Bringing Poverty Back to America

by John Moser

Trade and technical progress form some of the most important cornerstones of economics, identified as early as David Ricardo’s theory of Comparative Advantage in 1817 and Nicholas Klador’s model of productivity growth in 1957.  Trade and technical progress make an economy—a region, a nation, or the entire global system—and the people living under it wealthier, increasing the standard-of-living and allowing for population growth; yet one of the most-reliable political themes throughout history has been the resistance of trade and technology, whether it be the machine-breakers of Luddism, unionists arguing for adherence to classical production processes and guaranteed retention of regional jobs, or the modern uprising against globalization and outsourcing.

People, as individuals, want to be secure in their livelihoods.  An economy becomes wealthier by increasing productivity or, put simply, by reducing the jobs required to produce a unit of goods or service.  If three people working 40-hours produce 40 pairs of shoes between them, then those shoes must be priced at a minimum of three hours’s wage—if the factory workers make $25 per hour, those shoes cost $75.  If those same people working 40-hours can produce 60 pairs of shoes, then those shoes only require the price of two hours’s wage or $50; and if we don’t need more shoes than before, one of those three people is laid off.  Shoemakers might not enjoy the prospect of newer, faster shoe-making tools as much as the consumers who have to pay for those shoes.

Today, people worry about automation as a generalization of this scenario; and the topic of outsourcing has become a heavy political topic.  The ideal of “bringing jobs back to America” and “protecting American jobs” appears in political discussions frequently, because people don’t want their jobs pulled out from under them and sent off to a foreign country.  In a sense, trade is a form of technical progress:  cheap shipping and a more-cost-efficient process come together to give new production strategies, producing the same goods for lower prices.  As such, some people lose their jobs.

These effects impact individuals, rather than an economy.  The jobs lost are replaced as consumers use their greater purchasing power to buy more and better things, creating new labor demand; and robust economies such as Americas always have overlapping progress, continuously creating new jobs.  Jobs are destroyed more-rapidly than they’re created in recessions, and created more-rapidly than they’re destroyed during recovery and booms.  Even so, the individual who becomes unemployed for a few months is less-concerned with the long-term growth of his and everyone’s wealth—ostensibly the “greater good”—than he is with immediately feeding himself and his family.

Modern political dialogue has brought this individual concern back to the fear of “selling our jobs to China.”  As with automation, people believe American jobs are going away—to Chinese factories—and never coming back. This has brought campaigns to “bring jobs back to America.”

Modeling Chinese Imports on Jobs

With a look at the International Trade Administration’s data, we can try to model the change in jobs if we bring an outsourced manufacture back to the United States.  Using statistics for textiles, we can project the impact on jobs if we ended the import of a set of goods, such as Men and Boys’s Cotton Trousers.  To do this, we’ll use the number of units imported and the total cost of imports in 2015.

The advantage of trade increases as the gap between domestic and foreign costs increase.  That means higher American per-hour wages and lower Chinese per-hour wages favor outsourcing to China.  These models will use the high estimate of $3.50 hourly Chinese labor, although Bloomberg estimates the costs at 64 cents per hour, and the Bureau of Labor Statistics estimated the cost as high as $1.74 on average in 2009.  American labor will be modeled to include payroll taxes—Social Security OASDI and Medicare—and $3,000 yearly benefits on top of a theoretical $21 factory wage, the average wage for a General Motors factory line worker; the median income in 2015 was equivalent to a $27.89 wage.  The benefits number is low:  employees typically cost 18% to 26% more than their salary, and even much more at lower wages.

The cost of shipping bulk goods from China has a negligible impact.  In 2015, importing one 40-foot shipping container of goods from China into the United States carried a total cost of under $1,300.  Such a container can carry 20,000 pairs of pants or jackets, bringing the shipping cost of importation to 6.5 cents per one article of clothing.  Once imported, these containers load directly onto 48-foot container trucks, using the same domestic shipping as American-made goods.

Men and Boys’s Trousers

In 2015, America imported 16,298,776 dozen Cotton Men and Boys’s Trousers (M&B Trousers) from China, or a total of 195,585,312 pairs.  These imports came at a cost of $1,197,391,000, or $6.12 per unit.

At $21/hr wage (GM factory line worker) and 40-hour, full-time, American factory worker costs $23.85/hr after including 6.25% Social Security Retirement and 0.2% Medicare payroll taxes, plus $3,000 in benefits.  This figure doesn’t count further per-employee costs, such as unemployment insurance.  At a rate of $23.85 per hour, an American factory producing M&B Trousers at the same efficiency as the Chinese equivalent would produce them at a cost of $41.72 per each.  Levi’s Made-in-USA jeans retail for over $100, but other brands of jeans made in the state of Georgia retail as low as $58, so this seems fair.

This conversion is accomplished by multiplying:  Chinese Factory Cost x (American Hourly Wage / Chinese Hourly Wage)

In theory, 196 million pairs of M&B Trousers represents 171,056 jobs brought back to America; however, the American factory would produce them at a total cost of $8,159,364,390, or $6,961,973,390 more-expensive than the import good.

This conversion is accomplished by dividing:  Cost of All M&B Trousers Imports / (Chinese Hourly Wage x 2,000 Full-Time Hours per Year)

Wages are paid out of revenue, and the amount of spendable income available in any span of time is finite.   The amount of total money spent in 2015 would have been the same even if goods were slightly-more-expensive; Americans would have just bought less, because they would have run out of money faster.  The total number of jobs created can only reflect the number of M&B Trousers that Americans can now buy.

Directly calculating this on labor costs would ignore the non-changing cost of shipping and retail, which includes freight transit, warehousing, stocking, retailing, and providing infrastructure to retail centers.  Those are a lot of jobs unaffected by the change in importation.  Instead, we need a model price.  For our model, the average price of imported M&B Trousers is assumed $14.97—a number picked arbitrarily from Google as a low estimate.  This average spans children’s and adults’s clothing, so will include per-unit goods ranging from $10 to $25, all the way up to Lands’s End and Jos A. Bank products.  A higher estimate might be more-fair, assuming most clothing purchased is Wal-Mart adult clothing; however, high estimates favor Chinese outsourcing.

An average price of $14.97 would increase to $50.57 per pair of M&B Trousers.  Assuming Americans buy the same amount of all other goods, they would have to buy fewer M&B Trousers; either case is equivalent.  This reduces the number of purchaseable M&B Trousers to 57,898,203, or 29.6% as many.

The new price is established by adding the cost increase to the price:  Average Price + (Total Increase in Cost / Total Number M&B Trousers)

The number of purchaseable M&B Trousers is the number that costs as much:  Total Imports / (New Price / Old Price)

This, in turn, reduces the number of jobs created to manufacture all of those trousers.  Bringing M&B Trouser manufacture back to America would provide 50,637 40-hour full-time jobs.

These jobs are established by:  Total Theoretical Jobs x (Purchaseable M&B Trousers / Total Imports)

In doing this, Americans reduce the number of jobs supporting the retail of M&B Trousers.  Those jobs are the remainder of the price; the jobs lost are the ones that went with the no-longer-purchaseable share.  In total, this is a $8.85 share of each of 137,687,109 M&B Trousers, or $1,218,530,910.  That represents 59,267 minimum-wage, full-time jobs, including taxes and benefits in the minimum-wage cost.

This totals to a net loss of 8,630 jobs.  The total Chinese textile import market is 35 times this size, which would bring a total job loss of 302,050 jobs; while the total Chinese import market of $483,244,700,000 represents roughly a loss of 2,175,040 American jobs.

Breaking Even

The break-even point on jobs is just over an $18/hr American wage, or $36,000/year.  This is 64.5% of the $55,775 United States median income in 2015.  At the same time, all goods Made in China increase in price by just over three times.  In other words:  of goods currently Made In China, that $36,000 buys corresponding American-made goods equaling about what $12,000 buys today.  This includes clothing, televisions, phones, watches, and a lot of business goods.  Fortunately, only about 3% of American spending actually goes to the Chinese import market, so the damage is limited:  that $36,000 would buy about $33,000 of goods, since 97% of consumer expenses are houses, medical care, Internet service, and other domestic goods.

In other words:  when replacing Chinese imports with American manufacture, higher American factory wages translate to fewer American jobs, and reduce the amount of stuff purchaseable with American dollars.  The scope of damage from a protectionist policy is limited by the narrow margin of goods imported from China; although the United States has a much-larger impact than just China, at a whopping 12% of our spending.  Expect to see $1,100 budget cell phones, $2,000 iPhones, and $1,500 televisions instead of sub-$600 on these types of goods; as well as a mild rise in food prices and an increase in hunger among American families.

“Bringing Jobs back to America” is a great way to make Americans poor.  It’s interesting that the impact is equivalent to raising minimum wage and follows a similar mechanism, yet is particularly-popular among minimum-wage opponents.

Advertisements