Third world factories

I've always steered away from this topic because the people who are against third world factories are so vehement, even when they don't really know what they are talking about. But if the New York Times can publish this, then I feel a bit safer thinking out loud.

The basic economics behind any decision is that one option must be compared against its alternatives. And not just proximately, but to a few levels of depth.

Take factories in third world countries. They have much worse conditions than factories in the US. They often are dirty, have lax safety controls, and may employ young teenagers. There are lots of negative consequences of this. The kids miss school. Everyone can get injured or get sick. They don't pay enough to live comfortably.

But what else would these people be doing? These jobs almost always pay more than sitting at home or subsistence farming. That's why people do them. It is rare that factory workers are kidnap victims (although prisoners sometimes are forced to work there, but that's another post).

Lets take the situation that probably has the most arguments against these factories - the 12-14 year old. He/she could be missing out on several years of school. And his/her body is more sensitive to carcinogens than an adult would be. And he/she may be less experienced so may fall victim to hazards like falling into a trench.

Given all of this, its hard to make a case that this factory work is a good choice. But think hard about the alternative. We know that malnourished children with no home support and poor school quality don't learn very well. Some can overcome this disadvantage, but many would just be going through the motions. They may avoid the carcinogens, but even that is not clear because there are many environmental hazards in rural areas of developing countries. And the money that they would have earned in the factory could have solved some of the malnutrition problem. A well-fed (or just adequately fed) child may do better in the long run than a poorly educated and malnourished child, especially when the job market for adults is generally unskilled labor. How many of these kids do you think will become Muhammad Yunus' disciple and the next Bangladeshi entrepreneur?

I am not nearly smart enough to know which alternative is better. It's likely that some will do better working in factories and some will do better in a rural school. But I do know that most anti-sweatshop activists don't know either. And when there is this much doubt, the libertarian in me thinks that we should let them decide, not impose our unknowing opinions on them from 10,000 miles away.

Stimulus Plan should focus on Investment!!

The debate over the stimulus is starting to get really annoying. While I accept that implementation could be a real challenge, the approach that we should be taking is not that hard to figure out. It is accepted by economists across the spectrum that getting out of a slowdown requires spending. They may differ about how best to do this (Keynesians want government spending and Friedmanites want tax cuts), but spending is a given.

But we are in this mess because every sector of our society has been spending more than it has. The government has a huge deficit due to Iraq, the Bush tax cuts, etc. Banks way overleveraged using CDOs etc. Consumers have maxed out on credit and pulled mythical equity out of overvalued assets to buy flat screen TVs and eat at fancy restaurants.

So the solution should definitely NOT be something that encourages consumption!! Do NOT encourage people to go out and buy another flat screen TV. That’s what got us into this mess. If we need to increase spending, we need to increase investment. Keynesians should be pushing government spending on investments in human capital (education), technological infrastructure (broadband), transportation infrastructure (high speed rail) and looking hard to find the ones with the best returns. Friedmanites should be looking at across the board (no industrial policy allowed) tax cuts that will go towards investment (R&D tax credits, education tax credits).

And because of globalization and our preference not be become protectionist, we should also be finding investments that would naturally be spent here (forcing highway builders to use only US-made steel just causes other countries to retaliate and defeats the whole purpose). Retrofitting buildings to make them more energy efficient could work because it saves money in the long run (it is an investment), a lot goes to labor (which is local), and could build up capabilities in green engineering and technology for the private sector to take advantage of in the future. It can also be launched pretty quickly (if we start with government buildings), which is the other requirement of a good stimulus.

I accept that there are differences of opinion on the details. How to do this quickly, how to get a decent bang for the taxpayers’ bucks, etc are tough decisions. But to focus on investments rather than consumption is so blatantly obvious. I just want to cringe every time I hear a politician or an economist talking about getting money in the consumers’ hands so they can go out and spend. That may alleviate some of the short term pain, but it will make it worse in the long run. And with a higher deficit (that our children and grandchildren will have to pay back) to boot.