A modest proposal to resolve the Chinese trade deficit

No serious economist believes the United States' budget and trade deficits are sustainable. China is one of the biggest sources of the trade deficit, and makes up for it by holding vast dollar reserves, thus effectively underwriting the budget deficit. At some point, the balance has to be righted and they will have to find goods or services of interest to them from the US to redeem those dollars for.

One possibility: buy back all the priceless cultural artifacts that were pillaged under the quasi-colonial domination of China by western powers, most notably the United Kingdom, and which found their way to the US after an improverished Britain had to sell the family silver, so to speak (bought at the cost of much diligent opium smuggling, I might add). Of course, that would be selling the US' own family silver, but if Americans can't moderate their appetite for cheap Wal-Mart goods, it is ineluctable.

Defaulting on Treasury bills is not an option (it is actually illegal for Congressmen to question the Federal government's creditworthiness, a Civil War holdover), and in any case, as Argentinians can attest, that is no silver bullet to the woes stemming from financial recklessness. Even America's "exorbitant privilege" of having its currency be the world's reserve would not make up for that ocean of red ink if used as a one-time joker card.

As it turns out, China has requested the US stop the importation of Chinese antiquities, in compliance with UNESCO treaties. Perhaps granting them a right of preemption would do the trick...

H1-B bashing

It is amusing to see august professional organizations like IEEE-USA or the ACM take the same apoplectic tones when dealing with the outsourcing phenomenon and lobbyists efforts to increase H1-B quotas as the AFL-CIO must have about cheap asian imports two decades earlier. When white collar workers feel personally threatened, the level of discourse goes south as quickly as with blue-collar ones.

First some facts about the H1-B program - obtaining one is a fairly costly process, several thousand dollars per worker, and involves a determination by the Department of Labor that the salary offered for the position is not undercutting American workers and that there is a genuine dearth of skills in the worker's specialty. That said, the government's enforcement resources are limited, and there is certainly abuse in the system. The fact the visa is tied to an employer and transfers take time means H1-B workers have greater difficulty jumping ship than Americans do, and can be more attractive to some employers, specially those who mistreat or exploit their workers. And while employers are supposed to offer market wages to H1-B workers, simple economics tells us the introduction of new supply depresses wages, or at least limits their potential rise in periods of skills shortages.

Industry lobbyists claim the issue is quality of the workers, but that is not what I have observed. I have recruited two software engineers in the last 6 months, and I steer well away from H1-B holders - transferring their visas is costly and time-consuming, and their language skills and training is usually not to the same level as Americans. For all its well-publicised faults, one of the virtues of the American educational system is that it teaches self-confidence, initiative, curiosity, eloquence and creativity better than the more rote-oriented systems of East Asia or the former Communist Bloc.

Clearly, the industry's arguments are self-serving. That does not mean they are completely wrong. H1-B workers keep work in the US, and pay taxes, specially Social Security taxes most of them will never benefit from (a H1-B is good for 3 years, renewable once, so if they have not obtained a green card in that time, they have to return home). The alternative is that companies could entirely offshore the activities they keep in the US partly with H1-Bs. If H1-Bs are banned, cost competition with foreign companies could force them to offshore. If offshoring is banned as well (as is increasingly the case with state contracts), they might simply go under from foreign competition altogether.

The real issue is whether the differential in the standard of living of American workers and foreign ones is sustainable. If it isn't, e.g. if the "magic sauce" of education and working conditions that made the US the most productive can be replicated in other countries, a levelling to the bottom is inevitable, at least until poorer countries standard of living has caught up. Availability of capital, which used to be the limiting factor, is no l;onger so with globalization of finance. As I mentioned, the US educational system has hidden strengths, but the answer to the question of whether America has a sustainable productivity edge is by no means settled. Not incidentally, H1-B workers are only attractive if they are as productive as Americans in an American work environment. The popularity of the H1-B program among employers suggests this is the case, and that means if American working conditions can be replicated overseas, they eventually will. Returning H1-B holders who have been exposed to American working methods could well be spearheading that movement.