Pricing Ourselves Out of World Markets? M.E. Cravens

M. E. eRA VENS WHETHER OR NOT we're pricing ourselves out of world markets is a moot question. But there's no doubt that competition from for eign producers has intensified. We may hold an edge on quality, but foreign products often are cheap er. Auto manufacturers, for ex ample, are re-evaluating their pol icies in an effort to meet competi tion. Like many other industries, they are building plants abroad and hiring foreign labor to pro duce for sale in other countries and also in the U.S. market. A number of U.S. industries are ask ing for increased tariff or quota protection against imports. Foreign competition plagues ag ricultural as well as industrial producers. Currently, some 20 per cent of our agricultural exports are subsidized in some way. Some other countries also follow the practice; but it is ironic that the U.S. farmer, who is producing enough for himself and 40 other people, cannot compete with less Dr. Cravens is Professor of Agricultural Eco nomics at Ohio State University.

Pricing Ourselves OUT 01 World Markets? productive farmers elsewhere. For instance, in cotton, the U.S. is now a net importer instead of an exporter; in tobacco, we have been losing ground rapidly in world markets since 1949. Actually, the inability to com pete in certain things is not neces sarily a sign of lack of productiv ity in our economy. It happens all the time. For instance, in 1889 Ohio was the leading apple-pro ducing state with 14 million bush els, and ranked fifth in the pro duction of potatoes with 16 mil lion bushels. Today, Ohio is eighth in apple production and sixteenth in potato production, with about 3 million bushels of each - less than enough for its own use. Shifts of Production So it is with specific agricultural and nonagricultural products in other states and areas in the U.S. and among countries of the world. Shifts in production, no matter where in the world, occur in re sponse· to certain factors. The ad vantages of specialization and 1i\O 110 THE FREEMAN February voluntary trade are world wide.

As economies develop, as trans portation systems improve, as de mands change, the most profitable combination of resources in a given area may change. The land, labor, capital, and management are shifted to the use that will pay the highest return. This flexibility of adjustment to changing condi tions is one of our major advan tages. A market-oriented economy provides the mechanism to signal needed shifts. Today, however, there is wide spread belief that the government can and should do something to prevent these economic "laws" from working to the hardship of present businesses and employees. We are encouraged to reject the possibility that someone else can grow peanuts more efficiently than we can. Because peanuts was the most profitable crop for our grand fathers and our fathers, and they made a living growing peanuts, we should be secure in the right to do this too! In the past 30 years we have about convinced o'hrselves that we can "eat our cake and have it, too." In other words, that we can have foreign aid and foreign trade without foreign competition.

Recent trade and payments prob lems have brought us face to face with the fact that the rules still apply to us. Why Are Costs Higher? If prices and costs are rISIng in the United States relative to those of our foreign competition, how does this happen? Several reasons have been suggested. La bor leaders say profits are too high. Spokesmen for management say wages are too high, labor is unproductive, and taxes are too high. Some say that the rate of investment in new plants is too low. And each faction is likely to be so well satisfied with its own answer that it ignores the answer given by others. In the world of business, it's not uncommon that a firm may find it is operating at a loss. There's no doubt that lack of profits in many domestic indus tries is a major problem. And the typical result is a reduction in operations and the laying off of laborers. The reason often given is that foreign competition has taken customers by offering prod ucts for lower prices.

On the other hand, the business firm that successfully sells much of its output abroad is likely to show profits higher than average for that industry. The fact that some business firms are losing money because of inability to com pete in foreign markets, while others with above average profits can compete, suggests that high profits are not the basic cause of 1969 PRICING OURSELVES OUT OF WORLD MARKETS? 111 the inability to meet foreign com petition. Since business profits are what is left over after meeting business costs, high profits in themselves mean only that the business is efficiently operated and competing successfully. Low prof its mean the opposite. Wage Levels Wages in the United States have been higher for many decades than those in most countries. High-wage industries are our ma j or exporters. This was true even before the United States had widespread unionization or mini mum wage laws. The parents and grandparents of millions of us mi grated here in the late nineteenth and early twentieth centuries part ly because of attractive wages plus the fact that work was available for all at going wage rates. Let us hope for still higher wages in the future, because this is a ma j or indication of our level of pro ductivity.

Regarding the productivity of labor, there appears to be no question that some so-called "featherbedding" and other labor inefficiency exists. This is a net drain on the real wages of the gainfully employed wage-earning worker, as well as on everyone else. The "featherbedding" worker recei ves wages, and has a claim on goods produced, yet produces little himself. However, a limited amount of featherbedding has ex isted for many years, and there is no evidence that it has increased enough in recent years to explain the increasing pressure of foreign competition. Why are American workers more productive than most for eign workers? Why does one Amer ican farmer produce enough food for himself and 40 others while the Russian farmer produces enough for himself and only 5 others? Do American farmers work harder or longer or what? The higher output per man in the United States is due primarily to the use of more and better tools and equipment, the superior know how and management ability of the American farmer, and his greater freedom to make decisions.

Nonfarm workers also have more and better tools. Business manage ment is more skilled and has more freedom to make decisions in the United States than in Russia and most other foreign countries. This .dependence of labor pro ductivity on the availability of modern tools and equipment and the funds to finance them poses another problem. Any policy, gov ernment or private, that prevents or discourages the purchase of new and improved tools also re duces the efficiency of labor. Taxes and tax policies are prob112 THE FREEMAN February ably the-greatest governmental hindrance to the financing of new and better tools although restric tions by licensing, franchising, and exchange control are also im portant. Taxes which bear most heavily on the growing and more efficient firms tend to penalize and discourage such efficiency. Infla tion also creates special problems in retooling for firms that fail to allow for it.

In recent years taxes often have had a double-barreled effect. They not only have reduced the ability of individuals and business firms at home to finance new and im proved equipment but also have been shunted as "foreign aid" to help the foreign competitor buy equipment. The result is that to day the foreign competitor some times has a plant quite as modern as any in the United States, he pays lower wages, and he may pay a corporate tax rate lower than that of the U. S. business firm that helped finance him. A major cause of inflation is the spending by the government in excess of its income and the re sulting need for creating new money supplies. Inflation can stop only when voters quit expecting more services from the govern ment than they are willing to pay for in taxes. Our Competitors Competition from foreign pro ducers seems likely to increase. Our urge for protection and se curity leads to more and more intervention by government in the affairs of our farms and factories and family life. This intervention on behalf of the inefficient pro ducer in agriculture and industry weakens our capacity to compete.

We are becoming increasingly prone to consider present prices or perhaps a bit higher than pres ent prices, as the "just" or "fair" price. It follows that we consider the present producers as having a "right" to continue to produce. If either of these "rights" is chal lenged by a competitor, the in efficient producer is encouraged to look to the government for help instead of trying to find better ways to serve consumers. Future pressures of foreign competition will depend in large measure on domestic policies con cerning price supports, import quotas, tariffs, and other interven tions; on other "welfare" meas ures of the government; and on the extent of inflation in the United States. High tariffs, high supports, market quotas, and other such practices may hide the prob lem for awhile, but will not solve it. ~ JOHN W. CAMPBELL IT HAS BEEN said that "technology we can't understand appears to be magic." Actually, this applies only to technology more advanced than our own - for frequently we see some great technological device and, by familiarity, fail to recog nize it for what it is.