Made In America - The Economic point of view

[carlrx7]

I just finished my second economics class and the last chapter we had to read was about the global economy and how to achieve the greatest efficiency in production and growth.

 

I'm still fresh to all of this but it seems that buying only american made items isn't the most efficient way to increase the economy.  Here is a good article that my instructor referenced to us:

http://faculty.tamu-commerce.edu/dfunderburk/428/readings/The%20Iowa%20Car%20Crop.htm

 

 

The Iowa Car Crop

 

A thing of beauty is a job forever, and nothing is more beautiful than a succinct and flawless argument.  A few lines of reasoning can change the way we see the world.

            I found one of the most beautiful arguments I know while I was browsing through a textbook written by my friend David Friedman.  While the argument might not be original, David’s vision is so clear, so concise, so incontrovertible, and so delightfully surprising, that I have been unable to resist sharing it with students, relatives, and cocktail party acquaintances at every opportunity.  The argument involves international trade, but its appeal is less in its subject matter than in its irresistible force.

            David’s observation is that there are two technologies for producing automobiles in America.  One is to manufacture them in Detroit, and the other is to grow them in Iowa.  Everybody knows about the first technology; let me tell you about the second.  First, you plant seeds, which are the raw material from which automobiles are constructed.  You wait a few months until wheat appears.  Then you harvest the wheat, load it onto ships, and said the ships eastward into the Pacific Ocean.  After a few months, the ships reappear with Toyotas on them.

            International trade is nothing but a form of technology.  The fact that there is a place called Japan, with people and factories, is quite irrelevant to Americans’ well-being.  To analyze trade policies, we might as well assume that Japan is a giant machine with mysterious inner workings that convert wheat into cars.

            Any policy designed to favor the first American technology over the second is a policy designed to favor American auto producers in Detroit over American auto producers in Iowa.  A tax or a ban on “imported” automobiles is a tax or a ban on Iowa-grown automobiles.  If you protect Detroit carmakers from competition, then you must damage Iowa farmers, because Iowa farmers are the competition.

            The task of producing a given fleet of car can be allocated between Detroit and Iowa in a variety of ways.  A competitive price system selects that allocation that minimizes the total production cost.* It would be unnecessarily expensive to manufacture all cars in Detroit, unnecessarily expensive to grow all cars in Iowa, and unnecessarily expensive to use the two production processes in anything other than the natural ratio that emerges as a result of competition.

            That means that protection for Detroit does more than just transfer income from farmers to autoworkers.  It also raises the total cost of providing Americans with a given number of automobiles.  The efficiency loss comes with no offsetting gain; it impoverishes the nation as a whole.

            There is much talk about improving the efficiency of American car manufacturing.  When you have two ways to make a car, the road to efficiency is to use both in optimal proportions.  The last thing you should want to do is to artificially hobble one of your production technologies.  It is sheer superstition to think that an Iowa-grown Camry is any less “American” than a Detroit-built Taurus.  Policies rooted in superstition do not frequently bear efficient fruit.

            In 1817, David Ricardo—the first economist to think with the precision, though not the language, of pure mathematics—laid the foundation for all future thought about international trade.  In the intervening 150 years his theory has been much elaborated but its foundations remain as firmly established as anything in economics.  Trade theory predicts first that if you protect American producers in one industry from foreign competition, then you must damage American producers in other industries.  It predicts second that if you protect American producers in one industry from foreign competition, there must be a net loss in economic efficiency.  Ordinarily, textbooks establish these propositions through graphs, equations, and intricate reasoning.  The little story that I learned from David Friedman makes the same propositions blindingly obvious with a single compelling metaphor.  That is economics at its best.

 

            *This assertion is true, but not obvious.  Individual producers care about their individual profits, not about economywide costs.  It is something of a miracle that individual selfish decisions must lead to a collectively efficient outcome….

 

Steven E. Landsburg

The Armchair Economist:  Economics and Everyday Life

 

BTW, I'm not telling anyone to stop buying American, just that any kind of taxation, tariff, import quota is only hurting our economy.  In the end, it's all about maximum production and efficiency, if an American company can be the most efficient, then they are supposed to be making that product, if they need to handicap the imports, maybe they should be producing something else.

 

I'd love an open friendly discussion on what you guys think about all of this!

 

Cheers!

 

-Carl

[RonBoy]

Like anything else you can justify your views in multiple ways. A tariff isn't always about handicapping rather leveling the field, we hurt our economy by buying the cheapest over value. The equation doesn't factor in the quality of life that is the true American Dream.

[Tim]

That theory assumes ALL things are equal in the end. Quality, living wages, human rights, etc. They aren't.

[Marylander]

As noted above, it assumes all things are equal, including whether foreign companies please restrictions, taxes or tarrifs on our goods gaming into their countries. It's an interesting read, though.

[DaveVY]

I see the article referring to the issues of protecting one specific industry vs protecting all industries equally.

 

I believe we need changes to accounting standards, tax laws, burdensome laws/regulations and H1-B visa regulations to remove the advantages that corporations see to off-shoring our jobs. My current employer is off-shoring many jobs now because 1) it gets around the approval process needed for head count (internal issues, not national issue), 2) off-shore contract jobs are not reported as cost of sales in quarterly reports, 3) overhead costs are much cheaper (nationalized healthcare isn't helping here - actually is reducing blue color jobs and accelerating a decline in union enrollment).

 

I would agree with the concept in the article that protecting one specific industry will create corresponding burdens on other industries. But if we change the focus on equal protection for all industries with employee safety equally applied across the country then the largest potential losers would be those organizations who are outside of our country who refuse to offer sustainable wages and human rights protection.

 

My $.02

[Team Adam's]

Interesting stuff and theres a number of ways to look at it... no one is absolutely right or wrong. 

 

From where I stand, I work for a small American company. The things we do support other small American businesses. People purchasing through us supports everyone up stream from us and that keeps me, as well as the vendors we work with, employed. 

 

If we were to abandon our commitment to USA made, a number of vendors would suffer a loss, potentially costing jobs. 

 

Fact is, and something many people don't recognize, is that QUALITY OF LIFE and CHEAP GOODS don't coexist in many cases. In order for workers to enjoy a high quality of life they must be paid a fair wage, given benefits, work in safe environments. All these things add to the bottom line. Sure, we could make our stuff super cheap by using Chinese bottles, Chinese sprayers, and having our products mixed, bottled, and packaged in China... but the people there don't enjoy our freedoms or our quality of life. 

 

There is a very real reason why the cheapest products you can find are made in countries like China... your saving a buck on something is at the cost of someone else on the other side of the worlds low wage and poor quality of life. In some cases its also at the cost of someones employment here in the US. 

Edited July 26, 2013 by Dylan@Adams

[Feets31]

My daughter has been in a small Mexican village for the past two week and we have been discussing their economy.  She says there are plenty of jobs.  But that the jobs don't pay anything.  Where she is they make clay objects in their yards (mostly pumpkins for some reason) and then sell them.  The finished products sell for say $2 down there, so the works might make a quarter a piece.  

 

They can't mass produce them in their yards and with everyone in the village doing almost the same thing, they can not trade services easily.  So they are stuck in a poverty cycle despite the fact they are working. 

 

Dylan remark about a living wage is the important part to recognize in any economic discussion.  Shipping isn't cheap as we all know, but that then tells us the cost savings must be coming from the workers.   So yes American made products should cost more.  American pride also use to insure they would be well made.  That pride is not always there any more.   

[Team Adam's]

Not to mention its nice to buy something from your 'neighbor' so to speak. 

 

I love the craft beer, local food, local made products... gives me a sense of pride in my city, county, state, country. 

 

I try to buy local all I can simply b/c it puts money back into my community. 

[gencoupe3dot8]

As far as the American car issue I think we have been down this road before.  You won't find very many American *assembled* cars that are 100% American made (parts from all over).  Also a number of American *branded* cars aren't made here.  Now add to the discussion that a number of foreign branded cars ARE made here, thus adding American jobs....

 

All of that aside, a bigger issue is trade balance.  Until the US forces countries like China to open their markets to us, and stop the outsourcing trend, our economy will continue to suffer.

[Team Adam's]

Cars is a much bigger and more complex discussion... as it immediately pertains to Adam's its not. 

[TGO]

As far as the American car issue I think we have been down this road before.  You won't find very many American *assembled* cars that are 100% American made (parts from all over).  Also a number of American *branded* cars aren't made here.  Now add to the discussion that a number of foreign branded cars ARE made here, thus adding American jobs....

 

All of that aside, a bigger issue is trade balance.  Until the US forces countries like China to open their markets to us, and stop the outsourcing trend, our economy will continue to suffer.

 

 

I agree. I think the "foreign" cars that are built here are more "American" than the American cars. Does Toyota or Subaru have factories in Mexico?