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08/07/2005

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David

Judge Posner writes:

"foreign nations' purchase of U.S. companies should not be discouraged even when the foreign nation is a communist country potentially hostile to the United States and seeks to acquire the producer of a vital raw material, such as oil."

That's easy enough to write regarding China's bid for UNOCAL, especially since China's goal appeared benign: supporting its large and growing need for energy. The global price of oil will continue to increase because of China's large demands, regardless of the UNOCAL deal.

However, let's up the ante. If the Iranian government wanted to purchase a U.S. oil company, should we oppose the acquisition? Or, what if the Iranian government made a bid for Boeing? Or Microsoft? Let's assume, for the sake of argument, that the bid is bona fide and the company wants to accept.

Richard

Oil may be fungible, but the goal of the U.S. energy policy is that we should be producing as much of our own oil as possible. If CNOOC for whatever reason decided to export all of the oil it controlled in the U.S., then the U.S would have to increase its purchases from sources that have burned us in the past, as they used their oil to punish us for our foreign policies.

Aristides

Judge Posner,

Your analysis makes sense from a purely economic perspective, but I was wondering if you would extend your argument to the national security realm, in light of Unocal owning undersea imaging assets and one of the last rare-earth mines, if not the last, in the US.

China is developing an advanced navy replete with submarine assets, so you can see the worry over the imaging equipment, and the military is deeply dependent on rare-earth metals in its weaponry and technology.

Jim S

These are some of the most clueless articles I've seen from these two respected conservatives. The people who agree with them are obviously just as clueless about the Chinese mentality. If the Chinese government and Chinese companies had trillions of dollars in assets owned in the U.S. and one day they decided that they had to move or Taiwan would truly become an independent nation they would invade. They would kill any Americans who got in their way too. They wouldn't care if they lost all of that money and they would have the support of their populace in their actions. Those who think otherwise are just seeing themselves and America rather than Chinese culture and thought.

Brad K

The comparison between purchasing Microsoft or Boeing does not apply to this case simply due to the fact that the oil being mined is in American ground.

Let's simplify things for the protectionist: lets say you own a sandbox in your fenced in backyard. And your chinese neighbors were willing to pay you hundreds of dollars to play there. Seeing as you'll always have direct control over how much sand will actually leave your backyard why should you worry about this deal? It would be win-win.

Here we'd get massive infussion of investment and we'd always have direct control of the oil export, turning it off should we decide to for whatever reason.

That sounds like a great deal to me!

And the chinese would probably be paying Americans to mine for the oil. This is continued investment for us to advance our standards of living and promote prosperity.

Seth Ayarza

Judge Posner,
Before any sale like this should ever be cleared, we should be sure that our views of Unocal's assets are nearly identical to that of the the Chinese.

Might we have reason to be concerned if we took into account how easily Chinese agents could be infiltrated into the United States through such a large company? Perhaps I'm using my imagination a little bit much, but it could amount to multiplying the number of Chinese embassies in the United States.
Further, in a hypothetical situation where the United States discovered evidence of Chinese use of Unocal as a front to conduct espionage, possible consequences could be disasterous.

Would we want to put ourselves in a possible situation that could involve exchanging respective threats regarding a nationalization of foreign assets?

Surely in such a scenario we would be at a tremendous disadvantage given the level of our investment in their country. Add to this the phenomena George Stigler described in his Economic Theory of Regulation regarding American business interests capability in influencing politicians to heed their interests. Further, one can only imagine the level of influence that would be marshaled by American businessmen to insure a settlement keeps billions of dollars of investments secure. Now contrast this with the authoritarian leadership in China that I speculate is largely immune to such phenomena.

Perhaps policy may be overlooking ways in which closer economic US-China ties would adversely impact and constrain American foreign policy. We should be particularly aware of ways in which authoritarian models might have an advantage.

Nevertheless, I believe the most important comment made in response has been that of Aristedes. We should all be concerned with respect to the application of unique Unocal assets and their capability in benefiting the Chinese military.

sun bin

About infiltration:
1) There are more chinese in working different sectors in US than in oil. Microsoft, Intel, Dupont, Harvard, GE, NASA/Boeing. So Unocal shouldn't matter.
2) Since US investment in China is much higher than vice versa, it is easily for US spies to infiltrate China via commercial establishment than China in US.

jonst

The ruling class in America is selling the middle class here right down the drain. For the rather complex reason that the "ruling class" are the 'Chinese', in that the ruling class here is reaping much of its profits from overseas investments. That's cool....that's cool. Keep thinking it can go on forever. Just keep thinking it and acting as you have been. Another kind of day of coming. Sadly,I have little faith it will bring a fair and improved society. We are where our forefather's were around 1850. The sides are being drawn even as we trip the light fantastic behind our gated 'cities'.

Seth Ayarza

Sun bin, Unocal is different then Microsoft, Dupont, Intel... etc.
The issue is not the ethnicity of the workers, but the ownership of the company.

We would have reason to be worried if the head of Microsoft corp was not Bill Gates but a Communist party official with interests not limited to raising profits. This would have been the case had a Unocal(70% owned by the Chinese gov.) deal gone through.

Brad Kennedy

To me it seems as though the 'cold war' protectionists are rallying again! If the Chinese could benefit from mining our oil and we could benefit from them through over investment and continued investment - then there's a mutual exchange of benefits! Where both parties can prosper together. (I feel a verse of Kumbai-ya coming on.)

Point is, we don't drill oil for ourselves. We put it on the same market that everyone else buys it from and buy it at the exact SAME price as everyone else. There's no advantage to paying workers to drill our own oil only to buy it back at no reduced cost. So why not let the Chinese pay to drill our oil? Yeah, they can carry the cost of brining the oil to market and we can buy it as we always have, but now we have the funds and investment to buy more.

I haven't always been on this side of the fence but lately a friend of mine has been introducing me to capitalism. And I'm finding (after 20 years of hating it) that maybe it's not so bad.

So if we're discussing economics and the mutual exchange of benefits lets put away the chinese military (which wouldn't initiate anything against a major nuclear power anyway, or us against them) and the spies and the paranoia and talk about the possible advantages of the exchange.

Corey

"There's no advantage to paying workers to drill our own oil only to buy it back at no reduced cost."

Yes there is if you are a worker. The advantage is that you get a paycheck. That in turn opens up many exciting possibilities like feeding one's family.

Of course, if you are a neo-liberal economist or a capitalist, an American worker looks just like a more expensive version of a Chinese worker. Being a worker makes all the difference in point of view apparently. You all should try working some time.

"The issue is not the ethnicity of the workers, but the ownership of the company."

Really? You think that ethnicity of ownership is more important than ethnicity of workers?
(Really, nationality would be a better term, in deference to our chinese-american friends) Why do you think that?...

"not Bill Gates but a Communist party official with interests not limited to raising profits."

Oh! I see, if ownership decides to support social welfare then the whole American Apple Pie in the Sky system will collapse into communism and we all know that is evil because God helps those who help themselves.

Perhaps I am biased, having been repeatedly laid off without cause because ownership interests were entirely limited to raising profits. If only I could see how the profit motive will feed the families of all the workers who have been rendered unprofitable simply because someone overseas can eat for less dollars. Perhaps you could tell me?

Matt

Corey

"The advantage is that you get a paycheck."

Once again, attacking arguments nobody is making, I see. The discussion concerns change of ownership not employees. In any case, nobody is suggesting the jobs end because the owners are Chinese. If that is your point, say it.

"neo-liberal economist or a capitalist, an American worker looks just like a more expensive version of a Chinese worker"

Absolutely incorrect. American workers are both more expensive and more productive than their China-based counterparts, for four reasons: 1) Chinese workers have less capital at their command than Americans 2) Americans are far better educated on average than Chinese. 3) Chinese people's lack of experience on average with modern management and manufacturing systems. 4) China specializes in labor-intensive manufactures.

Productivity is measurable and empirical studies overwhelmingly confirm wages across countries vary in close proportion to productivity. A comparison of wages therefore provides no information on competitiveness of labor. It is simply wrong to claim demand for labor automatically goes where labor is cheap.

"If only I could see how the profit motive will feed the families of all the workers who have been rendered unprofitable simply because someone overseas can eat for less dollars."

Between 1970 and 2000, the US lost 2.5 million manufacturing jobs and the share of manufacturing in employment fell from 26% to 15%. Yet the unemployment rate was lower in 2000 than in 1970. This tells you than while "jobs exporting" has changed the mix of jobs in the economy, it has not rendered workers unprofitable or unemployable.

And since you asked, the pursuit of profit has been exceedingly successful in feeding everyone including the unemployed. My favorite quote from Baumol (2002) sums it up: "Average growth rates for about one and a half *millennia* before the Industrial Revolution are estimated to have been approximately *zero*...Even the most well-off consumers in pre-Industrial Revolution society had virtually no goods at their disposal that had not been available in ancient Rome. In fact, many consumption choices available at least to more-affluent Roman citizens had long since disappeared by the time of the Industrial Revolution. In contrast, in the past 150 years, per capita incomes in a typical free-market economy have risen by amounts ranging from several hundred to several thousand percent!" [his emphasis]

None of this will change your mind of course. I just thought you should know how strongly the evidence contradicts your view.

Joe Merchant


I do find your characterization "a producer of a raw material" somewhat of an oxymorn. These companies do not produce anything, they extract it from the earth.

As you point out, since oil is highly fungible, it really matters not who runs the extraction company, and if world politics should ever destabilize, what will matter then is where the remaining resources are - not who owns the extraction companies.

If Unocal owned major production fields inside the U.S., then, yes, it could be a concern that China might choose to exploit those fields as rapidly as possible, and either stockpile the oil or reserve production fields which they have greater control over. This doesn't seem to be the case.

Corey

"It is simply wrong to claim demand for labor automatically goes where labor is cheap."

Oh come on, you don't actually believe that do you? (Did you go to UChicago?) Why did 2.5 million manufacturing jobs go overseas then? Jobs go to where the labor is cheaper, factoring in overhead for things like shipping and lower productivity.

"This tells you than while "jobs exporting" has changed the mix of jobs in the economy, it has not rendered workers unprofitable or unemployable."

Wages (expressed in real dollars) dropped over that same period. So yeah, perhaps 2.5 million decently paying manufacturing jobs turned into 2.5 million minimum wage McWalMartJobs that won't support a family of one. Its amazing what jobs people will take in order to not die. You want to call that a "change in the job mix" then fine, whatever helps you sleep nights. Let them eat their made in China cake eh?

"In contrast, in the past 150 years, per capita incomes in a typical free-market economy have risen by amounts ranging from several hundred to several thousand percent!"

Now that's just silly, what in the world is a "typical free market economy" over a span of 150 years? Average incomes went up a great deal during the New Deal, is that typical? You want to compare post-industrial economic growth numbers with the Roman agrarian slave economy? You must be from UChicago. You know what I think is funny, we still like to look at art and tell stories produced during those millenia when growth was "zero". Well, some of us do anyway.

"per-capita income" begs the question anyway because it obsures the effects of income distribution. Bill Gates could have all of the money in America, invest it in EU stocks, see a return, and we would experience "per-capita income growth" as everyone but his staff starved. Since I am concerned with the well being of workers, I am not interested in "growth" per se unless it can be shown to have occured in the pocketbooks of regular people. (Which, as you may recall from earlier in this post, have SHRUNK over the time period from 1970-2005)

The ironic thing is that in my experience during the internet age, American workers had better job security at foreign owned companies. Of course, as Japan shifts to a more mercenary management/labor culture and China goes more "free-market", that may well disappear.

"And since you asked, the pursuit of profit has been exceedingly successful in feeding everyone including the unemployed."

That's funny. :) Next time a homeless person asks me for food money I will tell him you said that.

Seth Ayarza

With respect to the previous comments:
I lean towards agreement with Posner on giving a green light to the Chinese oil companies. Yet, I'm trying to think of ways that this company may in fact represent a strategically unique asset to the Chinese.
Obviously if we were talking about buying wheat in a perfectly competitive market that might be one thing. Yes, the oil that Unocal produces is fungible. But the infrastructure...property holdings...technological resources... and employees (scientists) are not fungible. Maybe I'm just being too susceptible to cloak and dagger fantasies, but I think that the Chinese may be in it for one of those rather unique variables.
Just a Thought: if we were to have observed the Chinese catch a case of Winners curse and overbid, instead of gloating, I'd be more worried that there was something we overlooked.

Matt

"Jobs go to where the labor is cheaper, factoring in overhead for things like shipping and lower productivity."

A different claim to the one you made earlier. But I'm pleased we can agree on this.

"Wages (expressed in real dollars) dropped over that same period."

Your earlier claim was that there are workers rendered "unprofitable" by competition from lower-cost foreign workers. Now you seem to be saying they are not. Whether real wages have declined or not is actually quite controversial. Krugman, for example, has expressed doubts they have fallen in view of large productivity gains.

"Now that's just silly..." etc.

My point is a general statement that the pursuit of profit under capitalism has produced wealth far in excess of any other economic system, and this has very substantially reduced starvation and poverty. True, starvation and poverty has not fallen to zero, but demonstrating that is not necessary to answer your original request.

"So yeah, perhaps 2.5 million decently paying manufacturing jobs turned into 2.5 million minimum wage McWalMartJobs that won't support a family of one."

Again, the data does not support you. George Viksnins from Georgetown University writes: "Although there was a distinct shift from manufacturing jobs (in part due to a strong rise in productivity in that sector) to employment in services [between 1980-95], 90% of the new jobs were full-time positions and 85% were in skilled occupations (not "flipping burgers")."

"American workers had better job security at foreign owned companies..."

Your observation is true generally. Lucky you. A number of studies have shown foreign-owned companies pay more and treat their workers better than local companies. US-owned manufacturing companies, for example, pay 1.4 times the comparable rate in high income countries and twice the comparable rate in developing countries. To the extent this translates to lower turnover, you are correct.

"I am not interested in "growth" per se unless it can be shown to have occured in the pocketbooks of regular people."

Real median household income and real median earnings, particularly for women, have increased in the US since 1970. Real incomes for the labor force as a whole have increased substantially since 1970. See US Census Bureau, "Income, Poverty, and Health Insurance Coverage in the United States: 2003." Over the longer term, capitalism has raised incomes and living standards beyond comparison with any other economic system.

"Next time a homeless person asks me for food money I will tell him you said that."

I said unemployed, not homeless. There is a difference Corey.

David Nieporent

Why did 2.5 million manufacturing jobs go overseas then?

They didn't. They were mostly replaced by machines. And no, wages didn't drop; you've got to count compensation, not just dollars.


Jim S: it would be bad if China invaded Taiwan -- but what does that have to do with this issue? Either they'd be disincentivized by the thought of losing billions of dollars, or they wouldn't -- but buying Unocal wouldn't make it easier for them.

Corey

"Again, the data does not support you. George Viksnins from Georgetown University..."

I do not know who George is and his opinion is not data. You, me, and George agree that there has been a shift in jobs from manufacturing into services, ok...

The Bureau of Labor Services publishes average hourly earnings:

A. Manufacturing: $16.08
Total goods-producing: $17.14

B. Retail Trade: $12.07
Leisure and Hospitality: $8.79
Other Services: $13.92

Now that is data. Please explain to me how jobs can shift from category A into category B without people experiencing a drop in average real wages.
90% may be full-time, and 85% may be skilled, just like George says... but they pay less!

Here is another fun bit of data:
http://www.bls.gov/news.release/realer.t02.htm

In 11 of 17 categories of work surveyed, wages expressed in constant dollars dropped over the last year. Among the others, the largest increase was 0.8% over inflation.

Of course, if you average it out, and include supervisory jobs, looks like growth to the US census. Which completely obscures the fact that income disparity is also growing. If you break down aggregate income into fifths of the population, only the top fifth has increased its "share" since 1970. Most of the "growth" is occuring at the top. Millions of workers have seen their jobs outsourced and have taken lower paying work to survive. Service jobs pay less than goods-producing jobs. Only on the Becker/Posner blog are these controversial assertions.

"I said unemployed, not homeless. There is a difference Corey."

Yeah, you want to exclude the latter because they make the profit motive seem insufficient. No matter, I'm sure the unemployed will be just as receptive to your assurances that it is their fault that capitalism hasn't helped them.

"you've got to count compensation, not just dollars."

Actually, no I do not. One counts dollars, and then compares it with the cost of living to arrive at an approximation of real buying power over time. If we look at "compensation", then you get to count recently skyrocketing health insurance costs as earnings growth, which is perverse. Health insurance is a tax providing a subsidy to a particular industry. If you get to count health insurance as compensation, then I get to put rising health care costs in the inflation index, then maybe we will learn something.

Matt

Corey

Again you resort to shifting the argument. You initially claimed workers are made unprofitable by foreign competition. Debunked, you then assert those leaving manufacturing get McJobs that pay minimum wage. Debunked, you reply with figures that undermine your own minimum wages claim. Your new position is that services jobs don't pay as much.

Even here there are problems with your argument. First, you are selective in your quoting. Wages in business services and education and health services are higher than manufacturing, and these sectors employ more people than retail, leisure and other services combined, but you failed to mention them. Second, using 2004 data is hardly relevant to job movements 20 to 35 years ago. Third, since all displaced manufacturing workers leave with work experience, and wages are positively correlated with experience, simple comparison of average industry wages may be quite misleading.

Then you raise income inequality for the first time. No argument from me there: its increased. But what on earth does that have to do with anything in my earlier posts or yours? Anyway your argument doesn't work on its own because the main cause of within-country inequality is higher pay for skilled labor which may well enhance the incomes of skilled manufacturing workers.

>>"I said unemployed, not homeless. There is a difference Corey."

>"Yeah, you want to exclude the latter because they make the profit motive seem insufficient. No matter, I'm sure the unemployed will be just as receptive to your assurances that it is their fault that capitalism hasn't helped them."

My comment was directed at your childish habit of putting words into your opponents' mouths to win arguments. Your response is to put (frankly stupid) words in my mouth. Touche.

Corey

Your optimism regarding the coherancy of your arguments is impressive. You might examine your own... childish habit of narrowly mischaracterizing the statements of others in order to fit the objections you wish to make.
Of course, too much self-reflexivity has the effect of distracting from the topic at hand eh?

No one on this blog has the moral high ground to start talking about selective quoting, I gave you the link to all the numbers you claim I hid. But since you brought it up, can you google for some statistics that show people outsourced off the auto line and taking higher paying jobs en masse as high school teachers and nurses? There is this thing called common sense. Go visit Flint Michigan or Columbus Ohio. Work experience isn't very relevant when the whole industry relocates.
You take less pay until you can get retrained for a better new job.

Me personally, I was outsourced as an engineer several times. Eventually I took a job as a part-time high school librarian so I could at least feel like I was contributing something. Now I am going to law school. In a few years, I might make as much as I did 5 years ago, if I am lucky.

"Then you raise income inequality for the first time."

Well, no, it really wasn't the first time. Its a pretty standard response to the whole capitalism saved the world line. I'm sure you have encountered it before.

Matt

Corey

Common sense is often fine, but where it is contradicted by deeper thinking and evidence it is helpfully modified or abandoned.

As usual, your post includes red herrings and straw men. Selective quoting is factual, not moral. I try to make my arguments coherent but if they aren't you should say why. And you seem to have shifted the argument again by mentioning Flint and Columbus.

But you have shifted to a place we can agree. Changing the mix and location of work is costly. I hope we can also agree that in the long term matching the mix of work to needs is useful (it would be unhelpful to still be employing x00,000 people producing horse whips as they were a century ago). So the question boils down to a) whether enough of the overall benefits to changing the mix of jobs are being shared with those displaced individuals who bear the costs of change, and b) how existing institutions could be modified to improve things. That is far more powerful than a rant about the evils of seeking a profit. So why not start at the point rather than finish there?

I apologize to everyone for the off-topic distraction.

Corey, best of luck in your studies.

David Shaw

Jim S:

I'm curious about your apparent expertise on the "Chinese mentality". What are your sources for these egregious claims? Frankly, I find that your depiction of the Chinese government as an irresponsible and, in effect, illegitimate political entity does a disservice to this entire discussion.

If we were to look at the facts, it is apparent that the Chinese are calculating - both rational and strategic in the development of their policies. Certainly, these policies often do not parallel our own philosophies and ideals, but the claim that the Chinese government would willingly and haphazardly squander "trillions of dollars" and valuable assets is far ill-conceived.

Indeed, the issue across the Taiwan Strait is an extremely tenuous and complex one - one that must be dealt with delicate hands. Admirably, the Bush administration has done a commendable job in relation to this issue. But the very fact that the Chinese government has NOT invaded and reclaimed Taiwan exemplifies that they DO consider economic and political costs. If they had the wanton disregard implicit in your argument, what is currently preventing them from acting?

Furthermore, the democratic movements in the populace would suggest a waning support for the actions of a repressive Chinese government. Unless, of course, the Chinese were to invade Japan. Ha. In any case, this is a much more complex issue than you think: a large part of the Taiwanese populace actually supports peaceful reunification.

Lastly, I find your understanding of the Chinese culture and thought extremely myopic and particularly xenophobic. Perhaps you should immerse yourself in a deeper study of the "Chinese mentality" before you lament about any supposed "cluelessness" you may perceive.

Bill Korner

I'm also curious if Profs. Becker and Posner think that CNOOC would actually drill for more domestic oil than UNOCAL... oil that it would not be profitable for a "private" company to drill? And would this be a benefit or not (or practically irrelevant) to oil consumers?

Anonymous

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Anonymous

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