worthless slimeballs which have to be taken care of by someone, if not by their employer then by the taxpayers. And what about those low-income employees who do not fit Stelzer's stereotype -- i.e., who do not need to be cared for by anyone and for whom there is no "social damage" to repair (because they are not the scum Stelzer implies they are)? Well, since they're not a problem, maybe they should be laid off and replaced by some scumbags who really need the job. After all, the purpose of jobs is to serve as babysitting slots for the scum, isn't it? Why else should the cost of "repairing the social damage" and "resolving the welfare mess" be placed on employers? Under Stelzer's welfare reform plan, "more of the cost burden would be shifted from government to employers where it should be in the first place." (p. 269) So it is clear what is the reasoning for preserving the "high-wage" manufacturing jobs. Those workers, if laid off or shifted to low-wage jobs, will certainly become a burden on society, being the worthless scum that they are, and of course it's not their fault (they're too worthless to be able to assume any responsibility for themselves), so we'll blame the most convenient target -- the employer who is trying to save on cost. And if, after all the employer-bashing and punishing, we find we don't have as many employers as we used to have (because they wanted to run a business and not be babysitters), we'll just bash all the harder on the few that are left. The difference between free-trade economics and protectionist economics is clear. We need only ask the question: What is the proper function of business in our society? To the free trader, the function of business is to provide products and services to consumers; and to perform this role best, it should always seek to minimize cost. But to the protectionist, the role of business is to provide needed jobs (especially to dregs and derelicts and welfare recipients because their need is the greatest), to make the U.S. "dominant" in the world economically by diverting the maximum possible energy and labor into manufacturing and blanketing the country with wall-to-wall factories, and to provide revenue to the government using its wage-earners as a tax funnel; and to best achieve these goals, it should perform all these functions or anything else it does at the highest possible cost. The case against free trade is based entirely on this foundation. Jobs for the sake of jobs, factories for the sake of factories, higher cost, consumers subjugated to the need of producers for markets, and all this seasoned with a smattering of nostalgia and wayward patriotism. Without this foundation there is no case against free trade. End of The Sucking Sound and You. Return to: The Sucking Sound and You: Introduction Part 1: What about those declining wages? Part 2: What about those high tariffs in the 19th century? Part 3, page 1: What about that deindustrialization? Part 3, page 2: What about that deindustrialization? cont'd Part 4: What about that multiplier effect? Part 5: Compete? Yes, but not with them foreigners! Part 6: Lower Cost vs. Higher Income All arguments against free trade (total unilateral free trade) will be posted in this site and debunked.
Do you have a bitch against free trade? Post it in
this web page (click here), or post it in the SocialContract.com
Message Board.