Santa Clara Magazine

Commentary

Discouraging job creation overseas could backfire

Legal scholar David Yosifon argues that there are other ways to encourage job growth—without resorting to protectionism.

President Barack Obama wants to give a tax benefit to companies that keep jobs in the United States rather than moving them abroad. The idea was put forward in the American Jobs Act, proposed to Congress in September 2011, though still unpassed as of February 2012. But the idea is a bad one economically and morally—which makes it especially scary, because it appears to be so popular politically.

Companies move factories overseas when foreign labor will take a lower wage than will domestic workers. The less expensive labor allows firms to produce at lower costs, which enables them to sell goods at a lower price. If they didn't, they would be overtaken by competitors who can also get inexpensive labor.

This benefits Americans tremendously. If you pay $100 less for your car or television because of lower manufacturing costs, the effect is the same as if you had received a $100 increase in your salary. Lower consumer prices increase real income and wealth for most Americans.

The plight of displaced American labor is real ... The prudent policy response is to tax a portion of the general gains that consumers and shareholders enjoy from globalization, or that wealthy consumers and shareholders enjoy, and use those resources to create domestic jobs that cannot be outsourced.

This kind of trade also is morally desirable because it improves the lot of some of the poorest people in the world. Chinese workers who might otherwise be on the edge of rank deprivation have income as a result of American manufacturers doing business in their land. Why should we feel good when we donate to charities serving the foreign poor, but bad when we buy goods that supply the foreign poor with jobs? Both are morally estimable.

Obama's tax proposal would reduce international trade by making foreign production more expensive through the blunt instrument of the tax code. Undoubtedly, some companies will find it better to stay home after such a tax change, but the effect will be to lower the standard of living for domestic consumers and foreign workers alike.

Bootleggers and Baptists

So why is the proposal so popular? It's a refrain of the classic "bootleggers and Baptists" saga.

Prohibition succeeded politically because of the strange coalition of religious people who were morally outraged by drinking and bootleggers who knew they would privately benefit when free trade in liquor was outlawed. Here the "Baptists" are nationalists who have a moral outlook that American manufacturing, American goods, American jobs are always best. The "bootleggers," no disrespect intended, are domestic labor groups whose jobs would be saved or wages increased through the tax change.

The plight of displaced American labor is real. Individual suffering, family turmoil, community malaise, and general civic discontent are predictable and tragic consequences. The prudent policy response is to tax a portion of the general gains that consumers and shareholders enjoy from globalization, or that wealthy consumers and shareholders enjoy, and use those resources to create domestic jobs that cannot be outsourced.

We can put Americans to work creating and improving public goods—schools, roads, environmental cleanup. We can train American workers in the kinds of technical skills in which we still have competitive advantages in the global marketplace.

We also can reform our corporate law to ensure that firms deal openly and honestly with domestic workers by alerting them early about global strategies, giving workers time to bargain or make new plans. Corporate law ensures that shareholders get straight talk about activities that bear on their interests; workers should be entitled to no less. International labor and human rights law also should be strengthened to ensure that gains from exporting jobs do not come from exploitative and unsafe working conditions, slave labor, or child labor.

It would be wrong to reap the general benefits of globalization without taking account of the specific and local sorrows that it sows. Managing this give and take is perhaps the most pressing public policy challenge of our time. But we can solve it without resorting to destructive protectionism.

David Yosifon is an assistant professor in Santa Clara University's School of Law. His scholarship has focused on applying social psychology and the social sciences to legal theory. This piece was originally written as a special in the January 29, 2012 Mercury News.