Monday, November 29, 2004

Haven't We Gone Over This?

Business Week has a particularly silly article about China's "threat" to American business. So let's get this straight. We've gone through agricultural revolutions, an Industrial Revolution, "downsizing" epidemics, the Information Revolution, opening of import and export markets to Mexico, Japan, and East Asia and our unemployment rate is still around 5%. Clearly technology and free trade do NOT have an effect on employment in the long run.

But, says Business Week, this time is different:

America has survived import waves before, from Japan, South Korea, and Mexico. And it has lived with China for two decades. But something very different is happening. The assumption has long been that the U.S. and other industrialized nations will keep leading in knowledge-intensive industries while developing nations focus on lower-skill sectors. That's now open to debate. "What is stunning about China is that for the first time we have a huge, poor country that can compete both with very low wages and in high tech," says Harvard University economist Richard B. Freeman. "Combine the two, and America has a problem."
Apparently "something very different" threatens our very way of life. The point, however, is that while China's comparative advantage in "knowledge-based" industries is debatable, there are more goods to produce than manufacturing and knowledge goods and the United States will be able to produce one, or more likely many, of them relatively more cheaply than any other country.

Furthermore, as of November 2003 employment in Mathematical and Computer occupations, the "knowledge" industries, included 2.8 million workers, out of 127.4 million. That's only 2.2% of total employment. Even if we lost all of those jobs, unemployment would rise to only about 7.5% which could be cured by expansionary monetary or fiscal policy (although, there are problems with this right now. But I still wouldn't worry about it.) It is patently unlikely, however, that these jobs would simply be lost without being replaced in other, growing industries.

Companies are attracted to China for their low wages. But low wages also mean lower productivity and as productivity rises, so will wages. And, the (hopefully) gradual depreciation of the dollar means that U.S. goods will become cheaper and thus more attractive to other countries as well as domestically. This means more GDP and lower unemployment.

The basic point is that, as history has shown us, trade and technology are not the primary determinants of unemployment. Rather, it's the Fed and fiscal policymakers who have their feet on the gas pedal. Widespread worry has abounded at every new introduction of free trade or new technology and the massive unemployment to which these worries refer has never materialized. It will not in this case either. There is nothing fundamentally different about China.


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