Automation, Outsourcing, and Bad Economic Propaganda

While on the internet one day, I noticed some media outlets have numerous bold headlines about any one pending economic horror. Many of these claims are based on bad economics and poor analysis of statistics. In a sort of economic propaganda, politicians use this as a means to justify power grabs. They’ll want to enact some form of trade barrier or labor regulation, which can sound good on the surface. In reality, offshoring and automation have increased living standards and alleviated poverty not just at home, but around the world.

It seems a prevailing thought that machines are taking jobs away from hardworking Americans. If that were true, unemployment would have consistently trended upwards as technology improves. This has not been the outcome. Despite a growing population, the United States has never had a significant reduction in aggregate labor demand due to increasing automation. There is also the fear that automation reduces income. Incomes, for both households and workers, have been steadily increasing since 1967.

Automation is a cost or productivity improvement on the supply side of the economy. In other words, it reduces the input required to produce a good. Forks were, at one time, forged by hand and were a luxury to have. Today, they are forged in heavy press equipment and, as a result of the labor reduction, are now an affordable household item.

Taking this concept a step further, the price of a fork has decreased from $5 to $2, hypothetically. Consumers who could afford the previous $5 now have a surplus of $3. With that surplus, those consumers will either 1) buy different goods 2) buy more forks 3) save/invest the money. In all three scenarios, more capital is being used in the market or allocated to other industries. Furthermore, an entire new group of consumers are introduced because of the new price point, which further increases demand. As a result of these factors, automation has a net positive gain on the economy and employment.

In some sense, automation does reduce labor demand in the short term. However, that is not necessarily a bad thing. Economists have found that high skilled wage growth has been at a higher rate than low skilled, presumably because the latter are easier to replace. This translates into more consumer demand and savings/investment. In other words, our economy is shedding non-value labor, but that does not mean the aggregate demand for labor is reduced. Government policies that make employment more costly drive employers to substitute low skilled labor for automation at a faster rate than they otherwise might. The minimum wage is a perfect example of that.

You’ve probably also heard about those “greedy corporations” who offshore jobs for cheap labor and “treat them like animals”. Of course, this claim is filled with double speak and buzz words, but lack any evidence or truth to support it. Similar to automation, offshoring reduces the input labor cost of goods. The resulting outcome is very similar to the aforementioned example of forks. Consumers save money, and the surplus of money is spent or invested. It does not simply disappear or be stuffed under a mattress.

While consumers save money, the larger and more widespread benefit is what other consumers gain. In other words, when you save money on a product now made in China, there is a Chinese person gaining an income. These firms certainly pay less than what any American worker would accept, but $1 a day is a lot better than $0. Furthermore, this claim takes no consideration for the cost of living in host countries. In China, the cost of living is significantly less than the U.S. If multinationals were truly paying slave-like wages, there would not be the rapid decline in world poverty and Chinese/Southeast Asian poverty.

How has offshoring helped Americans besides lower prices? Despite criticism from pundits, offshoring does not take jobs from Americans. The initial fallacy here is that the job market is a zero-sum game. One person is not hired because another was fired. Furthermore, research shows that offshoring is associated with more employment in the U.S. parent, not less.

When discussing offshoring, the backbone of it is trade liberalization or the reduced barriers to international trade. If countries cannot freely trade, they would not or could not offshore jobs. Thus, it is important to consider the effects of trade liberalization. Economists have found that trade liberalization, on average and in the long term, alleviates poverty. Furthermore, there is no convincing evidence that trade liberalization contributes to poverty.

Both supposed fears of automation and offshoring are rooted in fallacies and bad economics. Labor demand is not a zero-sum game, especially not in the long term. Yes, jobs will be lost in the short term, but, after an adjustment period, employees will re-train or learn a new skill. If these claims held true, the U.S. would have no more employment. For decades, pundits have had techno-fears and warned of globalization, but none of that has come to fruition, let alone on such a scale.

If policy makers really want to bring jobs home, they should reduce the cost of employment. Expensive laws such as minimum wage make it impossible for many goods to be manufactured domestically. No one is going to buy trinkets at twice the price. Furthermore, we should consider that sky-high cost of regulation that has been an unequal burden to small businesses. In a normative analysis, automation and offshoring are net positives, but heavy-handed policies and trade barriers can negatively influence the actual outcome.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s