Comment by narrator | Hacker News Reader

Comment by narrator | Hacker News Reader

The mystery at the center of all this is "Why is it so astronomically cheap to do the x in Asia vs the U.S?". Not just cheap as in low wage, but cheap as in finished goods costing less than the cost of materials delivered to the American factory. It's not just manufacturing.

In Thailand you can live in a high rise condo with a gym and maid service and eat out every day and do some traveling for $2000/month. That life style is 8x more expensive in San Francisco. In Argentina before the 2002 crash, the country was very expensive, but it wasn't some luxurious paradise, so it's not just that it's a developing country. AFter the 2002 crash the prices were absurdly cheap. Something just doesn't make sense, and there's an enormous amount of denial that anything's amiss. Prices are a mystical sacred phenomenon it would seem. American companies don't care why prices are cheap, they just build stuff where the prices are cheap and sell it where they are high. They couldn't care less about the mystery, neither could the politicians. It's just the magical mysterious market.

Health care prices are also a mystical sacred phenomenon. Why are they 10x in the U.S what they are in other countries? Other people get sick and die there and are willing to pay whatever money they have to get better. Prices don't necessarily scale with income per capita either. I am sick of pat answers to this question and "just-so" stories. Someone should take some cost accountants and figure out where all the money is actually going for these kinds of things and write some journal articles. It would probably reveal a lot of bizarre and interesting rough edges on the economy and maybe a fair amount of business opportunity.

Some researcher should go look at the cost to build an Intel fab in Taiwan vs the U.S and start asking why. Start with why is it 1/5 the price to build the fab in Taiwan: 1. Because the construction company charges that much. Why? 2. Because the labor is 1/2 and the materials are 1/3. Why? Because the labor's rent is 1/5? Why? Because the land for the apartment building was 1/10 the price? Why? Because there are no mortgages and the land had to be bought with savings from an export business, etc, and follow it all the way down for everything. Depth first search! Piles of fascinating economic nuggets are just sitting there untouched.

The short answer for why it's cheaper is that the west industrializing first is basically a historical accident. From of the perspective of a "make things and give them to people" optimizer, if you don't have a better reason to put things places, you'll want to put manufacturing close to people to cut down on transport waste. So, it's cheaper in Asia because prices convey information, and the information is "more things should be built in Asia because Asia has much more population than thing-making".

Another angle is asking why people are willing to spend so much money to put manufacturing in the US. Skilled workers is part of it. Another is having a low-corruption society, and all the advantages that social capital in general brings. Yet another is having convenient access to the other capital that your company needs to do business with in order to function. Like, if all the sub-components are built in the US, and your sub-component is being sold to US manufacturers, moving your facility offshore means a lot of shipping costs and delays.

Any source on "1/5 the price to build the fab in Taiwan"

Googling I found:

"Taiwan Semiconductor, the world’s biggest custom-chipmaker, plans record spending on plants and equipment this year. It’s lavishing $12 billion on factories -- more than Intel Corp. has ever spent in a year"

Which looks more like Taiwan being enthusiastic for building tech stuff rather than dirt cheap. I'm recently back from Taiwan and I'm not sure the costs are much lower than rural USA.

As I said in my other reply, that's just speculation to provide an example as to what they might find. I would really like someone to do some scholarly work on the subject to get to the real answers.

I think you're right to focus on prices. It turns out that there's a tremendous amount of economics that concerns itself with prices (7 chapters of Wealth of Nations are devoted to it, many other writers as well).

A crucial function of markets is in "price discovery". And there are numerous ways in which this can fail. I'm concerned that this is among the more fundamental flaws in market operations as a whole.

Keep digging at this.

I'm active at G+ ("Edward Morbius") and on reddit (https://reddit.com/r/dredmorbius), where I've been thinking about and musing on price, cost, value, and money. Somewhat frightening ground to cover, but fascinating.

Can you elaborate on your last paragraph please? What is the fundamental cause in your opinion? Or are you saying it's like turtles all the way down?

The last paragraph is just speculation as to what they might find based on some investment research I've done while traveling in various developing countries. My speculation is that land prices in America are vastly inflated because there is so much credit available to buy them while in developing countries there is very little credit available for borrowing against land.

In Argentina and most of Latin America for example, most real estate purchases are done with cash. Thus, in order to buy land you have to save for years till you have the full purchase price. The cost of renting is much higher vs the land value. Less credit = lower prices. Profits and savings from productive businesses and wages have much more power in the economy than bank loans.

It's a bit like what happened to higher education in the U.S. We rapidly increased the amount of loans available and the costs skyrocketed. Same goes for the housing bubble. You increase the credit available for houses, the price goes up. You decrease it, the price goes down. This is the game we play with money in this country because everyone will always take our dollars and we can QE as many as we want.

There's a lot of arbitrage of this via buying real estate in foreign countries. Lots of retirees sell their inflated home and buy in Costa Rica and all that money drives up the prices there. We've got the dollar spigot in this country and everyone else in the world has to drink off what leaks out the trade deficit.

It's a global game and the people who have made tons of money off that game go and manufacture stuff in China for impossibly cheap where the leaky dollar spigot has not deluged and import it back to the U.S. This is where the whole export led economy thing comes from. If you are a publicly traded company in the U.S, you get to benefit from the enormous amounts of dollar spigot that floods into the S&P 500 via the banks diversifying after they receiving money from the Fed's purchase of MBSs from the banks, that then get parsimoniously dolled out to factories in Asia and elsewhere by these big companies.

But then it is not land prices itself but rather the availability of the credit that seems to be the fundamental disparity, isn't it? And you could question why there's such a big difference in credit availability, which comes down to accumulated capital and to productivity/technology. Not to disparage your argument, but aren't you just saying more productive/advanced regions have more expensive stuff?

I think American financial institutions and their clients have a slight advantage when it comes to getting dollar credit than financial institutions in developing countries. That's why when American companies get cheap money it does so much more overseas.

Why do American banks and their clients get this advantage? Does it come down to the historical fact that the US Dollar is a currency with a unique worldwide status?

And, you know wages are way lower in those developing countries with cheap land. You may want to adjust for average and median wages when comparing the cost of living in various countries.

Wages are lower because expenses are lower. Mexican immigrants who can't earn enough to live in the U.S move back to Mexico. Expats living in low rent countries will underbid those living in high cost countries, even with equivalent skills.

There is definitely some (currently poorly explored and undefined as far as my efforts to locate scholarly research went) Tsiolkovsky rocket equation-like [1] effect going on with land pricing on a PPP basis. I, too, have been stymied by the "just so" pat answers economics gives to the questions you raised, and the entire field ducks reflexivity and quantification issues, even when modern Internet-driven tools and data are available to start empirically addressing the questions with potentially trillions of data points each week to mine.

[1] https://en.wikipedia.org/wiki/Tsiolkovsky_rocket_equation

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