Free trade is wrecking America

by Fabius Maximus 

Summary: Free trade is one of those things that benefits our elites, so we’re bathed in propaganda about its wonderfulness. Here is the rest of the story.

“When more than 95% of our potential customers live outside our borders, we can’t let countries like China write the rules of the global economy.”
–- President Barack Obama, 5 October 2015.

A world under control

Introduction

Globalization – the free flow of capital, jobs, and trade – was a pillar of the post-WWII geopolitical regime. Our leaders assure us that globalization is a “win-win” for all parties. But globalization in its current form has weakened us in important ways during the past 3 decades. Unless we start to think more clearly about trade, the ill effects will continue to grow.

In his clownish way, Trump’s attacks on China respond to these facts. So here is the rest of the story about trade that you have not seen.

Summary: Does free trade help America?

“If the tension is not managed intelligently and creatively, the danger is that the domestic consensus in favor of open markets will ultimately erode to the point where a generalized resurgence of protectionism becomes a serious possibility.”
— Dani Rodrik (professor of economics at Harvard) in Has Globalization Gone Too Far?(1997).

Is free trade beneficial to the US? David Ricardo stated that both sides benefited if the key factors of production were not mobile (in chapter 7 of The Principles of Political Economy and Taxation). That was true in 1817, but not so today. Three of the key factors are mobile: knowledge, capital, and labor (both as migration and outsourcing).

The expansion of our exposure to third world competition was tolerable so long as limited to traditional “tradable goods.” Now both sophisticated manufacturing can be done almost anywhere, exposing a large fraction of our workforce to global wage competition. Worse, globalization is expanding to services. Another tranche of high paying jobs – this time white-collar, professional jobs — are going overseas.

As a result, the political support for free trade is weakening. The core of America’s middle class has become vulnerable. By now everyone knows the “globalization” playbook, whether from jobs flowing overseas or immigrants (e.g., H-1B and H-2B visas) coming here to lower wages. As a result, the political basis for globalization is eroding even faster than our national balance sheet. Will Americans passively watch their “class interests” (a Marxist education is becoming more useful these days) erode away to maintain high corporate profit levels (as a % GDP)?

Trump trade policy

Problem recognition is the first & most difficult step

Alan S. Blinder is no anti-globalization Lefist, right-wing reactionary, or even just another economist. He is Professor of Economics at Princeton, member of the White House Council of Economic Advisers (1993-1994), and former Vice Chairman of the Board of Governors of the Federal Reserve (1994-96). He has written powerful articles challenging the orthodox theories about trade.

(a)  A warning we ignored. It became a successful prediction.

Offshoring: The Next Industrial Revolution?” in Foreign Affairs, March/April 2006.

“Although there are no reliable national data, fragmentary studies indicate that well under a million service-sector jobs in the United States have been lost to offshoring to date. A million seems impressive, but in the gigantic and rapidly churning U.S. labor market, a million jobs is less than two weeks ‘ worth of normal gross job losses.) However, constant improvements in technology and global communications virtually guarantee that the future will bring much more offshoring of ‘impersonal services.’ That is, services that can be delivered electronically over long distances with little or no degradation in quality.

“That said, we should not view the coming wave of offshoring as an impending catastrophe. Nor should we try to stop it. The normal gains from trade mean that the world as a whole cannot lose from increases in productivity, and the United States and other industrial countries have not only weathered but also benefited from comparable changes in the past.

“But in order to do so again, the governments and societies of the developed world must face up to the massive, complex, and multifaceted challenges that offshoring will bring. National data systems, trade policies, educational systems, social welfare programs, and politics all must adapt to new realities. Unfortunately, none of this is happening now.”

(b)  After the problem arrives, specious recommendations.

Will the Middle Class Hold? Two Problems of American Labor” – his testimony to the Joint Economic Committee on 31 January 2007

“The dividing line between jobs that are deliverable electronically (and thus are threatened by offshoring) and those that are not do not correspond to traditional distinctions between high-end and low-end work. …

“First, we need to repair and extend the social safety net for displaced workers. This includes unemployment insurance, trade adjustment assistance, job retraining, the minimum wage, the EITC, universal health insurance, and pension portability – plus other, newer ideas like wage loss insurance. …

“Second, we must take steps to ensure that our labor force and our businesses supply and demand the types of skills and jobs that are going to remain in America rather than move offshore. Among other things, that may require substantial changes in our educational system – all the way from kindergarten through college.”

Blinder gives the standard remedies: welfare, retraining, and more education.

  1. The first is likely both insufficient unsustainable as “outsourcing” grows from the manufacturing sector to the larger service sector, and effects higher-wage jobs.
  2. Re-training just pushes more workers into the ever-smaller boat of jobs not exposed to foreign competition.
  3. The last is nuts. Consider the plight of middle-aged workers with advanced professional degrees. Do they return to school to get a 2nd masters, or a PhD –competing for the tiny pool of jobs for which these are required?

This comment at Brad DeLong’s website gives Blinder’s recommendations the mockery they deserves. link — about :

“{T}his is what happens when a super smart man honestly analyzes and concludes that the following of his beliefs will lead to horrors but just can’t let go. Many economists must be starting to feel like the Communists felt when it became clear that it just wasn’t working out like they thought it would.”

For a more detailed analysis by Blinder, see “Fear of Offshoring” (December 2005).

An example of free trade at work

What’s The Problem With ‘Free Trade’?” by Dave Johnson at Our Future, March 2016 .

“The net result of allowing goods to cross borders without protecting local businesses is a ‘more efficient’ manufacturing/distribution system powered by the biggest and best-capitalized operations. The rest go away. Economists will tell you that these increased efficiencies allow an economy to best utilize its resources. But obviously one effect of this “increased efficiency” is fewer jobs, resulting in lowered wages on all sides of trade borders.

“After NAFTA, for example, smaller, more local Mexican farms were wiped out by large, efficient American agricultural corporations that were able to sell corn and other crops into Mexico for low prices. The result was a mass migration northward as desperate people could no longer find work in Mexico.

“Economists say even this is good because when costs are lower the economy can apply its resources more efficiently and increased investment can put the displaced people to work in better jobs. But we can all see that in our modern economy that’s not what is going on. Investment in our economy is not increasing, partly because the resulting downward wage pressure has resulted in an economy with decreased demand. Fewer customers with money to spend is not a good environment for investment. Instead of these “freed up” resources (money) being used to provide better jobs with higher wages for everyone, they are instead being concentrated into fewer and fewer hands.”

About those wages for highly trained professionals

The Minimum Wage and Doctors’ Pay” by Dean Baker on “Beat the Press,” 24 June 2006. He is an economist and co-director of the Center for Economic and Policy Research.

“To me, the main economic story of the last 3 decades has been that those in high paying professions (e.g. doctors, lawyers, dentists, accountants, economists etc.) have managed to drive up their wages by sustaining and increasing barriers against competition (both foreign and domestic), while less-skilled workers, like autoworkers, textile workers, dishwashers, and custodians have been deliberately placed in direct competition with low-paid workers in the developing world.

“The wages in these latter categories have generally been flat or declined over this period, while workers in most of the high-paid professions have seen substantial pay increases (e.g. the OECD reports that the real wages of doctors in the United States increased by 55% from 1964-1995 [sorry, it’s not free data, so I can’t link to it]). If this pattern is to be reversed, then the wage increases for workers at the middle and bottom will have to come at least partly at the expense of the real wages of high-end workers, just as the wage gains of high-end workers have come partly at the expense of those at the middle and bottom over the last three decades.

“This is all accounting; one can debate the merits of specific policies to reverse the upward redistribution of income, but there really is not much room to debate the accounting. My favored policy is free trade in professional services, so that doctors, lawyers, accountants and economists can enjoy international competition in the same way as autoworkers, textile workers and dishwashers. (See chapter 1 of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer.)”

Ricardo would consider our trade policies insane

David Ricardo

Many economists explain that the simple story about Richardo’s advocacy of free trade is false.

Is Off-shoring Really Just Good Old Free Trade?” by Herman Daly and James Socas, presented to a Senate Democratic Policy Committee Hearing on March 2004. Daly is a Professor at U Maryland, was a Senior Economist at the World Bank. Summary …

“Many academic economists argue that off-shoring is simply the next chapter in ‘free trade’ theory – a ‘good thing.’ However, some politicians of both parties are beginning to question whether off-shoring represents a fundamental break from the past. To them it appears that off-shoring is not free trade, as most think of it, but the systematic substitution in the production process of higher cost U.S. workers by lower priced foreign workers, due to an increasingly integrated global economy. The result is rising corporate profits, but falling U.S. jobs, stagnating wages, and enormous pressure on the country’s middle class.

“The authors contend that what is happening in today’s globally integrated economy is not the classical operation of ‘free trade,’ and, they point out, that argument can be found in the original writings on which free trade theory is based.”

Roy J. Ruffin’s article in History of Political Economy (Winter 2002) highlights the re-thinking of free trade theory, and economists’ closer look at the original theory: “David Ricardo’s Discovery of Comparative Advantage.”

“These observations are Ricardo’s ‘home runs.’ Ricardo emphasized the ‘four magic numbers’ as well as stating that because Portugal has an absolute advantage in the production of both cloth and wine:

‘It would undoubtedly be advantageous to the capitalists of England, and to the consumers of both countries, that under such circumstances, the wine and the cloth should both be made in Portugal, and therefore that the capital and labour of England employed in making cloth, should be removed to Portugal for that purpose.’ (Ricardo, 1817).

“Accordingly, Ricardo realized it was necessary to suppose factor immobility between countries. Indeed, of the 973 words Ricardo devoted to explaining the law of comparative advantage, 485 emphasized the importance of factor immobility!”

Here’s a link to Ricardo’s discussion of mobile/immobile factors of production. Discussions of “free trade” usually cite Ricardo but ignore his specific statement that advantageous free trade assumes the major factors of production are immobile. They were immobile in 1817, but today communication and cheap transportation have made land the only immobile factor. And land matters not at all.

Debunking an obsolete orthodoxy

Often mockery is the best debunking, like this comment by Ponzi Q. Globalization at Brad Delong’s website.

“You guys seem stuck in some zero sum downer. You have to realize that there’s no problem. Everybody wins with Free Trade! The Chinese will get all our boring old jobs researching, developing, and making stuff that people around the world need and want and Americans will do all the new and wonderful work that the Chinese will be too stupid to do. See, the Chinese *AND* the Americans win!

“It’s like Brave New World where the Alphas (Americans) do the really really hard intellectual work and the Betas, Gammas, etc. (non-Americans) do the easier – but no less important – routine intellectual and manual work. Thank heavens that geography is destiny when it comes to ability {& that knowledge cannot cross borders}, otherwise there would be a lot of unhappy Americans competing for work with people making a fraction of what it takes to get by in America.

“The really cool thing is that it all is happening naturally, with no human intervention. Just the inevitable workings of the natural unfettered market. So there’s really no point arguing whether it’s good or not. It just the way it is and the way it has to be.”

Another comment by Ponzi Q. Globalization at DeLong’s website.

“Blinder is an intelligent man and so he sees that the majority of Americans will be screwed by globalization. He sees that globalization, technology, and differences in living standards have combined in a very ugly way. Blinder realizes that with this ugly combination there’s really no good reason to produce much of anything domestically.

“Blinder is an orthodox member of the economics community and so he will not propose anything substantial to get us off the destructive globalizationized path we are currently on. That is, he would rather let the majority of Americans suffer than enter a state of sin by proposing heterodox solutions.

“Blinder and his ilk are not bad or stupid. They just can’t think out of the box in which their orthodox training has imprisoned them.”

Conclusions

Free trade has produced vast fortunes for our elites. The losers are peons in the eyes of our rulers, just collateral damage. This is the fate of an apathetic citizenry in the Great Circle of Life. But it need not be so.

Free trade is, like capitalism, a system that works well only when managed. America’s leading role in building a new international order is among our greatest accomplishments. That system provided for mechanisms to address these problems. But we have allowed special interests to tear down those institutions (much as they are tearing down the arms control treaties that have kept us safe for 55 years).

The political machinery created by the Founders is America’s greatest accomplishments, and remains idle but powerful. It needs only our participation to work. For ideas about what you can do, see Reforming America: steps to new politics.

 

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