Monday, March 28, 2016

The Unfortunate Intersection of Oreos, Nationalism, and Protectionism

Donald Trump and others are taking a brave stand against the consumption of Oreos recently, and somehow it became a big news story. The Oreos are not being targeted for any ill-conceived change in recipe or a newfound desire to lose weight. No, the Oreos' offense is that their parent company plans to shift its manufacturing operations from Chicago to Mexico. So it's yet another case of American jobs being shipped overseas-rivers, and the Presidential candidates are predictably up in arms. For Trump, it's another example of how America loses; for Sanders, it's further confirmation of the evil and greedy nature of corporations; and for Hillary, it's an opportunity for her to show she hates economics as much as her competition. For the rest of us, though, it should be a teachable moment.

It is easy and simple to decry an action we dislike, but it is far more useful to understand why it happened in the first place. The latter is what we should be doing here. And while there are probably many reasons that contributed to the company's decision to move its facility--including the relatively high wages of Americans generally, relative to Mexicans; the likely increased costs associated with the Affordable Care Act; and the City of Chicago's steadfast march towards a likely bankruptcy scenario--much of the blame can likely be laid on America's favorable treatment of the domestic sugar industry, which drives up costs considerably for a cookie that counts sugar as it's second most significant ingredient (after flour).

Before we get to the details on sugar, however, it is useful to point out another issue here. It obviously makes sense why American politicians are denouncing a company's decisions to move jobs from America to Mexico; by definition, all of their voters are Americans. It also makes sense why workers at the Chicago facility, their families, and the immediate community would be upset by this decision. It affects them directly, and, given that many of these jobs likely required relatively limited skills, the future employment prospects for the former workers may be bleak in the current economic environment. That's a real problem, and it should not be forgotten. But we also need to acknowledge the other side of the coin. The jobs aren't being lost; they're being transferred. The positions that are currently filled by American residents will eventually be filled by Mexican people. Thus, for the rest of us that are neither politicians nor directly affected, the appropriate reaction is less obvious. Should we prefer, in general, that American people are employed over Mexican people? And if so, why?

Given the level of discussion we might be used to on these issues, it might almost seem like a rhetorical question. It is not. Yes, the simple nationalistic answer of Trump, Sanders, etc., is an option--namely, I'm American, so I prefer the Americans have jobs over the Mexicans--but it is not a defensible position. To see why, just replace "Americans" with your particular racial (or religious) and replace "Mexicans" with a minority group. For example, "I'm white, so I prefer white people have jobs over black people," probably sounds much worse, but in substance, it's the same thing. Given that the vast majority of Americans and Mexicans did not choose to be Americans or Mexicans and were simply born into it, there's no logical reason to prefer one to the other on the basis of a shared identity that, incidentally, you probably did not choose either.

So tribalism isn't adequate to answer this question. Additionally, no one's rights are being violated here; neither the American workers nor the Mexican ones can have a right to a job making Oreos because that would imply someone else has a duty to employ them. That means a rights-based approach to the question isn't helpful either. Instead, the most rational approach to evaluate this narrow question is likely a utilitarian one (i.e. greatest good for the greatest number), using the economic concept of diminishing marginal utility.

Like most academic expressions, diminishing marginal utility is just a fancy label for something we all already know to be true from personal experience. It is probably easiest to understand in terms of food. Let's say you're having a strong craving for a particular kind of chocolate cookie with a creme filling of dubious composition. If you indulge in that craving, the first cookie you have will be the most satisfying (i.e. gives you the most utility, in econ-speak). Then the next cookie will still be pretty good, but it won't give you quite as much joy as the first. This process continues on down the line. And by the time you get to cookie number ten, it's not nearly as impactful as the first one. That's diminishing marginal utility. And don't pretend like you've never had ten Oreos in one sitting. We've all been there. (Haven't we?)

In any case, the same concept applies with money and jobs. The difference between being unemployed and broke versus getting your first decent-paying job (say at $50k a year) is dramatic. If you subsequently got a promotion that increased your salary by the same amount (from $50k up to $100k), this would still be significant, but it's not as significant as going from $0 to $50k. What follows from this general principle is that, given certain assumptions,* one could theoretically increase overall utility (well-being) by taking a job from a person in a healthier economic position and giving it to a person in a more desperate economic position.** That description, incidentally, fits well with the story of Oreos. Jobs are being transferred from Americans who, on average, are likely to be relatively wealthy, to Mexican people who, on average, are likely to be relatively poor. Indeed, that's part of the reason the move is being made: Mexican labor is willing to work for less.

So, based on the utilitarian approach to the issue, it would seem that, if we take any position at all on this event, we should actually favor the Mexican workers over the American ones. And that's before we take into account the fact that the economic evidence on the gains to trade in general tend to be significant and tend to benefit the poorest people the most by reducing the cost of products they purchase. When such effects get added in, we should be even more strongly in favor of trade, even when that means the ever unpopular idea of outsourcing.

Of course, this general theoretical understanding of net gains or utility maximization is probably of little consolation to people that are directly affected by the job cuts. For them, it is more helpful to understand why this happened. And for Americans that could certainly be affected by similar decisions in the future, it's important to understand what policies help produce these outcomes. For that piece, we'll turn to an excellent new article by James Bovard featured at The Foundation for Economic Education. He outlines the unfortunate protectionist policies of the US sugar industry that have created a very difficult environment for large-scale confectionery producers. And he suggests the kinds of policies advocated by Donald Trump, if implemented, would lead to similarly negative outcomes for other industries. Instead of superficially condemning a company for following incentives, outrage is best channeled towards the US politicians foolishly created those incentives in the first place and are promising to create more of those distortions in the future. To that end, here's the link:

Oreo Is Leaving for Mexico and Trumpism Is to Blame

*There are many key assumptions here, and the idea of utility maximization can lead to decidedly unfortunate conclusions if not properly constrained (as we'll see in the next note). One important assumption here, is that we're assuming both that we can quantify a person's satisfaction (utility) in a remotely meaningful way and then compare it / aggregate it with other people's satisfaction. There are obviously reasons this can lead one astray, and Austrian economists would tend to avoid such aggregation / general assumptions about what "the people" want. That said, given that we're just making the assumption that more money tends to be preferable to less, it does not seem unreasonable to assume that is generally true across people.

**This general idea is part of the reason some economists (and others) would tend to favor wealth redistribution schemes. Taking from the rich is a small inconvenience to them and could be a huge boon to whoever it's given too, or so the argument goes. At the extreme of this view, you could have an argument for absolute economic equality / communism. The problem, from a libertarian perspective, however, is twofold. First, the rich person owns the money and, at least in some cases, likely earned it through legitimate, non-coercive means. Provided this is the case, there needs to be a justification to violate this right. (And need alone, would not suffice). This is why we were sure to note that in the above case, there were no rights at stake and thus a utilitarian approach could be more appropriate.

The second problem with such schemes is the disincentives they will create. If those disincentives are strong enough, they could make everyone worse off, even on utility maximizing grounds. Obviously, if the tax and transfer system really did ensure absolute income equality, the incentive system would totally break down and everyone would be poorer.

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