Art Carden  

Does Paying More to Hire Americans Help Americans?

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Should firms pay a premium for products that are "made in America"? The obvious answer is "yes" if consumers are willing to pay a premium for a "made in America" label, but the benefit to Americans isn't so clear.

Last Summer, my wife and I visited the new Westin Hotel here in Birmingham (my review, if you're interested). I opted to pay $5 to rent New Balance workout gear. The shirt and shorts were clean and comfortable, the sneakers looked brand new and even though they're one size below the 14s or 15s I normally wear, they were still pretty comfortable.

The tag on the socks struck me (and I was allowed to keep the socks; in fact, I still wear them regularly). New Balance advertises their commitment to American workers by noting that the socks are made in the US with American and imported yarn.

I interpreted this to mean that they were willing to pay a premium for socks made by Americans even though they could have gotten socks of the same quality from a foreign supplier for a lower price (otherwise, it's just cheap talk). I like New Balance, and my newest pair of sneakers was made by New Balance. They make very good products. Notice, though, that American workers are also American consumers. By over-paying to get socks made by Americans, they end up over-charging American sock buyers.

Suppose my rental would have been $4.75 instead of $5. In the first case, I have an extra quarter I can keep in the bank. Add that to all the other quarters Westin customers would save and you would have something: a loan for a firm that wants to expand (or start) operations, or a mortgage for a family looking to buy a new house.

Suppose Westin would've kept the price at $5 and just pocketed the extra quarter. What happens then? Westin's parent company could reinvest that extra quarter in more and better hotels. This would make labor more productive and increase earnings. Westin could also distribute their accumulated quarters to shareholders, who would enjoy higher standards of living. They could either invest their share of the profits (raising the capital-to-labor ratio and raising wages) or consume them (by spending more nights at nice hotels or by eating better food).

Alas, they have no such option because the socks I'm wearing right now were made using relatively expensive American labor. It's New Balance's right to do so, to be sure, but the world is a poorer place for it.


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CATEGORIES: International Trade



COMMENTS (15 to date)
Tom West writes:

If paying more than the minimum possible price for a good or service is bad overall, I take it you don't tip?

Ghost of Christmas Past writes:

Well, overcharging American consumers but overpaying American sock-suppliers. By the simple and obvious symmetry even if Westin doesn't have that extra quarter-dollar, someone does, and there's no obvious reason why they won't spend it as well as Westin. (Perhaps they won't spend it as well as you would, but you switched from discussing your preferences to Westin's and it's not clear why we should privilege Westin's preferences over New Balance's or its suppliers' preferences, logically speaking. We aren't even sure the latter diverge!)

I myself am a free-trader, but many people-- enough to influence New Balance, Westin, and so-forth-- derive utility from social considerations like "buy American" and are willing to pay for it.

You're just swept along by that crowd because they have more influence over your suppliers than you do.

The "world" is only a "poorer place" to the extent that "buy American" means more taxes for the American government to waste, or to the extent that your preferences aren't satisfied (though some other folks' preferences are). In general the world is no worse off since the extra quarter-dollar from your pocket will be spent by someone!

Or to summarize, protectionism is bad because of deadweight loss and coercion, which your story doesn't reveal.

In fact, you only speculate that socks made in America are of no higher quality than those made elsewhere. When some camera-seller advertises German or Japanese lenses, is that necessarily an appeal to ethnocentricity? Or is it shorthand for a legitimate quality claim (at least on the average)?

peter writes:

Does the extra money that the New Balance worker gets paid just disappear after being paid out or does it get recycled in the economy in the same way you described above?

Jon Murphy writes:

Peter, it doesn't just disappear. It still moves about, but there is no wealth gain.

In this example, buying the socks for $5 with American made stuff shows a gain with socks, but that's it.

However, for the non-American stuff, you now have a gain of socks plus whatever that quarter is spent on (whether it be loaned out or used to build more hotels, etc).

So, in one case, you get the socks. In the other, you get the socks + the value of the extra quarter.

If you go to Youtube and type in "Broken Window Fallacy" you'll find a number of videos that can explain this much better than I (I think one by LearnLiberty may even feature Art)

Lupis42 writes:
I interpreted this to mean that they were willing to pay a premium for socks made by Americans even though they could have gotten socks of the same quality from a foreign supplier for a lower price (otherwise, it's just cheap talk).

Seems like a dangerous assumption. Since the label is going to increase demand for their socks, New Balance would presumably put it on there even if making socks in the US was cheaper than importing them.

Glen Smith writes:

I would assume that Westin thinks there are significantly more Buy American Bobs that use this amenity than Cheapo Charlies. Westin increases its profits by pursuing the Buy American Bobs as opposed to the Cheapo Charlies because the more BABs that use the service plus a lot of the Who Cares Williams. Further, the net revenue from this service is probably marginal but provides excellent sales and marketing points.

ThomasH writes:

So long as the combination of the Fed's insufficiently expansive monetary policy and the insufficient combined effects of Local, State, and Federal government fiscal policies hold the economy below it potential, a preference shift toward home goods will improve welfare. Of course macroeconomic management should avoid situations like this and possible some day the will in which But American will again be a solecism.

ThomasH writes:

So long as the combination of the Fed's insufficiently expansive monetary policy and the insufficient combined effects of Local, State, and Federal government fiscal policies hold the economy below it potential, a preference shift toward home goods will improve welfare. Of course macroeconomic management should avoid situations like this and possible some day the will in which But American will again be a solecism.

Tom West writes:

Now that I re-read the post, is this an argument that returns to capital are simply socially superior to returns to labor?

Better the stockholder consume a nice meal than the employee?

Ha, Piketty, take that!

Mark Brophy writes:

Socks are made in the USA because they're a high tech product that can't be produced efficiently in other countries. Apparel manufacturers aren't shy about making their products in the countries that yields the most profits. Many products are best made in the USA; don't be gulled into believing nationalist and socialist propaganda.

liberty writes:

You are omitting a few key factors, which are part of basic price / market process theory:

- It is a pure choice whether Americans buy New Balance sneakers at the higher price, and in general what footwear Americans buy: there is a huge variety, from $1 sandals to cheap $30 sneakers and shoes of various sort, to the $300 and up kind. Competition among shoe-manufacturers for customers is high and trade is free globally (products from all around the world are available to the American customer), so variety is great at a huge range of prices.

- Meanwhile, there may be some workers in the shoe-manufacturing industry who could face a fall in real wages due to competition from cheaper overseas workers, and they may have a lot less choice - a lot fewer alternatives - because the competition among employers for their labor is a lot less than the (global) competition among shoe-manufacturers for customers. This is obviously due in large part to the lack of mobility possible to the worker - instead of global competition and free capital, the typical skilled worker has only the competition of a few local firms (usually) for his/her labor, and sometimes has only one real choice, where he/she already works (as when in a small town with only one firm demanding his/her skills). The American shoe-manufacturing worker probably has less competition for his/her labor than the average, and the boost in income from a conscious policy may be necessary to offset a drop in real wages due to competition from cheap labor abroad.

- So, the benefit is real to the workers, who may not be the wealthiest Americans and may be struggling to pay their mortgages as they rise relative to their paychecks, but the cost to the DIFFERENT group of Americans--the voluntary group of those Americans who wish to purchase New Balance at the higher price--is trivial, since they can simply choose a different shoe if it is out of their price range, and the number of close substitutes is large.

NZ writes:

Art, why do you ignore the non-monetary benefits of "Made in the USA" products? (Namely, a sense of pride that one is helping one's countrymen, hope that one is contributing to an economic uplift that due to its relative locality may be more immediately felt, and a sense that the very meaning of a country--relative cohesion and reciprocity within a set of borders--is being maintained.)

I know the "autism of libertarianism" is a cliche at this point, but come on. Not everything is about the placement of numbers into columns.

Hazel Meade writes:

You're neglecting the fact that, to a certain extent, the producers of socks are also the consumers of socks.

So it's not just whose pocket the extra quarter goes into, it's that the gains to American labor from the extra quarter are negated by the cost of paying more for socks.

If it is was *only* socks, no they wouldn't be negated, but spread this policy out amoung numerous industries, and now the sock worker is paying extra for bread and cheese and milk and automobiles.

And then you apply comparative advantage and realize that the sock worker would be overall better off if his labor was directed to producing something that America has a comparative advantage in, in exchange for goods that other countries have comparative advantages in, because then not only does he not need the extra quarter, but the other $4.75 buys more (since other people/countries are producing good more efficiently due to their comparative advantages).

NZ writes:

@Hazel Meade:

Ignoring for now that you don't account for the "WalMart" effect of your suggestions on American culture (that is, replacing something unique and familiar that people identify with and take pride in with something that's all about monetary costs savings and consumerism, and in which public spaces are unpleasant, dirty, and crowded), have you been to WalMart?

How easy do you think it would be to retrain the average shopper there in a new, more high-tech line of work?

David writes:

Yes, but only if we have a balance of trade. Otherwise the foreign made goods will be cheaper and the American worker will appear to be more expensive than the foreign one.

Enforcing a balance of trade, along with policies to promote full employment will take care of the desire to pay Americans more as they actually will be paid more.

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