“Don’t Be Afraid of Competition”
By Karl Zinsmeister
The American Enterprise, June 2004
I was a little taken aback when I picked up a tube of good-old Crest toothpaste from my sinktop last year, started to read the label, and found the words “Made in Mexico.” O.K., we all recognize that labor-intensive products like blue jeans or green beans may be less expensive to produce in a place like Mexico. But toothpaste? I imagine that mixing the minty stuff and injecting it into plastic sleeves has been a low-labor, highly mechanized process for decades. How could it possibly be more efficient for Procter and Gamble to move everything south of the border, let the machines run there, then truck the heavy tubes all the way to me in upstate New York? I scoffed at this for a day or two. And then I just let it go. I’ve got to assume there is some advantage in doing business that way—or else nobody would have gone to the trouble to set it up. Why battle the natural economic breezes?
This issue of The American Enterprise features an interview with Fred Smith, the man who dreamed up FedEx and the overnight delivery business that is now such an important part of our lives. In one of his many memorable declarations, Smith has said of his company that “We are the clipper ships of the computer age.” That’s exactly right. Now, anyone who has seen a schooner under full sail might miss the romance of the sea merchants. But they did exactly what FedEx does today, only less reliably and a lot more slowly. The Flying Cloud was fine for importing tea, but try waiting on it to deliver blood you badly need for a transfusion.
The undeniable reality is that most of the economic transformations which dizzy us today also leave us better off— dramatically so over the long run. There are something like 25,000 different items in the inventory of an average supermarket these days. I ate lots of grapes this winter; I have no idea what country they came from, but I’m sure they weren’t grown in New York. Globalization gave me a nice alternative to raisins.
Nonetheless, a minor economic hysteria is currently sweeping this country....Today’s loudly proclaimed trauma is “outsourcing”— which is in turn part of the larger problem of “globalization.” ...Let’s take some of the complaints of the anti-globalist movement seriously, and see what hard empirical evidence can teach us about their claims. Take, for instance, the idea that global trade is merely capitalist exploitation of weak nations by strong nations. Given how anxious most poor nations are to trade with rich nations (the Third World’s main beef these days is that the First World won’t trade and invest more with them),this sounds a little fishy on its face. But let’s be open minded. What do the real outcomes of recent decades tell us about how freer trade affects poor countries?
The answer is encapsulated in the charts on pages 24,22,27, and 23 of Johan Norberg’s fine essay leading off our feature section. The more a country trades freely, those graphs demonstrate clearly, the less likely it is to be poor. Third World nations that held themselves apart from globalization during the last decade actually damaged themselves, while those who participated in trade and accepted foreign corporations and private investment grew briskly. The true result of free economic exchange is thus not “rape,” but rather things like fewer dead babies, more educated women, clean water to drink, decent houses to live in.
When the influential left-wing charity Oxfam claims that “trade is reinforcing global poverty and inequality, because the international trading system is managed to produce these outcomes,” you are hearing conspiracy theory in its most ignorant form. Does anyone really believe that pot-bellied, cigar- smoking managers in companies like Microsoft and Nestle and IBM actually conspire to run the international trading system specifically so as to shaft poor people? And the first part of Oxfam’s statement—“trade is reinforcing global poverty and inequality”—is just as crackers as its conspiracy dig.
Consider developments in the world’s two most densely poor countries after they abandoned socialism for capitalist trade From 1978 to 1998, poverty in China fell from 28 percent to percent, according to statistics from the Asian Development Bank. In India, poverty declined from 51 percent to 26 percent over the same time period. If you think the simple spread modern technology caused these improvements, independent economic policies, consider that during the quarter century prior to 1978— before China and India decided to tie fortunes to global trade— poverty actually went up in China, and held stagnant in India at 55 percent.
Further evidence of trade’s importance in bringing prosperity to the Third World can be seen in Africa. Africa is the part the world that has globalized the very least. Not coincidentally, it is by far today’s worst suffering continent, hosting 66 percent of the world’s poor. For more evidence on whether international capitalism harms or helps Third Worlders, see Columbia professor Jagdish Bhagwati’s excellent exploration of the subject on page 28.
A recent change in tactics by opponents of global capitalism illustrates the essential phoniness of many of their objections For a long time, the Left has argued that the problem with globalization is that it enriches the industrial countries at expense of poor countries (“Nike preys on the leatherworkers Malaysia”). But very recently, enemies of capitalism reversed the charge: Globalization comes at the expense workers in the industrial countries (“IBM gives good jobs Indians, betraying U.S. software engineers”). Once and for all: Is U.S. investment in the developing world good for them or for them? Good for us or bad for us? The critics can’t have both ways. In attempting to do so, they demonstrate that anti-globalization complaint is fundamentally a witch hunt—attempt to heap abuse on international business even if claims are directly contradictory....
According to a March 2004 study by Nobel laureate Lawrence Klein and economist Nariman Behravesh, overseas outsourcing increases the total number of U.S. jobs, and benefits the U.S. economy in many ways. Their report looks specifically at the effects of sending computer software and services overseas, and finds that, because the industries which use computers become more productive, the process ultimately produces twice as many jobs in the U.S. as are displaced.
In 2003, Behravesh and Klein estimate, offshore outsourcing of computer services created a total of 90,264 net new jobs in the U.S. The decline of 24,860 jobs in the software industry and 3,393 more in government was counterbalanced by 20,456 new jobs in wholesale trade, 19,815 in construction, 18,895 in transportation and utilities, 18,015 in education and health services, and so forth. By 2008, the authors project, outsourcing of computer jobs will result in a net increase of nearly 320,000 new jobs in the U.S. as a whole. And additional new jobs aren’t the only benefit. The two economists find that computer outsourcing also reduces inflation, expands exports, raises American wages, and yields higher overall economic growth.
One of the problems in judging economic changes is that the disadvantages are usually obvious, whereas the benefits are often hard to see at a glance. Lots of Americans now know that the number of computer service jobs outsourced to India has risen from 110,000 to 250,000 over the last five years. But few realize that over that same period India increased its purchases of U.S. services from $1.8 billion to $3.4 billion annually.
Many more billions of dollars worth of services are sold by the U.S. than we purchase abroad. And it isn’t only in services that the U.S. remains extremely competitive economically. When BMW decided recently to expand the number of cars it manufactures, it decided to “outsource” the work to the U.S. by building a new factory in South Carolina. Germany’s rigid labor laws and high social costs encouraged the decision. American politicians wanting businesses to make the U.S. their first choice when sinking new investments would do well to make sure our regulatory environment remains attractive to others in the future.
The bottom line: About 25 cents of every dollar in our Gross Domestic Product is now related to international trade. In 1970 that ratio was only about 10 cents. Anyone claiming that the internationalization of business is bad for us must explain why the most prosperous third of a century in American history has coincided with an explosion of overseas commerce.
Many of the issues blamed on international trade are, in truth, unrelated. Of the 58.6 million job layoffs in the U.S. between 2001 and 2003, how many would you guess were the result of jobs shifting overseas? Try just 690,000.The rest were simply part of modern capitalism’s normal churn. “Well that raises another problem,” you may say. “What the devil is wrong with an economy that lays off58.6 million people, anyway?” The answer is, “Nothing.” From 1993 to 2002—boom years by any standard— America’s total employment grew by 17.8 million. But do you know how this happened? Fully 310 million jobs were eliminated during that decade, and replaced with 328 million new ones. This may sound bad on paper, but that fluidity is precisely what makes the U.S. a marvel of creativity and new production, and the world’s best locomotive for pulling people from poverty to comfort.
And capitalist churn is not just an American phenomenon; it occurs wherever economies are free to experiment and grow. Between 1995 and 2002,countries like China, Japan, and Brazil eliminated more manufacturing jobs than the U.S., according to a recent study from Alliance Capital Management. Brazil shed fully 20 percent of its manufacturing jobs during that period, Japan 16 percent, China more than 15 percent (mostly from clunky state- owned factories). A willingness to replace less-productive old jobs with more-productive new jobs is the source of affluence today.
Jagdish Bhagwati notes that “when jobs disappear it is usually because technical change has destroyed them, not because they have gone anywhere.” He recalls, “When I came to my university 25 years ago, I got a secretary. Today, the new hires get a computer instead.” And a solution that is economical in one place, he notes, may not make sense in a different setting. “In India, where a secretary costs a small fraction of what one would in New York City, but a computer costs more, any Indian professor who asked for a new laptop would probably get a secretary instead. It is simply a matter of economic reality in both places.”
The real root of this: The world has become extremely competitive. the fretting over globalization, I suggest, is Globalized trade, communication, and travel has clearly ratcheted up competition in many sectors—the economy, technology, education.
It can admittedly be a little scary to compete for your living. But we all know that without the spur of competition, any organization eventually grows fat and lazy. Most Americans welcome the benefits of competition, and rely heavily on it to keep progress flowing.
The question about globalization thus becomes: Do we trust our ability to compete successfully against alternatives from other countries? Do we have confidence that we’ll win our share? Or are we afraid to face the challenge?
This winter’s Democratic debates often seemed to portray U.S. workers as frail reeds, worn out by a mean economic world, tiptoeing right at the verge of tears.Is that you? Is that me? Since when do Americans need to be sheltered from testing ourselves against others? What makes anybody think our society will become stronger if U.S. companies are forbidden from matching their workers against foreign alternatives for tasks like answering phones or writing computer programs or assembling hard drives? For that matter, is it even possible in this day and age to protect second-rate businesses from more productive rivals? One of the wisest responses to the 1996 economic sob story by the New York Times that I described earlier came from writer Robert Samuelson. Behind these whiny stories about the unfairness of economic discipline, he wrote, “is a contemporary consciousness, shared by many journalists, that assumes that people are entitled to life without worries, setbacks, or conflicts—and that anything less is a ‘crisis.’” This is infantilization of grown-up Americans, and it does not become us as a nation.
Nor will it make our society better. “The ultimate effect of shielding men from the effects of folly is to fill the world with fools,” said Herbert Spencer. We have seen this as a practical fact too many times to count. The managers and workers at U.S. automakers slumbered away in lazy mediocrity until sharp competition arrived from abroad. Now their cars are safer, more comfortable, less polluting, and cheaper to buy and operate than in the era before global competition. The battle brought out a better us.
If John Edwards wants to see American workers at the top of the heap, he and his trial-lawyer buddies ought to stop blocking efforts to tame the ridiculous lawsuit costs that drag on many of our companies. Dick Gephardt ought to ask the union bosses whispering in his ear whether the work rules and seniority stipulations and non-portable pensions and costly fringe benefits they’ve insisted upon have anything to do with the migration of work elsewhere. Software engineers interested in heading off Indian outsourcing need to ask their employers what they can do to help stop the mushrooming of employer-provided health care costs.
Wages account for only 10 percent of the total cost of U.S. manufacturing today. Litigation expenses, taxes, environmental rules, workers’ comp, benefit costs, and regulatory expenses total up to more than twice the wage bill at America’s average manufacturer. If they’re concerned about our economic viability, activist politicians should chisel away at those problems. Or, even better yet, address the biggest obstacle of all to a stronger American economy, by opening up our public schools to competition.
The very worst step we could take would be to “shield men from the effects of their folly,” as Spencer put it. Protectionism never helps in the long run. Besides, there is no economic crisis today in need of heading off. At our current rate of annual productivity growth our economy will double in size over the next two decades. That will make life better in many ways small and big. (If, on the other hand, the political class screws up our private economy, the Baby Boomers had better plan to triple up three to a room in their nursing homes, and learn how to divide their blood-pressure pills.) The American economic formula has been the very same simple one that nature uses to produce a taller corn plant: lots of cross-breeding and competition, resulting in impressive upward evolution over time. By inviting the smartest, most diligent, and talented workers on the globe to exchange their best products for ours, we’ve not only grown rich but also honed our own abilities to a very sharp edge.
America is a competing nation, not a shielding and sheltering one. Competing even more strongly in the future is what we ought to concentrate on now.
***
By Karl Zinsmeister
The American Enterprise, June 2004
I was a little taken aback when I picked up a tube of good-old Crest toothpaste from my sinktop last year, started to read the label, and found the words “Made in Mexico.” O.K., we all recognize that labor-intensive products like blue jeans or green beans may be less expensive to produce in a place like Mexico. But toothpaste? I imagine that mixing the minty stuff and injecting it into plastic sleeves has been a low-labor, highly mechanized process for decades. How could it possibly be more efficient for Procter and Gamble to move everything south of the border, let the machines run there, then truck the heavy tubes all the way to me in upstate New York? I scoffed at this for a day or two. And then I just let it go. I’ve got to assume there is some advantage in doing business that way—or else nobody would have gone to the trouble to set it up. Why battle the natural economic breezes?
This issue of The American Enterprise features an interview with Fred Smith, the man who dreamed up FedEx and the overnight delivery business that is now such an important part of our lives. In one of his many memorable declarations, Smith has said of his company that “We are the clipper ships of the computer age.” That’s exactly right. Now, anyone who has seen a schooner under full sail might miss the romance of the sea merchants. But they did exactly what FedEx does today, only less reliably and a lot more slowly. The Flying Cloud was fine for importing tea, but try waiting on it to deliver blood you badly need for a transfusion.
The undeniable reality is that most of the economic transformations which dizzy us today also leave us better off— dramatically so over the long run. There are something like 25,000 different items in the inventory of an average supermarket these days. I ate lots of grapes this winter; I have no idea what country they came from, but I’m sure they weren’t grown in New York. Globalization gave me a nice alternative to raisins.
Nonetheless, a minor economic hysteria is currently sweeping this country....Today’s loudly proclaimed trauma is “outsourcing”— which is in turn part of the larger problem of “globalization.” ...Let’s take some of the complaints of the anti-globalist movement seriously, and see what hard empirical evidence can teach us about their claims. Take, for instance, the idea that global trade is merely capitalist exploitation of weak nations by strong nations. Given how anxious most poor nations are to trade with rich nations (the Third World’s main beef these days is that the First World won’t trade and invest more with them),this sounds a little fishy on its face. But let’s be open minded. What do the real outcomes of recent decades tell us about how freer trade affects poor countries?
The answer is encapsulated in the charts on pages 24,22,27, and 23 of Johan Norberg’s fine essay leading off our feature section. The more a country trades freely, those graphs demonstrate clearly, the less likely it is to be poor. Third World nations that held themselves apart from globalization during the last decade actually damaged themselves, while those who participated in trade and accepted foreign corporations and private investment grew briskly. The true result of free economic exchange is thus not “rape,” but rather things like fewer dead babies, more educated women, clean water to drink, decent houses to live in.
When the influential left-wing charity Oxfam claims that “trade is reinforcing global poverty and inequality, because the international trading system is managed to produce these outcomes,” you are hearing conspiracy theory in its most ignorant form. Does anyone really believe that pot-bellied, cigar- smoking managers in companies like Microsoft and Nestle and IBM actually conspire to run the international trading system specifically so as to shaft poor people? And the first part of Oxfam’s statement—“trade is reinforcing global poverty and inequality”—is just as crackers as its conspiracy dig.
Consider developments in the world’s two most densely poor countries after they abandoned socialism for capitalist trade From 1978 to 1998, poverty in China fell from 28 percent to percent, according to statistics from the Asian Development Bank. In India, poverty declined from 51 percent to 26 percent over the same time period. If you think the simple spread modern technology caused these improvements, independent economic policies, consider that during the quarter century prior to 1978— before China and India decided to tie fortunes to global trade— poverty actually went up in China, and held stagnant in India at 55 percent.
Further evidence of trade’s importance in bringing prosperity to the Third World can be seen in Africa. Africa is the part the world that has globalized the very least. Not coincidentally, it is by far today’s worst suffering continent, hosting 66 percent of the world’s poor. For more evidence on whether international capitalism harms or helps Third Worlders, see Columbia professor Jagdish Bhagwati’s excellent exploration of the subject on page 28.
A recent change in tactics by opponents of global capitalism illustrates the essential phoniness of many of their objections For a long time, the Left has argued that the problem with globalization is that it enriches the industrial countries at expense of poor countries (“Nike preys on the leatherworkers Malaysia”). But very recently, enemies of capitalism reversed the charge: Globalization comes at the expense workers in the industrial countries (“IBM gives good jobs Indians, betraying U.S. software engineers”). Once and for all: Is U.S. investment in the developing world good for them or for them? Good for us or bad for us? The critics can’t have both ways. In attempting to do so, they demonstrate that anti-globalization complaint is fundamentally a witch hunt—attempt to heap abuse on international business even if claims are directly contradictory....
According to a March 2004 study by Nobel laureate Lawrence Klein and economist Nariman Behravesh, overseas outsourcing increases the total number of U.S. jobs, and benefits the U.S. economy in many ways. Their report looks specifically at the effects of sending computer software and services overseas, and finds that, because the industries which use computers become more productive, the process ultimately produces twice as many jobs in the U.S. as are displaced.
In 2003, Behravesh and Klein estimate, offshore outsourcing of computer services created a total of 90,264 net new jobs in the U.S. The decline of 24,860 jobs in the software industry and 3,393 more in government was counterbalanced by 20,456 new jobs in wholesale trade, 19,815 in construction, 18,895 in transportation and utilities, 18,015 in education and health services, and so forth. By 2008, the authors project, outsourcing of computer jobs will result in a net increase of nearly 320,000 new jobs in the U.S. as a whole. And additional new jobs aren’t the only benefit. The two economists find that computer outsourcing also reduces inflation, expands exports, raises American wages, and yields higher overall economic growth.
One of the problems in judging economic changes is that the disadvantages are usually obvious, whereas the benefits are often hard to see at a glance. Lots of Americans now know that the number of computer service jobs outsourced to India has risen from 110,000 to 250,000 over the last five years. But few realize that over that same period India increased its purchases of U.S. services from $1.8 billion to $3.4 billion annually.
Many more billions of dollars worth of services are sold by the U.S. than we purchase abroad. And it isn’t only in services that the U.S. remains extremely competitive economically. When BMW decided recently to expand the number of cars it manufactures, it decided to “outsource” the work to the U.S. by building a new factory in South Carolina. Germany’s rigid labor laws and high social costs encouraged the decision. American politicians wanting businesses to make the U.S. their first choice when sinking new investments would do well to make sure our regulatory environment remains attractive to others in the future.
The bottom line: About 25 cents of every dollar in our Gross Domestic Product is now related to international trade. In 1970 that ratio was only about 10 cents. Anyone claiming that the internationalization of business is bad for us must explain why the most prosperous third of a century in American history has coincided with an explosion of overseas commerce.
Many of the issues blamed on international trade are, in truth, unrelated. Of the 58.6 million job layoffs in the U.S. between 2001 and 2003, how many would you guess were the result of jobs shifting overseas? Try just 690,000.The rest were simply part of modern capitalism’s normal churn. “Well that raises another problem,” you may say. “What the devil is wrong with an economy that lays off58.6 million people, anyway?” The answer is, “Nothing.” From 1993 to 2002—boom years by any standard— America’s total employment grew by 17.8 million. But do you know how this happened? Fully 310 million jobs were eliminated during that decade, and replaced with 328 million new ones. This may sound bad on paper, but that fluidity is precisely what makes the U.S. a marvel of creativity and new production, and the world’s best locomotive for pulling people from poverty to comfort.
And capitalist churn is not just an American phenomenon; it occurs wherever economies are free to experiment and grow. Between 1995 and 2002,countries like China, Japan, and Brazil eliminated more manufacturing jobs than the U.S., according to a recent study from Alliance Capital Management. Brazil shed fully 20 percent of its manufacturing jobs during that period, Japan 16 percent, China more than 15 percent (mostly from clunky state- owned factories). A willingness to replace less-productive old jobs with more-productive new jobs is the source of affluence today.
Jagdish Bhagwati notes that “when jobs disappear it is usually because technical change has destroyed them, not because they have gone anywhere.” He recalls, “When I came to my university 25 years ago, I got a secretary. Today, the new hires get a computer instead.” And a solution that is economical in one place, he notes, may not make sense in a different setting. “In India, where a secretary costs a small fraction of what one would in New York City, but a computer costs more, any Indian professor who asked for a new laptop would probably get a secretary instead. It is simply a matter of economic reality in both places.”
The real root of this: The world has become extremely competitive. the fretting over globalization, I suggest, is Globalized trade, communication, and travel has clearly ratcheted up competition in many sectors—the economy, technology, education.
It can admittedly be a little scary to compete for your living. But we all know that without the spur of competition, any organization eventually grows fat and lazy. Most Americans welcome the benefits of competition, and rely heavily on it to keep progress flowing.
The question about globalization thus becomes: Do we trust our ability to compete successfully against alternatives from other countries? Do we have confidence that we’ll win our share? Or are we afraid to face the challenge?
This winter’s Democratic debates often seemed to portray U.S. workers as frail reeds, worn out by a mean economic world, tiptoeing right at the verge of tears.Is that you? Is that me? Since when do Americans need to be sheltered from testing ourselves against others? What makes anybody think our society will become stronger if U.S. companies are forbidden from matching their workers against foreign alternatives for tasks like answering phones or writing computer programs or assembling hard drives? For that matter, is it even possible in this day and age to protect second-rate businesses from more productive rivals? One of the wisest responses to the 1996 economic sob story by the New York Times that I described earlier came from writer Robert Samuelson. Behind these whiny stories about the unfairness of economic discipline, he wrote, “is a contemporary consciousness, shared by many journalists, that assumes that people are entitled to life without worries, setbacks, or conflicts—and that anything less is a ‘crisis.’” This is infantilization of grown-up Americans, and it does not become us as a nation.
Nor will it make our society better. “The ultimate effect of shielding men from the effects of folly is to fill the world with fools,” said Herbert Spencer. We have seen this as a practical fact too many times to count. The managers and workers at U.S. automakers slumbered away in lazy mediocrity until sharp competition arrived from abroad. Now their cars are safer, more comfortable, less polluting, and cheaper to buy and operate than in the era before global competition. The battle brought out a better us.
If John Edwards wants to see American workers at the top of the heap, he and his trial-lawyer buddies ought to stop blocking efforts to tame the ridiculous lawsuit costs that drag on many of our companies. Dick Gephardt ought to ask the union bosses whispering in his ear whether the work rules and seniority stipulations and non-portable pensions and costly fringe benefits they’ve insisted upon have anything to do with the migration of work elsewhere. Software engineers interested in heading off Indian outsourcing need to ask their employers what they can do to help stop the mushrooming of employer-provided health care costs.
Wages account for only 10 percent of the total cost of U.S. manufacturing today. Litigation expenses, taxes, environmental rules, workers’ comp, benefit costs, and regulatory expenses total up to more than twice the wage bill at America’s average manufacturer. If they’re concerned about our economic viability, activist politicians should chisel away at those problems. Or, even better yet, address the biggest obstacle of all to a stronger American economy, by opening up our public schools to competition.
The very worst step we could take would be to “shield men from the effects of their folly,” as Spencer put it. Protectionism never helps in the long run. Besides, there is no economic crisis today in need of heading off. At our current rate of annual productivity growth our economy will double in size over the next two decades. That will make life better in many ways small and big. (If, on the other hand, the political class screws up our private economy, the Baby Boomers had better plan to triple up three to a room in their nursing homes, and learn how to divide their blood-pressure pills.) The American economic formula has been the very same simple one that nature uses to produce a taller corn plant: lots of cross-breeding and competition, resulting in impressive upward evolution over time. By inviting the smartest, most diligent, and talented workers on the globe to exchange their best products for ours, we’ve not only grown rich but also honed our own abilities to a very sharp edge.
America is a competing nation, not a shielding and sheltering one. Competing even more strongly in the future is what we ought to concentrate on now.
***
