Sunday, October 27, 2013

Two Ways to Look At Christmas

I have a friend who is an ardent Emailer.  She often sends out inspiring and interesting posts.   But this morning she left me flat with a suggestion that instead of buying something made in China that we buy American.   In this globalized world the sentiment is nice but actually not helpful to our own interests in the US.

Her post, suggested that you do things like going to a local restaurant and leaving a big tip (nice sentiment for the server); getting a gift certificate for your barber; a health club membership - or other things which seemingly buy local.

But the curmudgeon in me could not resist responding.  The premise of the argument suggests that we should buy American and close out all those foreign products.  But I go back to David Ricardo who had a much more Christmasy idea called comparative advantage that suggests that it is often better to allow a country or firm to produce a good or service if they can do it with either lower cost or lower opportunity cost.

Let's look at the purchase of a cellular phone compared to a health club membership.   If a cell phone costs about $200 very little of the value is produced by the manufacturing process.   By allowing your Christmas gift list to get that Chinese made phone you do a couple of things.  First, you encourage the creation of higher end jobs in the American economy - think of the difference between the wages of a health club employee or a designer or engineer who figures out how to make all those new features.  Second, you are helping to build another economy in the world where (as their economy develops) they will have a whole lot more buyers who want things like American designed cellular phones.

Now consider some of the consequences of buying that health club membership.   If cellular phones are manufactured in China could it be possible that all those workout machines are also made outside the US - the US has (until recently - more on that later) been losing manufacturing jobs.   Think of how overjoyed you 15 year old - or even your spouse would be with a mundane Christmas gift like a certificate to a barber - almost as good as a pair of socks.

Finally, there is that stubborn thing about changes in comparative advantage.  In the last couple of years, comparative advantage on manufacturing many things has come back to the US.  It seems that our stronger productivity has helped us to bring back jobs on shore - and those jobs pay pretty well.  So the best strategy for Christmas giving seems almost the opposite of what my good friend forwarded to me.   But then that is often how economics thinking works out.

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