For those of you not working on Sunday (many of us in PRC are working this weekend so we can have the next 7 days off for the National Day holiday), you are probably bored and in need of some good econ reading.

This is one of the best posts I have seen in a long time on foreign investment/outsourcing, from Ian Welsh writing on Firedoglake.

After running through the basics of comparative advantage and explaining why capital will naturally flow to places like China and India in search of a better return (no discussion of the tremendous risks over here, though), Welsh ends with this great paragraph:

What should be happening is that US costs should drop and developing country costs should rise. It is happening. It’s not happening very fast, and where they meet is going to be somewhere a lot south of the current US standard of living. In the meantime the dynamic is the US shipping its capital and its growth in productive capacity to lower cost, higher surplus domiciles. That will continue until the conditions for it end – and not before. The conditions which can end it are increased shipping costs (favouring more localized production), surplus production evening out, a political decision to discourage either trade or capital flows or an unwillingness or inability of either the US to borrow or its creditors to lend (the end of the housing bubble strikes directly at this). Until then capital will go to the higher returns and since the highest returns on production are mostly not in the US, capital that creates production jobs will flow disproportionately away from the US while asset bubbles form in the United States in order to pay for imports. (And the assets they have bought or allowed the US to borrow against are likely to crash in the final days of this system. A suckers game all around, but the only thing worse than playing is trying to stop playing.)

Why is this post so good? First of all, it's an accurate description of where things are right now, particularly on the cost side. I also like to see a well-balanced and non-normative discussion of trade. Note that Firedoglake is a popular progressive (liberal) blog, and while I generally love the political commentary, it is not the place I usually go to for a fair look at trade policy.

Anyway, yeah, if capital is allowed to flow, it will go to where the best return is. The standard of living has been rising over here in China and has stagnated in the U.S. for a lot of people. The question is not whether this is happening, but what to do about it. That's where the Left and I part company. Protectionism, capital controls, etc. are non-starters, and when politicians start yakking about closing the borders to protect American jobs, I usually turn off the TV and go to sleep.

If we first accept that globalization has already happened and will continue, then we can work on policy designed to help folks that have suffered from dislocations, better protect the environment, etc.

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