The “f” word.

Y.C.L. posted the following comment in response to my recent article “In which I play the role of demagogue.”

I feel compelled to write and correct “cassandra’s” incorrect premise regarding trade. It is not that our country is unwilling to allocate resources for a particular product that makes an imported product cheaper. It is in fact the opposite. We allocate many resources to ensure american products are produced under far stricter labor and environmental standards than are followed in other countries. If we follow the premise that we should allow our resources to be allocated where the market dictates is most “efficient”, then we will literally import everything because we will never be able to compete with companies that pay their workers $1 a week. Ask Cassandra if he eats every day. If so, ask him if he wants every morsel of food he eats to be from China (laced with melamine or antibiotics). Didnt think so. Free trade is not fair trade…never has been and never will be.

I started to respond in the comment thread, but it got a bit longish so I decided to write a separate post. Needless to say, I have a few problems with her comment.

1. The first problem is a logical error. Y.C.L. suggests that America’s “far stricter labor and environmental standards” make our companies less efficient—which is generally correct. She then suggests that if we didn’t have these labor and environmental standards, then American companies would be defeated in market competition by foreign companies (“we will never be able to compete with companies that pay their workers $1 a week”). This is nonsense. If American companies no longer had to heed labor or environmental laws, they would by definition become more efficient andmore competitive in the markets, not less. American companies would be even more competitive against those companies that pay their workers $1 a week.

2. The second problem is comparing the cost of labor from country to country instead of comparingproductivity (revenue generated by a worker divided by the cost of hiring the worker) from country to country. Consider: we don’t have any laws forcing companies to operate here—or if we do, there aren’t that many and I’ve never heard of them. So if companies voluntarily operate in the United States, where they’re paying a minimum wage of $6.55 or so an hour, instead of in these countries where people earn $1 a week (which works out to 2.5 cents per hour based on a 40-hour work week), then we’ve got to ask why. The answer is that Americans must be at least that much more productive. $6.55 an hour is 262 times greater than 2.5 cents an hour. An American minimum-wage worker must, by definition, produce at least 262 times as much revenue for the company as the hypothetical dollar-a-week worker.

On average, Americans are more productive per dollar spent on labor than the vast majority of non-Americans. We’re more productive than them in spite of stricter labor and environmental standards.

3. The third problem is the idea that without labor and environmental standards, we will somehow end up eating nothing but melamine-and-antibiotic-laced Chinese food. (By the way, “Cassandra” tells me that he loves Chinese food and would probably eat it regardless.) But this belief, even if not taken literally, ignores a basic economic reality. Here, I’ll turn it over to Cassandra and give him some credit:

She seems to be saying that if we allow market forces to dictate the allocation of our resources (in this case, for the production of food), then companies WILL leave the country to produce food where it is cheaper and less safe.  The problem with this is thatmarket forces INCLUDE the demand for clean and healthy food. [emphasis added]

Believe it or not, some American companies would make clean, healthy food without having the FDA breathing down their necks. Heck, I’ll bet there are even foreign companies who produce clean, healthy food without the FDA or its equivalent holding guns to their heads.

4. Y.C.L. writes, “Free trade is not fair trade… never has been and never will be.” Here’s my response:

“Fair” is in the eye of the beholder. It means so many different things to so many different people that it is a useless term. Worse, “fair” is a totally imprecise and meaningless term. That’s why I’ve banned the word from my economics courses. I’ll save further discussion on that issue for another time.

Anyhow, Y.C.L. is family, and I’m sure to get an earful the next time I see her. I’ll shut up now.


Your Imperious Leader

18 March 2009 5:38 pm

I find the whole discussion somewhat ludicrous. A government bureauocrat and an academic intellectual discussing the finer points of trade, productivity, efficiency, allocation of resources, and (by implication) consumption….all the while deriving their salaries from my tax dollars. When either, or both, of you start actually generating wealth in our economy, instead of just consuming it, I will allow you to have an intelligent discussion on these subjects.

Vincent Viscariello

25 March 2009 5:38 pm

…says the former lobbyist.

leslie aka YCL

1 April 2009 5:38 pm

Dom – Should have been more clear in my definition of “allocation of resources” I meant that local, state and the federal governments allocated significant amounts of resources to ensure compliance with these laws. I think that puts my comment in better context. But more to the point….

Question to both you and “Cassandra” – when you see a special advertised on tomatoes, oranges, whatever, do you look to see what country it was produced in? The answer for most people is no…they just want the lower price. This is exactly the point I was trying to make…that most people just want to pay the lowest price for something. Yes there are those that want to eat “healthy” but how many people take the time to determine what countries that grow tomatoes are still allowed to use pesticides that, while cheap, have been banned for use in the US? Some people may be willing to pay a higher price for “clean, healthy food” (sometimes it is 2 or 3x’s the price of imports) but that segment of the population may not be enough to keep the US farmer in business. I see it every day.

Also, you write…”Believe it or not, some American companies would make clean, healthy food without having the FDA breathing down their necks. Heck, I’ll bet there are even foreign companies who produce clean, healthy food without the FDA or its equivalent holding guns to their heads”. Yes, you are correct…there are many firms that do produce a safe wholesome product and would do it whether there were regulations in place or not. But go back to the statement I made above that most people dont know where their food comes from. One salmonella tainted pepper from Mexico and the entire market drops off for peppers…no matter where or how they are grown. I hope that Cassandra eats tomatoes every day but I bet he gave it a second thought in the weeks after tomatoes were initially blamed for salmonella last year. If he didnt, good for him but given that our market for Fla tomatoes is off by 40% from previous years, he would be in the minority.

I could go on and on about yours and Cassandra’s “textbook” theories on free trade. Yes, American workers are the most productive in the world. But a lot of those companies that have remained in production in the US do so because they are getting significant tax exemptions and enticements (both state and federal) that you and I are paying for. Oftentimes, when these enticements run out (10-15 years usually on tax breaks), it is very common for them to close up shop.

I will leave you with this…Call centers in India, mass shrimp farming in China, raw sewage used to irrigate crops in Mexico, mass ethanol production in Brazil that produces a toxic byproduct that they fertilize crops with. That is what you get with free trade. bon apetite!

Vincent Viscariello

5 April 2009 5:38 pm

Once again, the response to this comment warrants a longer entry that I’ll probably have up later this week. Be forewarned, much of it is based on that “book larnin” that comes from “textbooks.”