Pacific Views

Too Bad, A

The Seattle Times/P-I has a commentless blog where a staffer posted the following economic adventure:

An American, A, earns $100,000 creating software for another American, B. In India, C earns $15,000.

Now suppose the American B switches his business to the Indian C, who creates the same software for $25,000. What has happened? Well, A has lost his job. And as long as A is out of work, there is a net loss to the American economy. But most people displaced do find work. Assume that A cannot find another $100,000 job, but finds one at $60,000. Here are the gains and losses for A, B, and C:

A, the American producer: -$40,000
B, the American consumer: +$75,000
C, the Indian producer: +$10,000
The net gain is $45,000, of which $35,000 is in the United States.

These are all made-up numbers. You can make up different ones. But if you assume the American gets another job, it’s pretty difficult to come up with a net loss for the United States-and the lower the wage level of our trading partner, the more difficult it is for America to come out behind.

None of this reasoning makes the process any kinder to A. But let us not forget B and C. They gain from trade more than A loses.

The problem, of course, is that A is B. B just lost $40k in purchasing power, and the US government just lost the taxes on $40k worth of wages, as well as the taxes on $40k worth of spending. Also, A would be lucky to get a job paying $60K in this economy, because most people haven't made it anywhere close.

But the author does invite me to make up my own scenario. How about this:

A gets laid off from one outsourced job where the pay was $45k, and manages to find another at $39k. Whew. When that company outsources it's jobs, A is lucky to be able to continue paying for insurance out of unemployment to cover a chronic health condition for a while.

Eventually, A loses the house and has to get help from family. A can no longer afford to purchase the $340 software product they provided technical support for, and the company still charges the same amount it did before reaping all these wonderful cost savings. A begins to run up large credit card balances just to pay for food and doctor's bills.

A finally finds temp work with no benefits that winds up paying around $34k a year. A goes to night classes to get a certificate that will boost their wages back up towards their previous level, and succeeds 3 years later. A spends the next 7 years digging out of a mountain of debt, while accumulating no savings.

Of course, that's all made up, too. But it corresponds more closely to the experiences of people I've known whose lives never do quite make it back to where they were before what becomes a huge personal catastrophe.

Global trade isn't going away, and I don't think that it should. But if A had permanent healthcare benefits, longer term unemployment, and access to educational assistance for displaced workers, they get back on their feet quicker, and with less debt. Importantly, they start paying back into the system much faster, both in terms of taxes and purchasing power.

Globalization: Don't try at home without a net.