Inside a Chinese Factory

Via Tom, here’s a fantastic series of posts by the guy who’s setting the Chinese supply chain to manufacture the Chumby, an Internet-enabled alarm clock. Here you can see videos of a Chinese factory floor, with workers assembling sneakers. Here is a story about the fanatical level of dedication he has seen among the workers at the factory—dozens of employees stayed at work until 3 AM while he debugged a flaw in the first run of devices, and then showed up again at 8 AM to resume assembly. And finally, here are some videos of Chinese workers doing extremely detailed work quickly and accurately.

Some peoples’ instinctive reaction to this story is no doubt to wring their hands about the exploitation of Chinese workers. It’s not hard to see why; wages are only about $0.60/hour, and the jobs are tedious. And indeed, when I was in college in the late 1990s, there were a lot of activists who did just that, agitating for the shutdown of “sweatshops” in China and elsewhere. But I think this suggests a better way to look at the situation:

The amazing part is that the Shenzhen factories were complaining that labor rates were way too high. Apparently, minimum wage for factories in other regions is much less, so they are seeing contracts migrate away from their factories and inland where labor is cheaper. Think about it–Americans complain about work going to Hong Kong, Hong Kongers complain about work going to Shenzhen, Shenzheners complain about work going inland China, and to Vietnam (apparently Vietnam is the new hotness for cheap skilled labor).

The low wages and tedious work of the early sweatshops were a temporary condition. The author reports that the minimum wage in Shenzhen has been increasing by about 30 percent per year in the last couple of years. As the workers in Shenzhen become more skilled and the companies develop better business relationships with Western companies, demand for the area’s manufacturing facilities rise. The companies expand their facilities and hire more workers, and the competition for workers then pushes up wages. And that, in turn, will lead companies to increasingly transition to more complex and lucrative activities. Firms in Shenzhen will specialize in manufacturing more and more complex products, and eventually some of them will begin designing and building their own products.

That’s what happened in postwar Japan, South Korea, and Taiwan, all of which have since achieved Western levels of affluence. The anti-globalization activists meant well, but in reality, the opportunity to become integrated with the global economy will do far more to help the average Chinese worker than anti-sweatshop laws could possibly have done.

Economics and Values

A recent NYT article has roiled the economics blogosphere by spotlighting several prominent economists who ostensibly challenge the “fundamental assumptions” of their field. A snippet:

“Economists can’t pretend that the consensus for free markets and free trade that existed 30 years ago is still here,” said Robert B. Reich, a public policy professor at Berkeley who served in President Bill Clinton’s cabinet.

Part of the reason is the growing income inequality and dislocation that global markets and a revolution in communications have helped create. Economists who question the free-market theories “want to speak to the reality of our time,” Mr. Reich said.

The article references some interesting material, including Alan Blinder’s criticism of offshoring and David Card’s provocative work ($) with Alan Krueger on employment and the minimum wage. However, contrary to its tone, the article is not (for the most part, anyway) about disagreements in economics — it’s about disagreements over values.

Consider, for instance, this bit from Blinder’s recent Washington Post op-ed:

And if the jobs do move offshore, displaced American workers may lose not only their jobs but also their pensions and health insurance. These people can be forgiven if they have doubts about the virtues of globalization.

We economists assure folks that things will be all right in the end. Both Americans and Indians will be better off. I think that’s right. The basic principles of free trade that Adam Smith and David Ricardo taught us two centuries ago remain valid today: Just like people, nations benefit by specializing in the tasks they do best and trading with other nations for the rest.

Blinder does not dispute (and indeed endorses) the economic orthodoxy that trade materially benefits participants. Instead, he notes that a change in trading partners produces both winners (the new trading partners) and losers (displaced partners), and that change can often be painful for the loser — a notion that most all economists would endorse.

Given this economic analysis, Blinder offers a values judgment: the United States should implement public policies to aid displaced workers caught in such change (but he expressly eschews protectionist measures that would prohibit change). Libertarians may disagree with Blinder’s policy proposals (perhaps on the grounds that such policies are not appropriate for limited government, or are economically inefficient, or would create perverse incentives and unintended consequences). But this disagreement is not about economics, it’s about competing values (e.g., limited government is preferable; economic inefficiency is undesirable, perverse incentives and unintended consequences are to be avoided).

Like “hard” science, economics is a non-normative field that attempts to determine certain types of relationships — in this case, economic ones (e.g., what is a minimum wage’s effect on employment; what market power effects result from industry regulation?) — and use those determinations to predict the future. Economic analysis often leads to policy recommendations, but those recommendations are the product of value judgments: Should the well-being of one group of workers (e.g., domestic, unionized, members of a particular group) be promoted over another? Should the harm experienced by displaced workers be mitigated, and if so, how?

From a policymaking perspective, it is useful to distinguish what part of economic policy is about economics and what part is about values. Economic analysis of U.S. farm subsidies and trade protections reveals their effect on farmer and consumer behavior, but good policy ultimately comes from answering such values questions as whether the tradeoff of higher consumer food prices for higher producer revenues is acceptable, or whether ag subsidies are a good use of the public fisc.  Or, concerning Prof. Reich’s comment above about income inequality, good policy would come from answering the values question of whether it is a problem that some people are rich or, instead, that some people are poor.

All of this is not to say that we should not question whether neat, simple economic theory plays out cleanly in this messy, complicated world. The debate ($) over Card & Krueger’s minimum wage findings is one of the most interesting in economics, and the burgeoning field of behavioral economics is reinvigorating long-simmering questions about the rationality of market actors — though those questions may not support the values judgments that the apostates and heterodoxoi presume. But I would argue that economics is not so different from the hard sciences — the core tenets are quite solid (though revolution does occur). What remains (appropriately) shaky is a pluralistic society’s attempts to apply its many values (as well as its hopes, fears, grievances, immediate concerns, and political aspirations), to economic phenomena.

Should We Execute Bad Regulators?

I just sent this letter to the editor of the Washington Post:

The lack of outrage about China’s horrific execution of a corrupt food and drug regulator in a recent editorial [“Rough Justice,” July 14] was itself outrageous.
 
Zheng Xiaoyu was put to death for (allegedly) taking bribes that enabled unsafe products to reach the market. The death toll thus far is hundreds of lives lost in China and Panama.
 
Dr. David A. Kessler was commissioner of the U.S. Food and Drug Administration (FDA) from 1991 through 1996. In 1988, researchers at Harvard University had demonstrated that widespread use of aspirin at the onset of a heart attack and daily for 30 days afterward could save 5,000 lives per year in the United States. Yet Dr. Kessler’s FDA refused to let aspirin manufacturers advertise that extremely important information until 1996. That policy resulted in as many as 30,000 unnecessary deaths during Dr. Kessler’s tenure. No one has ever accused Dr. Kessler of taking bribes. But he surely benefited personally from his position and from his aggressive regulatory policies, going on to be named dean of Yale University’s medical school.
 
If Dr. Kessler’s political opponents in the U.S. government had put Dr. Kessler to death for his actions as a regulator, I think the Post would denounce his execution as barbaric. But then why be so blithe about an equally barbaric execution in China?

I’m used to people valuing the lives of the FDA’s Type I victims more than the lives of its Type II victims. But valuing the lives of Type I victims more than the lives of the regulators themselves is a new one by me.

Norway’s Hypocritical Statists

The socialist government of Norway is leading a new campaign against tax havens. Norwegian workers can be thankful, though, that the state pension fund is not consumed by the same big-government ideology. According to a Norwegian newspaper, the oil-enriched fund invests billions of dollars in tax haven companies, thus ensuring that more money actually winds up in the hands of retirees rather than politicians. But if the Norwegian government’s anti-tax competition campaign is successful, all workers will be hurt since politicians all around the world will be more likely to raise taxes if they think the geese that lay the golden eggs cannot fly away:

Norway’s center-left government coalition has made an issue of battling offshore tax havens. Both Finance Minister Kristin Halvorsen and the minister in charge of foreign aid, Erik Solheim, have harshly criticized companies, both Norwegian- and foreign-owned, that avoid taxes by registering themselves in countries with low or non-existent tax obligations. At the same time, however, the state’s massive pension fund that’s fueled by Norway’s oil revenues has been investing billions in companies that are registered in tax havens. This includes companies “based” in places like the Cayman Islands, Bermuda and Cyprus. … Finance Minister Halvorsen has characterized Norwegians who invest in tax havens as a “provocation against Norwegian taxpayers.” She’s not demanding, though, that the state pension fund blacklist tax haven investments.

America’s Anti-Competitive Corporate Income Tax

The Wall Street Journal editorializes about America’s corporate income tax, which now has the dubious honor of imposing the highest rate in the developed world. This punitive system is bad for workers, as the WSJ notes, but it is even counter-productive for politicians because the high tax rate probably results in less tax revenue:

At least 25 developed nations have adopted Reaganite corporate income tax rate cuts since 2001. The U.S. is conspicuously not one of them. …Even in France, of all places, new President Nicolas Sarkozy has proposed reducing the corporate tax rate to 25% from 34.4%.

What do politicians in these countries understand that the U.S. Congress doesn’t? Perhaps they’ve read “International Competitiveness for Dummies.” In each of the countries that have cut corporate tax rates this year, the motivation has been the same — to boost the nation’s attractiveness as a location for international investment.

Germany’s overall rate will fall to 29.8% by 2008 from 38.7%. Remarkably, at the start of this decade Germany’s corporate tax rate was 52%. All of which means that the U.S. now has the unflattering distinction of having the developed world’s highest corporate tax rate of 39.3% (35% federal plus a state average of 4.3%), according to the Tax Foundation.

…Lower corporate tax rates with fewer loopholes can lead to more, not less, tax revenue from business. …Tax receipts tend to fall below their optimum potential when corporate tax rates are so high that they lead to the creation of loopholes and the incentive to move income to countries with a lower tax rate.

Ireland is the classic case of a nation on the “correct side” of this curve. It has a 12.5% corporate rate, nearly the lowest in the world, and yet collects 3.6% of GDP in corporate revenues, well above the international average. The U.S., by contrast, with its near 40% rate, has been averaging less than 2.5% of GDP in corporate receipts. …[M]ost economists understand that corporations don’t ultimately pay any taxes. They merely serve as a collection agent, passing along the cost of those taxes in some combination of lower returns for shareholders, higher prices for customers, or lower compensation for employees. In other words, America’s high corporate tax rates are an indirect, but still damaging, tax on average American workers.

The Futility of Government Education Standards

Parents want to know how well prepared their children are academically. Employers want to know what job applicants know. Educational standards and testing are thus useful tools. Leaping from that fact to the belief that state or federal government should impose a single set of standards or tests on all students is utterly unjustified.

When the government imposes, for instance, a high-school leaving test that students must pass in order to graduate, one of two things happens: the test is watered down to the point of meaninglessness to ensure that virtually every student receives a diploma, or the test is deferred or eliminated to ensure that every student receives a diploma.

The latter course was adopted by Washington state several months ago, and by Texas two days ago. Once a government gets into the business of handing out diplomas, it is compelled by political expediency to ensure that virtually all students are awarded diplomas. You can’t get re-elected if voters think that you’ve ruined their children’s career prospects by denying them a government diploma.

Most people want to know how well students are actually performing, especially at the end of high school, but government diplomas cannot tell us that because they must be easy enough for virtually everyone to obtain.

There is an obvious solution to this dilemma: get the government out of the diploma business. While it is important for diplomas to be meaningful, to connote some specific set of skills and body of knowledge, it is not necessary for every student to earn precisely the same diploma, or for diplomas to be awarded by the government. The private sector handles knowledge certification all the time. In the computer industry, for instance, database and networking companies certify workers as competent to use their products. These certifications are meaningful, but different from one another.

Diplomas that connote more advanced skills in a wider range of subjects would be more difficult to obtain, but would have more value in the eyes of employers and institutions of higher education. Every student could seek to obtain the most advanced diploma he or she is capable of attaining, and hence diplomas would become a useful source of information about a student’s competencies. Diplomas could be awarded by individual schools or by educational certification agencies. There is no need for the government to get involved. In fact, government involvement, as noted above, would muck up the process.

Government intervention in any industry is fraught with unintended consequences, and this is true most of all in education, the field into which governments have intruded most aggressively.

Big-Government Surgeon General

I have written before about how the U.S. surgeon general has become the national nanny, nagging us to stop smoking, lose weight, exercise more and never leave home without a condom. James W. Holsinger, a surgeon and cardiologist from Kentucky, is President Bush’s latest nominee for the post. His nomination has been in trouble because of some retrograde comments and writings on homosexuality. But it is also worth noting that Dr. Holsinger testified yesterday he also supports:

  1. Universal health insurance;
  2. Banning pharmaceutical advertising;
  3. Banning the advertising of sugary cereals and other “junk food” on television;
  4. Federal regulation of vending machines in schools; and
  5. Increasing tobacco taxes as part of a campaign to “make America a tobacco-free nation.”

All in all, a perfect national nanny, and another example of President Bush’s big-government conservatism at work.