IBM plans to move skilled software jobs to China, India.

[Midnight Son]

http://story.news.yahoo.com/news?tmpl=story&cid=530&ncid=530&e=2&u=/ap/20031215/ap_on_hi_te/ibm_offshoring

IBM Corp. plans to move up to several thousand skilled software jobs from the United States to India, China and other countries, which could amount to one of the biggest such actions yet in the technology industry.

IBM documents obtained by The Wall Street Journal said about 4,700 programming jobs could be shifted overseas to save costs, a growing high-tech industry trend known as "offshoring."

Globalization sure does suck if you're an American! In a generation the only highly paid Americans will be CEO's. The rest will work at Walmart or Seven Eleven.

[Mark Asher]

Yeah, globalization's fine if you're a higher-up, because you'll reap windfall profits, no doubt. Middle management on down will get bent over. Heck, we've already lost a lot of the smokestack industry. This trend isn't good news for most Americans.

I guess the U.S. future's Snowcrash, where Americans are good at writing code and delivering pizza, but take out the coding part which is going to India.

[Jakub]

I think you're bound to see a swing to protectionist economies again, with limited free-trade zones like NAFTA and the EU.

As soon as the job and wage loss starts hurting, people are going to start voting for economic protectionists, and if the current parties won't embrace that philosophy, new ones will arise that do. I wouldn't be surprised with a return to the neo-colonialism of the mid 20th century, or even the colonialism of the 19th. I just don't think everyone in the world can be rich, and those that are, will protect their wealth from dissipating.

My bet is America will move first in this direction, as the people have the most to lose and still have the largest protectionist and isolationist sentiments, followed by the EU. Arab states are already this way.

I sincerely hope this happens before China gets too much momentum from the flowing investment capital, technology, etc. Not that I don't wish the Chinese well, I just don't wish myself ill.

[bago]

It's hard enough to be in someone's office trying to understand their description of the object model through a thick accent. Add to the fact that your primary vehicles of communication are now going to be thousands of miles apart and usually involve clueless middle management types, I predict this will last about 1 version of a product.

[XPav]

It's hard enough to be in someone's office trying to understand their description of the object model through a thick accent. Add to the fact that your primary vehicles of communication are now going to be thousands of miles apart and usually involve clueless middle management types, I predict this will last about 1 version of a product.

Some of the things you mention are covered here... (www.businessweek.com/technology/content/oct2003/tc20031027_9655_tc119.htm)

Keith Franklin, president of Empowered Software Solutions in Burr Ridge, Ill., loves offshore outsourcing. It means more work for his 40-person company. Just last year, ESS, which specializes in developing applications for Microsoft's .Net platform for Web services, earned $500,000 in revenues from fixing buggy software written in India. It took ESS five months to repair a glitch-filled application for a Web portal. Most pages on the site weren't connected, turning updating into a nightmare. Some code was missing.

The shoddy work didn't come cheap, either: The Indian outsourcer went $1 million overbudget. Franklin says he could have done the project for less than $900,000 -- right here in the U.S.

And then I love this quote...

One reason for the initiative, says Dan Zadorozny, EDS's vice-president for application-services delivery, is that labor costs in traditional outsourcing powerhouses such as India are escalating. Already, an entry-level programmer costs more there than in Argentina, he says -- which is where he's increasingly sending clients.

Beancounters will send programming all over the globe in an effort to make the bottom line happy, not realizing that there are a whole bunch of intangibles that they aren't factoring in.

[Qenan]

I have mixed feelings about this. Naturally I don't want to be out of a job. But I am skeptical that protectionism is the answer.

However, I agree with Jakub in that if a significant number of voters start feeling the pinch, you will see political parties become pro-protectionist.

[Kyle Wilson]

I think you're bound to see a swing to protectionist economies again, with limited free-trade zones like NAFTA and the EU.

Kiss the days of $40 DVD players goodbye, then.

[Midnight Son]

You're missing the point. What's the use for $40 DVD players if you can't come up with the measly $40?

[bago]

I remember having to work with the Dublin branch of my company. After sending various management back and forth for weeks at a time they still couldn't finish their deliverables within 2 months of their promised ship date. This was while both parties spoke fairly good english, and all worked for the same company.

All outsourcing does is remove accountability from the teams producing the work. It makes some management look good for the next year or two until the entire thing crashes hard. Then they blame the people under them for shoddy work while continuing to drain the company of resources and productive talent.

I'm all for outsourcing -- for the competition.

[Jakub]

See, I'm scared of China. I'm afraid that in 50 years, the West will be enthralled to the Chinese in the way Canada is to the US now (let's face it, the situation is real. Friendly, but real.)

China has a 5-6 century or so cycle of rise, power, decline, and collapse. In the past, this has been done with emperors - native Chinese or assimilated, as was the case with the most recent two dynasties - the Mongol Yuan and the Manchu Ching. The dynasties started very dynamically, open to the outside world, stagnated and then fell. In general, Chinese empires were always essentially feudal in nature. Whether you had allied families, royal cousins and brothers, or mandarins ruling the various provinces, the provinces would always grow strong enough to resist central rule and break away. Then they'd fight amongst each other in devastating civil wars until the country lay in ruin and the strongest province united it.

Today, China is rising and I don't think it will come down, certainly not as fast and definitely not as catastrophically as it has in the past.

Why? Now, you have an oligarchy ruling. A party. You may see a single man rise to power, even hold it absolutely, but if he loses it and is deposed, you won't see the chaos as in earlier centuries. Certainly nothing to inflict the lasting damage that always happened at the end of a dynasty or in interregnums. Moreover, with modern communication, nationalism and armies, few revolts are likely to succeed. Oh perhaps Tibet and Manchuria will break away in the fashion of Chechnya, but China itself is the largest single homogenous culture in the world. There may be different dialects and provinces, but they're all Chinese, in the way all the German states of the pre-Bismarck era knew they were German before there was such a thing as Germany.

I don't know why people call it the largest market in the world, because it's not. China isn't a consumer, it's a producer. Almost anything they need, they can produce - not counting luxury items and the expensive equipment of modern heavy or high-tech industry. I imagine it has a trade surplus with almost every single nation in the world and that is only going to increase as, for some reason, western capital funds industries that will produce products that rob us of our wealth even faster. With its abundant labor pool, a peope used to subjugation and no real democracy, I doubt China will see the kind of wage and cost inflation that will bring the cost of production there to parity with the West. The government there doesn't need or desire advanced health care or social reforms - they have more than enough population as it is.

And here we are, funding them. I'm not a conspiracy theorist, but who exactly benefits from Chinese goods? Sure it's cheaper for us, but we're earning less because they're not produced here. No one is ever going to argue that the US is a richer country, per capita, adjusted for inflation, and relative to other countries, now than it was in the 1950s and 60s. Since that time the West has exported more and more industry to 3rd world countries. At first it made sense; there was little profit or reason to have the basic industries here any longer. Africa, South America and Asia weren't the playgrounds of colonial powers, but the nations there became neo-colonial. Producing industrial goods, but only those that it wasn't worth making here any longer. They may have had official political independence, but little beyond that - enslaved as they were by debts to foreign banks, governments and investors, enslaved to Soviet and American interests.

However, as time has passed, we've exported more industry out there. We're losing wealth faster than producing it. We can print all the money we want, and our economists can say the economy is growing faster than ever but is it really? Just what is growing? Industry? Obviously nothing as archaic as US Steel. Tech and biotech? Sure, but we're already exporting the former and the latter is becoming prohibitively expensive to grow (not to mention preserve.) Rising drug costs are the sign of ever-more-difficult discoveries.

You may say - well, we built the 3rd world, everything they produce comes back to us through the owners of their industries. The western owners. Quite true. However, all it takes is a look back on Egypt and the nationalization of the Suez to see the panic that causes here, and our powerlessness to stop it. We were even more powerless to prevent the fall of the Persian Shah, or to stop Cuba from going communist and nationalizing all the American property, businesses, industries, and hotels. Fidel Castro is nothing, a benevolent dictator if anything. The reason why the US is squeezing him is to get its investments in Cuba back. And it isn't working. So if we couldn't stop Khomeini or Castro, what is going to happen with China?

We're already becoming addicted to their goods, we rely on them to a certain extent - not as much as they need us, but how long will it last? How long until, in an ironically Marxist way, we give them the weapons to subjugate us? Not physical weapons, but economic, technological and industrial ones?

What will happen if we need Chinese goods the way we need Arab oil? Not long after that threshold, that point of no return of dependency on the Arab world was crossed, they squeezed us. Oil prices rocketed, the trade surplus disappeared, production and living costs went up. Yes, we technically still own the industries that extract, refine, transport and sell the oil, but since OPEC squeezed its muscles, I somehow doubt we have control.

When will China grow powerful enough to do that? Up until that point, our trade deficit will be, I think, a figment of accountant's imagination since those are our factories, our labs, our offices in China. The only benefit they get are the pitiful wages and taxes we pay. All the money the "Chinese" companies earn will funnel right back here - until China says "no, that's enough." When they pull an OPEC, that imaginary trade deficit will become very real.

Or what if they simply nationalize and redistribute everything? Who's to stop them? How? How would you defeat ANY China, never mind a modern one, without ruining the industries we WILL grow to depend on?

Sure they respect our patents and copyrights and property now, they need us. How long until all that becomes too much of a burden, the last step to their supremacy?

And for anyone thinking that national supremacy isn't a concern, sorry, that's human nature. We fight, we struggle to survive, and to survive we conquer to improve our odds best.

I might be a complete lunatic, I might not understand how trade surpluses/deficits work... but this has been brewing in the back of my mind for about four years now. Thoughts?

PS
We can't rely on the incompetence of Indian programmers or Chinese laborers. That's silly - they're just learning. Soon, they'll get good enough to compete, and maybe even beat us.

[bago]

Innovation requires freedom.

China has had four times the number of people and a larger set of natural resources than the US for centuries now, and still hasn't ever gotten its economy to a size even beginning to approach that of the US. There is a reason for this.

[Jakub]

Innovation requires freedom.

China has had four times the number of people and a larger set of natural resources than the US for centuries now, and still hasn't ever gotten its economy to a size even beginning to approach that of the US. There is a reason for this.
1. False. The Soviets made plenty of innovations without freedom. Besides, China does have freedom, in its own limited way. I doubt you could find many urban Chinese who think they are oppressed. By their standards, historical and otherwise, things are hunky-dory.

2. Sure, because when the industrial revolution was occuring, China was on its downward slide. Look at them now, they're catching up at a tremendous pace. We're building their factories for them, because it's not worth it to build them here.

[Jason McCullough]

"Addicted to chinese goods?" What on earth do you mean by that?

And I've got to wonder what they'll be doing with all the goods and services we give them for their products if they're a "producer" nation - what, are they going to throw our dollars into the ocean?

[Jakub]

Addicted to their goods means exactly that.

What would happen if the Arab countries stopped shipping us oil? How long could we last?

What would happen to say... oh what's a good example... ok, Spain, if the US and Europe stopped exporting there? Think about it. There are millions of goods your citizens want, and thousands that your industries absolutely require that are not produced in your country. It's the reason that Napoleon's Continental System failed to crush Britain - countries simply needed British products and needed to export their resources to Britain.

---

We don't give them goods and services. We sell them. They sell theirs in return. Except that at the moment, they sell a lot more to us than we do to them - and this figure is going to increase rapidly over the years. What will they do with the money they make off the trade surplus? Well, a great portion of that comes right back to us as revenue from the industries we own there (for now). The rest goes to their local entrepreneurs, who in turn pay taxes and wages (and there are taxes on those wages). The Chinese government uses the taxes to fund whatever it deems China or the ruling party require, while the entrepreneurs re-invest in their own business and buy the resources (very few, such as oil, are imported) or goods (like high-tech equipment, heavy machinery, etc.) that they require, and spend the rest on the goods they personally want (like a Benz S-class or a mink coat for the lover).

As you can see, they are taking our money, slowly. As long as western investors own the majority of business and industry in China (and thus take our own money back - the money that our public spends on goods produced in China), China's growth will be limited. They'll only have a fraction of the income.

However, the moment they deem western investment has made them strong enough (ie, necessary enough) to OPEC us (demand a greater share of revenue by threatening embargo or other diplomatic means), they will do so. Worse, they may simply nationalize in the fashion of Egypt and the Suez, taking EVERYTHING - both the actual property (and the billions of western investments in infrastructure, industry, etc) as well as any subsequent profit. The latter is clearly the riskier move, and given the MASSIVE commitment so far that is growing exponentially, it's a move worthy of nuclear retaliation. The Suez and OPEC Oil Embargo will be pitiful economic blips in comparison.

[Jakub]

Honestly, China is playing hardball and it's the biggest enemy western civilization has. They've pegged the yuan (their currency) to the US dollar, so even though American goods are more competitive abroad and foreign goods less so in America due to the lower dollar, the situation with China remains unchanged. Indeed, you could say it still gets worse because while the US imports a ton of other resources and necessary goods which make our goods more expensive in return, China is relatively self-sufficient aside from its oil and American imports.

So why do we fund China? Because if we don't, someone else will, and then we'll STILL be buying Chinese goods, but made by a French, British, German or Russian firm, and we won't get ANY of that money back.

The #1 goal of American (and with the lower dollar) world policy should be to break the yuan off the dollar and make it float up to its natural value, which my guess would be is a lot higher than it is now.

http://www.washingtonpost.com/wp-dyn/articles/A60677-2003Dec12_2.html

[bago]

1. False. The Soviets made plenty of innovations without freedom. Besides, China does have freedom, in its own limited way. I doubt you could find many urban Chinese who think they are oppressed. By their standards, historical and otherwise, things are hunky-dory.


Name some soviet innovations that weren't either A. Stolen from the US, or B. Cheap knockoffs with an insanely high failure rate?

About the only area that the Sovient Union led in for a while was the science of putting large payloads into space, which only came about because they couldn't design a nuclear trigger that weighed less than two tons. Of course these rockets also had a very high failure rate...

[Jason McCullough]

What would happen if the Arab countries stopped shipping us oil? How long could we last?

About as long as they would, seeing how it's literally their only source of income.

[XPav]

What would happen if the Arab countries stopped shipping us oil? How long could we last?

About as long as they would, seeing how it's literally their only source of income.

Exactly. China nationalizes all their industry and pisses of the people that own the factories, and who are they going to sell their stuff to?

Everything is interlocking now -- there's no magic economic advantage that one country or region has over the other.

[Jakub]

Exactly. China nationalizes all their industry and pisses of the people that own the factories, and who are they going to sell their stuff to?

Everything is interlocking now -- there's no magic economic advantage that one country or region has over the other.
Don't you guys get it lol?

Doesn't matter if they piss us off once we're at that stage. We'll NEED them. Let me stress that again because I like capital letters - NEED. Not want, not "it'd be nice", not "we can suffer through", but literal, actual, need.

It's like how the US can go pissing off 50 countries at a time right now, from pissant little nations of no consequence to countries like France that are attempting to establish military, economic and cultural separation (to no avail, I might add.) Everybody needs us right now. Soon, China will be the US.

Open your minds a little.

Sure, everything is inter-connected, but doesn't anyone here understand basic economics? We're running out of wealth. Our money is based on our goods and our future production. It's going away. Bye-bye. Soon no more, and we'll be bartering only what we're making against what we need, which isn't a favorable bargaining position and is very unhealthy for growth.

Imagine a business that grew at a rate of 3% per year, had revenue of $100,000 and expenses of $110,000. I don't mean the government, I mean the actual country. Why do you people insist on thinking a trade deficit is OK? Where does the money come from?

[Jakub]

About as long as they would, seeing how it's literally their only source of income.
Are you sure about that?

They lasted pretty long and brought us to terms - painful, painful terms (compare the prices, all regulated by OPEC. Check 1973/1974, the late 70s and early 80s, the mid 80s, the early 90s, and the mid 90s.) It's OPEC, not the petroleum companies, that now control prices. BP, Exxon, Shell are as much OPEC's mercy as Joe Gas Consumer.

http://research.stlouisfed.org/fred2/data/OILPRICE.txt

The only thing keeping OPEC at bay is fear of our arms - that if they hurt us bad enough, we'll hurt them permanently. The actual cost of oil in 1999, according to my economics class, would be something like $2.50USD, and the price would be around $6.

China has no fear of attack. Once they hit us, it will be as equals.

[Jason McCullough]

Ah, but "charging us a lot more money" is different; that's not what you said originally. They could make the West's lives a living hell for a while, but once oil hits $40 a barrel all sorts of interesting alternatives become profitable, and once you get those going you get into path dependence issues, and it's entirely possible the west will come out, long term, not that bad off, while completely destroying the one income source oil countries have.

That's exactly the reason those countries leave oil prices pretty much as is.

Imagine a business that grew at a rate of 3% per year, had revenue of $100,000 and expenses of $110,000. I don't mean the government, I mean the actual country. Why do you people insist on thinking a trade deficit is OK? Where does the money come from?

Imagine your neighbor gets bigger raises than you every year. So? It doesn't logically follow that he'll try to kill you and take your property, even if the law wouldn't stop him.

Seriously, there's reasons to worry about China, but you're commiting a lot of classical trade fallacies here. Get thee hence to some economics textbooks.

BTW, those oil prices don't look inflation adjusted.

[bago]

Russia would become a lot more wealthy if OPEC tried to do what they did in the 70's.

Besides, someone in the cartel always flinches and starts selling, especially since cartel countries don't have the reserves they once did. There's major problems in Saudi Arabia, where the population growth from the excessive wealth has caught up to the excess cash reserves, causing a lot of young people to be unemployed with grim prospects for future employment.

Also, it appears that Jakub doesn't know the basics of economics, or how transactions cause profit to occur on both sides of the equation. Malthusian Zero-sum economics don't exist except in the minds of doomsday speakers like Ehrlich.

[Jakub]

Oh I know there aren't zero-sums, we're constantly growing our wealth (and printing the money to match)... but we're also constantly losing wealth - at a rate faster than our growth. The problem is this will get worse as time goes by. Bago, come on, are you really thinking that such a gigantic trade deficit can go on forever? Sooner or later you'll lose your liquid wealth and have to trade directly, unless you mortgage future production which is a terrible idea unless you can be sure you'll dig yourself out of the hole.

As for OPEC raising prices to $40, why should they have to? They're making a 400% net profit, assuming they're paying for shipment. They won. They have what they want.

Russia COULD make more money but there's only so much supply, and I doubt the Russians will be able to supplement the 5 million b/d that Saudi Arabia alone produces. Not to mention the 2M b/d each from Nigeria, Iran and Venezuela (well, less from Venezuela since the strike, and Iran doesn't export to the US since 1992.) Kuwait is worth only about 1 million, and the other OPEC nations like Qatar and UAE are at about roughly half a million per day.

My point is that China will be able to do what it wants in 50 years. As soon as their industry produces at least some of every required good, and the moment the major powers absolutely need China's products (or at least would find it too painful to wean themselves off), the game is done. We can't threaten them militarily now (sure we can destroy a great deal, but it'll be mostly American property anyway), and there's no way we can conquer China. What hope in 50 years?

[Jason McCullough]

.....but we're also constantly losing wealth - at a rate faster than our growth.

Err, no, we're not; neither income or assets are falling. Do you have a data series showing this?

My point is that China will be able to do what it wants in 50 years.

Maybe. My pet theory is that they'll crack up in a civil war.

[bago]

Think about it for a second.

If there's a billion dollar trade deficit with China, then China get a billion dollars in cash, and we get a billion dollars in assets. Where exactly is the wealth lost?

[Jakub]

.....but we're also constantly losing wealth - at a rate faster than our growth.
Err, no, we're not; neither income or assets are falling. Do you have a data series showing this?
What do you think a monthly $18B trade deficit is? China sends us $20B of goods every month, we send them $2B of goods. What do you think covers the 18 billion dollar difference? Good wishes? No. Cash money. Consumer cash. Consumer cash that comes from the goods generated by us, that are traded to other nations, which pay us in return.

The US creates a lot of wealth, but my guess is that it isn't up to covering the $480B it loses to other nations (almost 50% of which goes to China) every year.

[Jakub]

Think about it for a second.

If there's a billion dollar trade deficit with China, then China get a billion dollars in cash, and we get a billion dollars in assets. Where exactly is the wealth lost?
Because assets are consumed and wasted. Your t-shirt, Made in China, will last you a year, maybe two before it's worthless. The $5 for the shirt that goes to China will last China for quite a long time. Not to mention that you're paying not the cost of the assets, but the price. They profit off that. That's wealth they get to keep.

Why do you think it is good fiscal policy to have a trade surplus? If nobody cared about trade deficits, they wouldn't put tariffs and duties on imports. Where do you think the wealth comes from to buy the goods we need? Is there an inexhaustible supply of money? Sure, you print enough and you get inflation.

[Jason McCullough]

The US current account deficit is 5% of GDP; it's probably can't stay at that level forever, as foreigners wille eventually stop buying US assets. The financial markets will have to adjust, as will the US budget deficit.

But this is *not* making us poorer - it's shifting future income forward to today. It's a loan. It's not a good idea to be spending 5% more than you make every year, but it's not going to continue every year. I think the current state of things has more to do with foreigners being totally crazy for investing in the US, though - the other side of the trade equation.

http://www.pkarchive.org/trade/ShrinkingTradeDeficit.html

Edit: Ah, I knew I was missing something.

http://www.pkarchive.org/trade/redeast.html

[Jakub]

In 1972 Nixon broke the gold standard and floated the American dollar, bringing it down in order to help overcome a trade deficit that was 0.5% of GDP.

Foreign investors are buying up American assets - companies, divisions, patents, copyrights and bonds. When there's nothing to buy, what do you think will happen to the economy?

Trade deficit = bad. It's that simple. 5% of GDP is disastrous. You know the last nation that had a 5% of GDP trade deficit? Italy in the 1920s, shortly before Mussolini took over.

[bago]

Because assets are consumed and wasted. Your t-shirt, Made in China, will last you a year, maybe two before it's worthless. The $5 for the shirt that goes to China will last China for quite a long time.


But you only spent 5 dollars on the shirt, which means the other 5 you'd spend if you bought a domestically produced shirt stays in your pocket and you invest it somewhere else. In your view you got a ten dollar shirt for 5 dollars. This is the wealth produced on the other side of the transaction...

Transactions almost always produce profit for both sides. That's why they make them.

[Jason McCullough]

I'm not arguing it's good, but we're pretty far afield from your earlier statement, that China was going to inevitably turn us serfs through the trade deficit.

And as Krugman points out, when you include Hong Kong the Chinese trade surplus with the US mostly disappears.

[bago]

Foreign investors are buying up American assets - companies, divisions, patents, copyrights and bonds. When there's nothing to buy, what do you think will happen to the economy?


Wait... wasn't this the big worry about Japan in the 80's? We all saw how that turned out.

Japan got the short end of the stick on Rockefeller Center.

[Jakub]

But you only spent 5 dollars on the shirt, which means the other 5 you'd spend if you bought a domestically produced shirt stays in your pocket and you invest it somewhere else. In your view you got a ten dollar shirt for 5 dollars. This is the wealth produced on the other side of the transaction...

Transactions almost always produce profit for both sides. That's why they make them.
No, because the $5 shirt you spent the money on is part of the trade deficit. The other $5 is domestically spent, sure, but it isn't an export, ergo it doesn't cancel out the earlier $5.

[Jason McCullough]

You're channeling the exact same "third world countries will take all of our money with their trade surpluses and become filthy rich at our expense" stuff Krugman goes over in the second link.

[Jakub]

Wait... wasn't this the big worry about Japan in the 80's? We all saw how that turned out.

Japan got the short end of the stick on Rockefeller Center.
Hmm, let's see...

Japan was at its economic peak and had nowhere to go. China is just scraping out of bottom.

Japan invested in over-valued American property.

Japanese people stopped spending. They save. Religiously. They have Deflation, which is as bad if not worse than inflation because people save rather than spend which isn't good for the economy.

American debt is growing at a staggering pace. Sooner or later this has to be paid, with interest.

How much more do you think foreign investors will tolerate before they look at future prospects and say "No more, now pay us back what you owe us."

[Jakub]

I'm not arguing it's good, but we're pretty far afield from your earlier statement, that China was going to inevitably turn us serfs through the trade deficit.

And as Krugman points out, when you include Hong Kong the Chinese trade surplus with the US mostly disappears.
LOL do you have any idea what's happening in Hong Kong? Economic collapse. That city lost all importance the moment China opened its borders. It's no longer collecting tariffs and skimming off the top of every transaction between China and the world. There's no income there. It's going to be irrelevant in a decade.

And yes, China will take the pre-eminent position in the world. I don't know where you expect the wealth to come from in America.

[Jason McCullough]

The fact we invent more shit than anyone else?

BTW, do you have any numbers or model for this stuff?

[Ben Sones]

But you only spent 5 dollars on the shirt, which means the other 5 you'd spend if you bought a domestically produced shirt stays in your pocket and you invest it somewhere else. In your view you got a ten dollar shirt for 5 dollars. This is the wealth produced on the other side of the transaction...

Transactions almost always produce profit for both sides. That's why they make them.

You are playing pretty fast and loose with the term "profit." Obviously the consumer perceives the value of the goods he buys to be at least equal to the value of the money he spends (it may or may not be, in reality)--otherwise he wouldn't spend it. But goods--particularly consumables--are not "profits" in an economic sense, unless the consumer later sells the shirt for more than he paid for it.

The US shirt company that relies on imported goods or outsourced production instead of domestically produced goods does realize a profit, theoretically, which is why the trade deficit exists, and why so many jobs are moving overseas. I'm no economist, but I can't understand how these profits can be anything but short-lived, and I suspect that this business trend will be the downfall of many, many companies. Henry Ford realized that if he didn't pay his workers enough, they couldn't buy his cars. Today's business wisdom recommends that we lay them off and give their jobs to someone in another country. Maybe that lets you sell your shirts for $5 instead of $10, but if your market has $0 to spend on shirts, you might as well be charging $1000.

[Derek Meister]

Name some soviet innovations that weren't either A. Stolen from the US, or B. Cheap knockoffs with an insanely high failure rate?

Tetris?

[XPav]

About the only area that the Sovient Union led in for a while was the science of putting large payloads into space, which only came about because they couldn't design a nuclear trigger that weighed less than two tons. Of course these rockets also had a very high failure rate...

The Soviets, and Russian, have always led in booster rockets. By your logic, one might say that the US had better computers because we didn't have a big massive booster to loft stuff into space cheaply.

On another note, I just read that Yuri Gagarin ejected from Vostok 1, and so technically, according to "the rules", he really wasn't the first person to make a complete orbit in a spacecraft. I didn't know that.

[bago]

The Soviets, and Russian, have always led in booster rockets. By your logic, one might say that the US had better computers because we didn't have a big massive booster to loft stuff into space cheaply.


Umm.. What do computers have to do with anything?

As I said, the only area they ever had a tech lead on was putting heavy payloads into prbit, and this is only because they were deficient in other technology areas, and this was the best kludge. Even then it wasn't exactly reliable. How many dead cosmonauts are there?

[Jakub]

The fact we invent more shit than anyone else?

BTW, do you have any numbers or model for this stuff?
Again, invention will matter little if anything the moment China decides that they can ignore patents, or perhaps they'll simply buy the patents up.

I don't have any "official" numbers, but it's just common sense. You're bleeding money. You're using up your savings (ie, the liquid wealth already in the country), and taking loans. Neither of these measures is healthy in the long-term. I don't care what nonsense you say about non-zero-sum Malthusian economics or new economy or whatever. Collateral is put up against loans, loans have to be paid. Sooner or later one of the following will happen:

1. Run out of collateral.
2. Investors lose confidence, reduce or cancel willingness to take your paper (ie, guarantee of a payback), and thus you can't raise foreign capital.

So you say "but that's the government". Well, who controls money, who prints it? If American dollars are flowing overseas at a rate of $1.3B/day in just trade deficits, you have to come up with that money somewhere. Printing more won't help without extreme inflation and devaluation, not without something to back it. Before 1972 that was gold. In the new economy, it's "wealth" - the goods, services, resources produced here, as well as future economic prospects and the liquid resources (ie, cash, loans in the form of foreign currency) you have.

Maybe a budget deficit isn't a big deal, maybe a trade deficit isn't - but both at the same time? Both worth 5% of GDP? Compounded on top of the gigantic debt Reagan and Bush left? (no, I'm not drawing any political conclusions, please don't turn the debate that way for now.) Where is the money going to come from when investors lose confidence and the loans run out? Just because they didn't lose confidence like was predicted in the 1980s, doesn't mean they won't. It has to happen sooner or later, otherwise debt loses all meaning.

Then again, perhaps Americans are reacting to the gigantic inflow of cash from the spending by the government and buying goods - they just happen to be foreign goods. But this doesn't explain the growing trade deficit in the surplus Clinton years.

The neurotic, paranoid cynic in me says that we're being fleeced deliberately, with the help of government. The only people profiting by this are the rich - they own the businesses in China, Indian, Malaysia.

[Rob_Merritt]

Name some soviet innovations that weren't either A. Stolen from the US, or B. Cheap knockoffs with an insanely high failure rate?

Tetris?

Yako Smirnoff?

http://escapeholidays.com/tours/Photo76.jpg
"what a country"

[Jakub]

Umm.. What do computers have to do with anything?

As I said, the only area they ever had a tech lead on was putting heavy payloads into prbit, and this is only because they were deficient in other technology areas, and this was the best kludge. Even then it wasn't exactly reliable. How many dead cosmonauts are there?
Look, if a society like the Soviet Union can innovate, then China certainly can. I think you've got a very skewed perspective about what life is like in China - it's not people on bicycles in little blue suits, going to gray factories, throwing coal into furnaces for no apparent reason (although interestingly enough, China never made the transition from coal to oil, and there is a LOT more coal in the world than there is oil, furthermore, China has an inexhaustible supply).

Downtown Shanghai. (www.albany.edu/wwwres/mumford/Center_Act/moreinfo.html)

Downtown Beijing. (www.fysel.ntnu.no/~espens/beijing/sunriselong.jpg)

[Squirrel Killer]

Name some soviet innovations that weren't either A. Stolen from the US, or B. Cheap knockoffs with an insanely high failure rate?

Tetris?

Yako Smirnoff?

Keeping dead leaders minty fresh?

[XPav]

Umm.. What do computers have to do with anything?

As I said, the only area they ever had a tech lead on was putting heavy payloads into prbit, and this is only because they were deficient in other technology areas, and this was the best kludge. Even then it wasn't exactly reliable. How many dead cosmonauts are there?

Computer -- electronics, whatever. We had to make ours smaller and lighter and more effecient because our boosters sucked. We had to make everything lighter.

Seriously,

Soviet Boosters were better -- and its not because they were defecient in other areas. Yes, they were deficient in other areas but it wasn't the reason their booster were good (and still are).

[Jason McCullough]

Look, if a society like the Soviet Union can innovate, then China certainly can.

You know the USSR's income fell every year after the mid-1970s, right? That they actually had negative productivity growth? They hit a wall once they educated everyone and got women into the workforce; they were practically the antithesis of innovation.

http://web.mit.edu/krugman/www/myth.html

Henry Ford realized that if he didn't pay his workers enough, they couldn't buy his cars.

This is the popular conception, but it's wrong - Ford's employees were a tiny fraction of the car market. What he was actually doing was an "efficiency wage."

http://economics.about.com/library/glossary/bldef-efficiency-wages.htm

And if cheap overseas labor will impoverish the US, how come Japanese wages going way, way below to a bit above US wages didn't make us poor?

Today's business wisdom recommends that we lay them off and give their jobs to someone in another country. Maybe that lets you sell your shirts for $5 instead of $10, but if your market has $0 to spend on shirts, you might as well be charging $1000.

Who says they have to be making shirts? It's a mathematical identity that there'll always be something you can do for less opportunity cost than anyone else.

I don't have any "official" numbers, but it's just common sense. You're bleeding money.

In other words, you don't know what you're talking about.

The neurotic, paranoid cynic in me says that we're being fleeced deliberately, with the help of government.

Do you complain that people are stealing your money when you run up a credit card bill?

[Jazar]

focus people! Outsourcing! India! Rawr! :)

[Jakub]

Jason, how many times do I have to say it - China isn't the USSR. The people there aren't clamoring for freedom, they don't feel chafed. Sure, they have their wacko liberal hippies who want rights like freedom of press, but the average person there just doesn't care.

More importantly, the Soviet system collapsed because it lacked incentive. Nobody had a reason to work hard, if at all. In China, you most certainly do have incentive.

So please cut the fucking comparisons, because they're not applicable in any shape, way, or form. I brought the USSR up only to prove that innovation exists even in the most despotic society, and I'm still right on that. In fact, a better comparison to China would be Nazi Germany. You know, the backward little country in 1930s and 40s Europe that was such a rich storehouse of technology it led to the space race, the atomic race, the development of the practical jet engine, and completely revolutionized warfare.

BTW, your credit card analogy has nothing to do with the current situation.

[Ben Sones]

This is the popular conception, but it's wrong

Sometimes I think that you'll disagree with anything that anyone posts simply by reflex. I'd hate to question the rock-solid reference that is the About.com economic glossary... fortunately there's not much to question, since your link has nothing to say about Henry Ford.

Ford's employees were a tiny fraction of the car market. What he was actually doing was an "efficiency wage."

It seems reasonable to assume that Ford hoped that higher wages would quell potential labor disputes and lessen worker turnover, but it seems unlikely that it was the only reason for doing it. At the beginning of the 20th century, there simply was no market for mass-produced automobiles. The upper class wasn't large enough to demand a large number of factory-produced cars, and the working class couldn't afford them. Ford's employees may have only been personally responsible for a small percentage of automobile purchases, but Ford's policies sparked a trend of wage inflation throughout the auto industry. At the turn of the century, the average American worker earned about $500 a year. Ford's first car sold for $600, and the first Model T sold for $900. That was cheap, as cars went, but without a corresponding increase in the average worker's wage, Ford Motor Company wouldn't have the market to support their production.

Forbes' "Greatest Business Stories of All Time" (www.wiley.com/legacy/products/subject/business/forbes/ford.html) describes Ford's wage policy as a simultaneous effort to retain workers and increase the market for his products, thus further reducing per-car costs. Lee Iacoca's biography (www.time.com/time/time100/builder/profile/ford3.html) of Ford for Time Magazine paints a similar picture. I don't claim to be an expert on the history of Henry Ford's financial policies, but if you want to convince me that conventional wisdom on this matter is incorrect, you're going to do more than merely say "you're wrong" and toss out a link to some dictionary definition.

I don't have any "official" numbers, but it's just common sense. You're bleeding money.


In other words, you don't know what you're talking about.

But we're supposed to take your word that you do?

[Ben Sones]

Who says they have to be making shirts? It's a mathematical identity that there'll always be something you can do for less opportunity cost than anyone else.


So theoretically, nobody should ever be unemployed?

[Ben]

Ben Sones- Do you know the difference between frictional and structural unemployment?


Jakub- Do you know anything besides what Pat Buchanan or Ralph Nader told you? Your theories here are like 300 years out of date. Maybe you can talk to Cleve and catch up to 1850 or so.

[Jakub]

Jakub- Do you know anything besides what Pat Buchanan or Ralph Nader told you? Your theories here are like 300 years out of date. Maybe you can talk to Cleve and catch up to 1850 or so.
I've never read nor listened to either Pat or Nader. I'd like to think I came to my conclusions rather independently.

However, I still fail to see how they're supposed to be 300 years out of date when they were a concern as early as the late 80s (and, actually, if I recall correctly, again during Clinton's second term when there was a sudden spike in the trade deficit). 15 years is hardly enough time to dispel those, especially given the frantic pace at which the national debt is growing (or is that too, in your thinking, a good thing?)

Now your turn: would you like to back up your statements with at least your own counter-theories? Is there an intelligent remark, a glimpse of common sense you'd like to share? Or are you here simply to insult people, in which case I'd like to redirect you to anywhere but these forums.

[Ben Sones]

Ben Sones- Do you know the difference between frictional and structural unemployment?


Nope.

[Midnight Son]

What's next? Gonna trot out some charts and shit?

[Kyle Wilson]

However, I still fail to see how they're supposed to be 300 years out of date when they were a concern as early as the late 80s (and, actually, if I recall correctly, again during Clinton's second term when there was a sudden spike in the trade deficit).

Politicians whine about trade "deficits". Economists (with the possible exception of a few fringe whackos) don't.

[Jason McCullough]

Frictional vs. structural unemployment was the answer to your question about unemployment.

Now your turn: would you like to back up your statements with at least your own counter-theories? Is there an intelligent remark, a glimpse of common sense you'd like to share? Or are you here simply to insult people, in which case I'd like to redirect you to anywhere but these forums.

See: econ 101 textbook.

Ben, I called it an efficiency wage because it's literally used as a textbook example of one. There is debate about Ford's mixed motives, but it doesn't take very long with a calculator to conclude there was no way for Ford to make money on the wage increase by it turning back into car purchases. By contrast, his made huge productivity gains because workers would work pretty damn hard to keep that wage; screw up, and there's a hundred guys who will gladly take your place. I linked to a garden-variety definition of the phrase because I thought the conclusions would be obvious.

However, I still fail to see how they're supposed to be 300 years out of date when they were a concern as early as the late 80s (and, actually, if I recall correctly, again during Clinton's second term when there was a sudden spike in the trade deficit). 15 years is hardly enough time to dispel those, especially given the frantic pace at which the national debt is growing (or is that too, in your thinking, a good thing?)

That it crops up in politics when it's flat wrong isn't particularly shocking.

http://www.pkarchive.org/global/pop.html

And for chrissakes, "trade and budget deficits are not a good idea for the US at the present time (there's occasions where both are good), but the trade deficit component isn't all that bad, as it's mostly the result of foreigners loving the US" -my opinion - isn't the same as "all deficits everywhere are good," which you're trying to pin on me for no apparent reason.

But we're supposed to take your word that you do?

I guess so, since apparently I'm the one who bothers to understand the models and history.

[Ben Sones]

There is debate about Ford's mixed motives, but it doesn't take very long with a calculator to conclude there was no way for Ford to make money on the wage increase by it turning back into car purchases. By contrast, his made huge productivity gains because workers would work pretty damn hard to keep that wage; screw up, and there's a hundred guys who will gladly take your place. I linked to a garden-variety definition of the phrase because I thought the conclusions would be obvious.

I'm not suggesting that this was his sole method of realizing profits. Ford did a lot of different things in combination to make his company work, such as streamlining production costs, and this was merely one of them. Let me put it another way: if Ford did not expect to nurture a new market for his cars where none had existed before, then who did he plan to sell his cars to? His company's production capabilities far outstripped the existing market for automobiles. Are you saying that you think that it's more likely that he just decided to mass produce cars and hope against hope that a market would appear buy them on its own, even though that market didn't exist when he started the company? Because that seems pretty far-fetched to me.

[Jason McCullough]

Well, ok, we don't disagree much then. I think it's more likely he expected to drive down unit costs so much through really high productivity labor he could create a new market entirely. Kind of how dropping processor costs created a market for home computers that didn't exist before.

It's just a casual observor would think, given the rhetoric out there, that Ford did it because he's a) a great guy and b) would make tons of money back by his employees buying the cars.

[Ben Sones]

Driving down costs alone would never have worked, though, because prior to the twentieth century the working class had little disposable income. They made enough wages to cover subsistance, and maybe a little bit more, but not enough to buy even very cheap cars. The twentieth century saw the rise of a new sort of middle class consumer that hadn't existed before, and increased wages were a part of that.

[Jason McCullough]

Well yeah, but I don't see the economic linkage that caused everyone's wages to rise just because Ford raised his. There's a bit of a feedback effect, but it's not like Ford is personally responsible.

[Ben Sones]

The linkage is the fact that Ford's policy was so successful. He increased his costs by raising salaries, but also increased his productivity and decreased employee turnover more than enough to compensate for the additional overhead. Other businesses started to employ this policy, simply because it worked. And this had the end effect of significantly raising the average income of the working class over what it had been in the past, which in turn increased the size of Ford's market.

[Jason McCullough]

See, that's the thing about an efficiency wage - it doesn't work if everyone does it. If everyone's wages go up, then the productivity gain you had from paying more than everyone else disappears.

Over the long run, people are paid about the level of their "marginal productivity", and when wages increase it's because they're better educated, have more capital, whatever. Might be able to tell some sort of demographic transition story, though.