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Friday, January 23, 2009

Spending money locally

I always find it amusing when socialist organizations like the Canadian Centre for Policy Alternatives delves into economic issues. For one, because they are always predictable in the sense they almost universally demand higher government spending, higher taxes on the upper-class, and even more ominously, protectionist policies

The rise of protectionism is not limited to left-wing think tanks. Among the populist tendencies of the masses, economic protectionism is often one of the first planks that people reach for.

Protectionism manifests itself in several different ways, with the most obvious being tariffs levied by states for the importing of goods. But it is also manifested in what economists refer to as home bias.

Home bias refers to the tendency of people, businesses and governments believing that by focusing economic activity at a local level, you will improve your local economy. For example: buy Canadian-made or American-made goods. In the case of government bailouts, many would like to see government tie bailouts to local-spending and labour guarantees.

This all sounds good and it would seem to make some sort of sense. Except it doesn't.

The nature of this economic downturn is global. And it must be solved globally. To deny this, is to simply ignore the nature of the division-of-labour between the developed and developing world, resource exporting nations (like Canada), and principally service-oriented nations (like the US).

Much has been made about the declining role of manufacturing jobs in the developed world, as the United States, Canada, and the United Kingdom in particular have precessed over the migration of low-skill manufacturing jobs to the developing world. But not much is made about the real improvement in quality of life in these nations in the same period.

The export of manufacturing jobs to developing economies, has provided a buffer of lower prices on consumables, helped foster a global financial system which ironically is the primary source of the US government's deficit borrowing, and transitioned the developed world towards a high-value, high-tech, service-oriented economy.

While it is true that some people have been adversely affected by the decline in low-skill, high-paying labour jobs, the real economic figures paint a different picture. That, in particular, quality of life using broad economic measure has been consistently ascendent since the 1970's. More importantly, it has been consistently and rapidly ascendant in the developing world in the same time period.

The gradual removal of barriers to international trade, starting at the end of the Second World War, and extending up until today have been broadly accepted by economists as contributing to a massive decline in global poverty. But this is lost of leftist economists, because they are morally opposed to the divisions of labour that provided the opportunities in the first place, wilfully ignorant of the infrastructure and education that these low-skill exports have brought. Which brings me back to the buy locally argument.

When you buy locally you are almost certainly reducing the productivity of your economy if by, buying locally, you are reducing choice, competition and the quality of the product. In fact, as protectionism has consistently demonstrated when applied, either voluntarily or by force, the economic effects are almost always a net negative.

When you buy a Chinese-made product, contrary to popular belief, you are not concentrating wealth in China, since most Chinese made products are made on behalf of international firms. Many of those international firms employ people in your country, and who's stock price forms part of your RRSP or 401(k). These firms employ the services of contractors, financial services, technology services, payroll services, and so on, that employ you, your family and your friends. The relationships in this global market are complex and interconnected on levels that are almost impossible to contemplate.

When you simply buy the best product for the job, for the price and most importantly: for you, you are helping the local economy through being part of functioning and vibrant global economy. And it's a good thing too. Many people in India and China who knew nothing but abject subsistent poverty 30 years ago, will be happy you do, and both you and them are the richer for it.

Posted by Mike Brock on January 23, 2009 | Permalink


Thanks Mike for speaking about CCPA. As the writers of "Rescue the Right" reveal this organization is basically 100% funded by taxpayer money. And they are in the news a lot lately in response to the credit crisis. Them giving advice for that is like an arsonist telling me who he thinks started the fire that consumed my home.

Not surprising then they want MORE stimulus. Interesting that the media rarely quotes the Fraser Institute. I wonder if we compared the Canadians Taxpayer Federation to the CCPA, what the ratio to news articles would be?

Posted by: Faramir | 2009-01-23 1:43:37 PM

Well with all of the hope provided by the promise of government stimulus, I've decided not to renew the lease on my truck, cashed in my stocks (a year ago)paid off my credit cards and stuck them in a drawer...
And why not? The government seems well in control of stimulating things...

Posted by: JC | 2009-01-23 5:23:17 PM

Hi Faramir
Just to clarify CCPA is not government funded at all, in fact entirely membership funded. It is this financial autonomy that enables it to provide independent and often critical analysis of government policy.

Posted by: John | 2009-01-24 4:29:47 AM

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