THE FREE TRADE KOOL-AID GETS WATERED DOWN

3/11/16

The long held American enthusiasm for free trade has taken a beating in this year’s presidential contest.   Democrats and Republicans, from Bernie Sanders to Donald Trump, are scoring points taking shots at the impact free trade has had on our economy.  Those candidates who have long stood for free trade either are doing poorly (John Kasich) or try to avoid the subject during the campaign (Hillary Clinton).   As one who had once ravenously imbibed the Kool-Aid of free trade as a panacea for our economic maladies and who has, for the last decade or so, questioned my unremitting thirst for this increasingly malodorous concoction, yours truly might be able to provide some insight into Americans’ waning enthusiasm for free trade.

It takes only a little background in economics, either academic or practical, to realize that free trade can only lead to a world wage or, rather, a series of world wages in those industries that produce goods and services that can be freely traded.   For example, if cars are traded freely across national borders, global competition will force auto producers to pay auto workers the same wages wherever they are located.   This can only be bad news for American workers, along with German and Japanese autoworkers, who are among the highest paid such laborers in the world.   How can an auto producer selling and producing across the globe to afford pay Americans, or Germans or Japanese, a premium simply because they of their nationality?   While the world wage toward which free trade is leading us is great news for workers in developing markets, it can only be bad news for American workers.

One can argue that Americans currently earn wages higher than those of workers in, say, Mexico, China or India, because U.S. workers are more productive than workers in those competing countries.   While this is true, how long can this situation last?  A car plant, or any manufacturing facility, in Mexico or China is virtually indistinguishable from a car plant in Lansing, MI or Lordstown, OH.   If anything, the plant in the emerging market country is more advanced because it is highly likely to be newer than its counterpart in the United States.   So how can American workers using the same, or even less advanced, tooling, methods, and other capital goods and processes be more productive than their counterparts in Mexico or China?

Some will argue that we have a technological edge because we are better educated.   While it’s true that the average American spends more years going to school than the average Chinese or Indian, both countries have more honor students than we have students.   Further, students in China or India have a greater propensity to study math, science, accounting, or engineering than do American students.   Chinese and Indians, for the most part, don’t spend four years in college nurturing grievances by majoring in subjects with titles that end in “Studies.”   They don’t spend four years in college trying to build self-esteem on shaky foundations by pursuing dreams that involve “creativity” but have great potential to wind up as nightmares that involve asking customers whether they would “like fries with that.”   While the Chinese and Indians pursue subjects that lead to employment, our students pursue subjects that lead to inflated expectations and senses of entitlement but provide scant preparation for anything useful. 

 Lest I be attacked for favoring technical education over the liberal arts, I’ll add here that the traditional study of liberal arts would be fine; it not only gives one an appreciation for one’s culture and background, but also teaches people to think, write, figure, and learn.   But those traditional liberal arts have given way to majors that stress non-conformity, self-expression, and disdain for one’s culture and background and that eschew such now declared useless virtues as being able to think, write, analyze, and generally participate not only in the work force but also in society.   Meanwhile, our global competitors produce engineers.    But we comfort ourselves in the supposition that our superior access to “education” will forever give us a technological and productivity edge.   Good luck with that.   But even if we do somehow maintain our technological edge, if our superior technology is transferred, as it is now, to foreign venues in which it can be applied more cheaply, how does that benefit the American worker?  The only way the American worker can compete in a global free trade environment is by accepting a lower wage.

What proof is there for the common sense contention that a global marketplace leads to a world wage that can only force American incomes and prospects in a downward direction?   Real hourly wages in our country have been essentially stagnant since 1964.   This measurement includes, by the way, all those wonderful jobs that free trade true believers tell us have been created in exporting industries.   This stagnation only stands to reason; it is explained by simple supply and demand.   With all those emerging markets workers formerly shut out of the world markets suddenly flooding those markets, how can anyone with an ounce of economic literacy expect anything but severe downward pressure on wages?   Can anyone blame the typical worker and voter for not being overjoyed that free trade has made those in the C-suites astoundingly wealthy while s/he has seen little growth in the wages s/he earns or appreciation for the work s/he does?

Furthermore, there are societal costs to free trade.   I expounded on this point, almost as a side note, in my discussion of the U.S. Steel South Works in my seminal 7/9/14 post THOSE HORRIBLE SOUTH WORKS AND RAHM EMANUEL’S CORE CONSTITUENCY.  My point was that places like the South Works, long abandoned as a result of free trade orthodoxy, long provided that first rung on the climb to the middle class for immigrants and minorities.   A guy with little education could get a job that paid good money so that he could send his kid to, say, IIT to be an engineer so he in turn could send his kid to, say, the University of Illinois or that U of I of the East, Harvard, to become a lawyer, an investment banker, or a tech billionaire.   That rung has now been removed so now the guy in China can work at a steel plant and send his kid to Shanghai U to become an engineer and he can in turn send his kid to say, the University of Illinois or that U of I of the East, Harvard, to become lawyer, an investment banker, or a tech billionaire.  

What will replace the South Works?   For awhile, we thought maybe the Obama Library.  Now it looks like maybe the Lucas Museum, a gambling casino, or a huge park.  None will generate the types of jobs that paid the wages that gave people hope of a better life for themselves and their children.  And we wonder why we have so many drug, crime, familial, and other sociological disasters in both the inner cities and the countryside.   The choice for many people, and, increasingly, many educated people, is to work for Third World wages or pursue any number of nefarious enterprises that draw their customers from those facing the same prospects.

I’m not an opponent of trade; as one who makes his living studying, teaching, and applying economics, I know that free trade leads to efficient resource allocation and has myriad benefits for consumers here, producers “there,” and, yes, even certain producers here.   Doubtless, though, after the thoughts I have shared in this post, yours truly will be attacked by those who, as I once did, unreservedly and unquestionably still guzzle the Kool-Aid of free trade.  I will be ridiculed as one who wants to, as John Kasich put it in last night’s debate, shut the windows and lock the doors of our economy.  In the orthodoxy of free trade nirvana, those who don’t buy into the entire package, those who don’t buy the proposition that elimination of all barriers to imports will lead us to economic Valhalla and who thus propose negotiating better deals for American workers, or even who simply want to re-examine some of our assumptions, are castigated as heretics worthy of expulsion, ridicule, or both.   In that way, ardent proponents of the what has become the religion of free trade are not at all unlike ardent proponents of the most fundamentalist forms of any religion.   They close their ears to any fresh ideas, perhaps because doing so might shake their desperate hold on even the most untenable manifestations of their faith.