Patriotism' is just bad economics

The latest article by John Blundell in The Scotsman - Elections are auctions. Every time the politicians have an appointment with their electorate, the volume of dud economics is turned up

This week the US Senate will vote through a Bill banning all federal agencies from buying services in from abroad. "America First" resonates well, "Buy Expensive" lacks charm.

Yet there is a paradox. The more the branches of the vast US government machine fail to buy abroad when it makes sense to do so, the more the dollar will suffer and the more profitable it will be for American companies to migrate offshore.

Once again, I offer you an example of "Blundell’s Law" - that all political actions create the opposite effect.

In the G7 nations, the leading capitalist economies, about half their commerce is in or through the diverse arms of the state. By a point-blank refusal to open these sectors up to international trade, the opportunities of half the economy are neutered or suppressed. The more governments deter international procurement, or "out-sourcing", the more chances for enrichment are lost.

If this has long been true of public bodies it is becoming true of companies too. Large firms have long expected to trade overseas. This is their strength and a major virtue. Now it is being treated as a sub-species of treachery.

If you are the chief executive of a company and your accountants tell you that you would make far more money by relocating to the Bahamas, or Bermuda, or the Isle of Man, should you ignore them?

Your role is to make more money for your shareholders. It is not to be "socially responsible" or to "back the government". You are husbanding the assets of your firm. Your purpose is to pay dividends.

Naturally your PR advisers will alert you that this move overseas will look unpatriotic. The politicians will seek revenge. They’ll argue for higher taxes or an outright ban on your goods and services - just as the US Senate enacts this week. You’ve definitely scotched any hope of that knighthood.

All protectionism is a malignancy. This new form of protectionism has an added pernicious quality. The markets will always seek out lower costs. If the UK government tries to influence company decisions - or punish companies for the decisions they take - the great computer of the exchange rate will grind in the new data and corporate "outsourcing" will become even more profitable.

In Edinburgh, everybody felt a pang of anger and alarm when Scottish & Newcastle announced it was planning to shut down its heartland plant at Fountainbridge in Edinburgh and is looking at closing its other "home" site in Newcastle-upon-Tyne.

Everyone grumbled - except the shareholders. The real estate value was far greater when redeveloped for homes. Modern breweries have no need to be in locations based on 19th century brewing technology and before the cities had expanded. Beer is now an international trade.

Daft though it may seem, we enjoy beers from India or Australia. S&N might be better criticised for being a little slow to enact their policies. All talk of patriotism is a smoke screen for political intervention. If you prefer to accompany your curry with a pint of Foster’s rather than a pint of Tennants, no politician has any need to reprimand you.

Governments spend such huge volumes and employ so many people we usually mutter that Whitehall jobs ought to be shunted out to Glenrothes or Irvine. The Inland Revenue has sentenced thousands of its staff to East Kilbride. I argue this is far too tentative. Just as banks are finding it useful to shift many backroom roles offshore, so should agencies of the state.

If, say, Customs and Excise shifted all its processing duties from Southend in Essex to the Cape Verde Islands, they would create a major injection of prosperity to that beautiful archipelago. If Bombay can flourish with all those call centres talking to their EU customers, then so can Social Security offices be moved offshore.

This argument has added resonance now that e-mail and computing power has come of age. The bulk of civil service jobs are of a mundane nature. They could be performed just as well in Eritrea or, let’s be bold, in Haiti. The kindly people who support Oxfam, Christian Aid or buy "fair trade" goods could achieve a far greater transfer of wealth by supporting foreign outsourcing of roles. Edinburgh City Council could contract tasks such as its payroll to Sierra Leone. Such a cluster of secure incomes would be a boon to locations currently bereft of them. This would be true overseas aid.

Haiti has been in the news. Its degradation seems the more striking to me as it is so close to the bubbling prosperity of Miami and the Florida coast and nearer still to the Bahamas. Haiti lacks the two simple ingredients - the rule of law and open markets. By using the patronage of large companies or the state, even the most blighted places could be transformed.

Anybody with any imagination or sympathy wants to help the Third World lift its people into wealth and health, yet we punish them by policies that lock them out. The decision of the Senate to direct the US government to buy only within its territories is a cruel and stupid decision. It guarantees higher taxes for US citizens and the forfeiture of liberating opportunities for poorer locations.

Of course the market is evolving to counter the foolishness of the politicians. The Americans tax any firm incorporated in the US at a 35 per cent tax rate. To this a 5 per cent rate of state tax is added. Can there be any surprise that US executives see it is only sensible to move to lower tax jurisdictions? One reason British firms are able to buy up US companies so often is the relative sloth or costs imposed by the Internal Revenue Service - their Inland Revenue. The best manoeuvre for a sizeable American firm is to change their domicile to places such as the Cayman Islands or Bermuda.

All the Democratic candidates for the presidency share an hysteria about preserving US jobs from the tyranny of "sweatshop" competition. It plays well to a naïve audience, yet this is mere populist posturing to blame any faltering in the economy to pesky foreigners. This is not just an American disorder. Neither the UK nor the EU looks favourably on outsourcing.

The more the political class tries to impoverish the rest of us, the more difficult they will find it to preserve their folly. Directing General Electric to only buy expensive local goods is to cripple General Electric in the long run. GE’s leadership will have to move off-shore or see itself atrophy as a silly policy erodes its status.

The Americans are still in a lather of fear about "international terrorism". The greatest threat to the US remains its wrong-headed politicians. Those in Scotland are not much wiser. Let the poor of the world help us. Let us trade with them. Let us create jobs across the globe, not just in our neighbourhood. Let firms transfer whatever they want to far away places. If functions are performed less expensively, who are the losers?

• John Blundell is director general of the Institute of Economic Affairs

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