During the income-tax debates of the late 1970s, Congressional Budget Office head Alice Rivlin argued that workers had a set idea in mind of what their take-home pay should be. If offered tax cuts, Rivlin said they would have more money in their pockets and would reduce the number of hours they worked to meet existing income goals. By Rivlin’s estimation, marginal rate cuts would have no economic impact.
Replying in a Wall Street Journal editorial, Paul Craig Roberts showed the flaw in Rivlin’s argument, pointing out that if the majority of workers responded in the way she predicted, economic productivity would fall alongside worker income. In short, Rivlin’s understanding of the behavioral impact of tax cuts was backwards. Roberts’s reply is useful today in that he recently made an argument that mirrors Rivlin’s in a Washington Times op-ed.
Citing a University of California study that said 14 million “white collar jobs are vulnerable to offshore outsourcing,” Roberts said the loss of these jobs is “fool’s gold for companies,” and that U.S. workers will eventually see lower wages and less opportunity if companies continue to move jobs offshore.
What Roberts failed to address in his op-ed is capital, and the source of benevolent capital that would fund work here that could be done more cheaply elsewhere. Germany is a modern-day example of a country that tries to keep low-value work “onshore,” but if its high unemployment rate and trade surplus tell us anything, it is that capital flees unproductive opportunities.
Adam Smith addressed this concept centuries ago in The Wealth of Nations. Countries that tried to shield economic effort from the markets had “stationary” economies that experienced low wage growth and low job growth. England tried to protect workers with its Poor Laws, and the result was that its poorer North American colonies had laborers earning wages higher “than in any part of England.”
Smith said capital “cannot long remain in any country in which the value of annual produce diminishes.” Citing a report titled “Outsourcing America,” Roberts acknowledged that in certain white-collar fields, Chinese and Indian labor can out-compete the work product of laborers in the United States.
The flipside of his point is that even if U.S. companies wanted to keep certain jobs onshore, the capital available to maintain this work would very quickly dissipate. Roberts completely ignores this reality, and instead says the natural (and very healthy) worldwide division of labor is making the U.S. labor force look increasingly Third World.
But Roberts can’t have it both ways. He deplores our trade deficits all the while arguing that the U.S. is headed for Third World status. In decrying what he sees as a trade imbalance, he fails to address what causes this imbalance, which is the record foreign purchase of U.S. stocks and bonds.
Roberts might argue that part of our trade deficit is related to foreign central bank purchases of U.S. debt, but who would want to own the debt of a supposedly imploding economic power, let alone equity in its private companies? If what he’s saying were remotely true, the U.S. would be the first failing economy in world history to draw massive amounts of investment capital from around the world. Not very likely.
Instead, the lesson here is that U.S. companies aren’t just doing the right thing in adhering to the laws of comparative advantage, but they’re also doing what’s essential to attract the capital that will fund more productive employment in the future. Paul Craig Roberts should know this well, given the productivity arguments he made in defense of tax cuts 25 years ago.
Adam Smith said capital “must in every country naturally increase as the value of annual produce increases.” In agitating for protection of work that the markets have deemed low value, Paul Craig Roberts is promoting economic prescriptions that will repulse capital and that will ultimately bring us closer to the low-wage Third World status that has him so fearful to begin with.
–John Tamny is a writer in Washington, D.C. He can be contacted at firstname.lastname@example.org.