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Prosperity usually is the first theme of politics. It
is rather unpredictable in the never ending sequence of economic boom and
recession and yet so meaningful and consequential for politicians vying for
position and power. For many Americans prosperity means steady employment and
satisfactory pay. Unemployment is a curse regarded with fear and
apprehension. It seems to obsess many politicians; their eyes are glued on
the numbers which are adjusted and readjusted continually. All want to know:
what are today's numbers?
Some politicos and newsmen like to focus on the
employment figures of major American corporations. It disturbs them greatly
to observe business reducing employment in the United States and simultaneously
increasing it in off-shore branches abroad. In their view, it is unpatriotic
business behavior to desert their laboring countrymen and replace them with alien labor abroad. A new word describes their conduct; they
are "outsourcing" American jobs.
It is true, numerous
companies in the fields of information technology and manufacturing are known
to outsource jobs to countries where wages are lower. Some observers even
predict that by 2008 a quarter of all technology jobs will be located in
lesser-developed countries with lower labor costs. Unfortunately,
they do not explain; they merely spread fear which weakens judgment and
invites that which they fear.
Throughout most of the 20th century American workers
earned higher wages and enjoyed higher standards of living than their peers
abroad. Yet there was no outsourcing of jobs to countries with cheaper labor. On the contrary, many foreign jobs found their way
to the U.S.,
giving employment to a rapidly growing population. Many millions of
immigrants flocked to these shores, seeking and finding employment with wages
among the highest in the world. Yet labor costs,
when calculated per unit of output, were among the lowest in the world. They
were low because American labor was very
productive.
Labor
productivity and labor costs are a direct function
of the tools and equipment used by labor. A
500-horse power tractor makes a farmer more productive than a team of mules
or horses. Economists speak of the amount of productive capital invested per
head of population that determines labor
productivity and income. The amount of capital investment in turn depends on
a number of psychological, sociological, and institutional factors such as
the common habit of saving and investing, the regard and concern for the
future, the safety of savings and investments, the laws and regulations that
limit their use, and the level of capital taxation. In other words, people
who are future-oriented, who are free and secure in their possessions, tend
to be productive and prosperous. If they remain true to their proven ways
from generation to generation, they may even excel all others.
Capital investment indeed is an important
determinant of rates of income. Yet we must not overlook the effort and skill
in the use of capital. Power tools and equipment that are used twenty-four
hours a day make human labor more productive than
tools used only eight hours or just five, four, or even fewer hours. Moreover,
workers who lack the necessary skills to use the equipment efficiently and
reliably are less productive than better-trained labor.
And workers who work grudgingly and reluctantly, who call strikes and
slow-downs undoubtedly are less productive than others who are eager and
diligent. Angry workers may force employers to close their doors forever or
move their jobs somewhere else.
China is
a favorite corporate destination in the search for
cheaper labor. Last year, foreign corporations
invested some $60 billion in Chinese industrial facilities; this year, they
are expected to invest more than $70 billion. Many corporation executives
apparently do not realize that doing business with communist political
authorities is highly speculative. In fact, it may prove to be outrightly reckless and foolish in years to come. After
three years of futile negotiation, Chinese authorities, for instance, forced
three oil and gas corporations, Shell, Exxon-Mobil, and Gazprom,
to leave the country, leaving behind their designs, field-development plans
and technology. A British utility firm that had built and was running a
waste-water treatment plant in Shanghai was
forced to pull out after the Beijing
government suddenly decreed that a fifteen percent return, which had been
agreed upon when the investment was made, was illegal. It takes courage,
patience, and much labor to navigate through the
country's opaque bureaucracy, to cope with ever changing rules and
regulations, and deal with communist officials who distrust and despise
entrepreneurial profits. Moreover, to contend with piracy and outright fraud
in a communist legal system tends to be outrightly
disheartening.
A business project fraught with danger, uncertainty,
or perplexity requires a higher return than one without such impediments. An
investment in China
or any other country where political and institutional conditions are
antagonistic to private capital surely merits a double-digit return
consisting not only of ordinary business return but also an additional
political risk premium. Loan funds offered to the U.S. Treasury may yield
three or four percent; funds extended to a government or enterprise in many
foreign countries may need to earn some twenty percent or more. If they yield
lesser returns, the investment, in our judgment, is imprudent and foolhardy. Yet
some investors may be tempted in hope of improving conditions in the future.
Some businessmen run away to other countries because
they are unhappy in their own, and then run back to their own because they
fail abroad. Most have no choice but to bravely meet all difficulties and
challenges at home. A few corporate leaders interested in economic ideas and
policies even venture to participate in intellectual discussions about the
ideological and institutional setting of business. Some may reach out to
their own employees, offering economic instruction which may make them more
knowledgeable and productive. Others may support schools and foundations
specializing in economic education or underwrite media programs dealing with
economic issues. They all labor in the
dissemination of economic and social ideas that shape public opinion and
thereby influence the institutional setting of business.
Few economic problems, if any, are as meaningful and
consequential as the questions of employment and unemployment. They are
discussed and explained by every school of economic, social, political, and
ethical thought; every religion visits the poor and unemployed. Yet the
causes of their plight are rarely discussed without preconception,
predilection, emotion, and bias. It is more popular to charge
"unpatriotic business behavior,"
"malicious outsourcing," or "employer greed" than to
analyze the demand for labor. Few speakers and
writers have the courage to analyze and point at popular labor
laws and regulations that paralyze the market and condemn millions of men and
women to a life of chronic unemployment.
A few economists dare apply basic economic
principles to human labor. They insist that free labor markets would suffer no mass unemployment -- just
as free goods markets suffer no chronic surpluses. And they argue that every
mandatory boost in labor costs reduces the demand
for labor -- just as government fixing of prices
that are higher than market prices reduces the demand for economic goods. Many
politicians are attorneys, counselors, and
solicitors unschooled in the intricacies of inexorable economic principles;
they revere the power of manmade law. To command improvements in income and
living conditions, they may legislate a minimum wage
or impose valuable fringe benefits which raise the cost of labor and thereby reduce the demand for labor. They create surpluses of labor
especially of workers directly affected by the minimum wage law and other
fringe benefits. Having created a surplus, they grant generous unemployment
benefits which they exact from some hapless taxpayers.
In order to eradicate the evil of mass unemployment,
economists would merely remove the institutional restraints and lower the
costs imposed on labor. Every dollar of cost
reduction undoubtedly would increase the demand for labor
by many thousands of unemployed workers. Every rescission of labor restraint would render many idle Americans
productive again. Economists would immediately reduce the burden of fringe
costs that weigh heavy especially on unskilled labor;
the fringes may actually double labor costs and
cause much unemployment. A five percent rate of national unemployment always
hides the fact that fifty percent of unskilled labor
may be unemployed; the rate may even be higher for minority youth in inner
cities. When seen in this light, labor laws that
boost the cost of labor inflict much economic harm
on the poor and breed much social strife. They gnaw at the very foundation of
society.
Labor
fringes are costs to those individuals who are forced to pay them; they are
benefits to those who enjoy them. Because every reduction in benefits would
be spurned, condemned, and vilified, no matter how baneful it may be for the
young and unskilled, some economists are proposing a simple moratorium of labor-cost legislation and regulation, that is, a
temporary halt in adding costs; it would give the labor
market a chance and time for readjustment. A ten-year moratorium may suffice
to reduce significantly the unemployment rate. It undoubtedly would allow our
minority youth to work again.
A moratorium of error merely suspends the harm; it
does not change old habits, predispositions, and deeply ingrained attitudes. The
true spirit of improvement is a spirit of liberty,
it is the limitation of government power.
Dr Hans F. Sennholz
www.sennholz.com
Dr. Sennholz is President
of The Foundation for Economic Education, Irvington-on-Hudson, New York and a
consultant, author and lecturer of Austrian Economics.
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