Jay Reding.com

Turning Back The Clock On Trade

Over the holidays, Senators Byron Dorgan and Sherrod Brown demonstrated just how bad the level of economic illiteracy is among the Democratic Party these days. Abandoning the truly progressive approach of the Clinton Administration, the new Democrats are resorting to the old playbook of crude faux-populism and protectionism. The American economy depends on trade, and the world economy depends on America’s strength. To turn back the clock and reject the basic principles of economics is to turn back the clock on America’s prosperity. Dorgan and Brown clearly don’t understand what they’re talking about and have resorted to the crudest populism:

Fewer and fewer Americans support our government’s trade policy. They see a shrinking middle class, lost jobs and exploding trade deficits.

Either the middle class is getting shorter, or this is just more populist garbage. There’s no evidence that supports a “shrinking” middle class. Instead, reality tells a different picture. We’ve had years of solid growth. Unemployment is at record low levels. Consumer confidence is high. For all this talk about how terrible life is for the middle class these days the numbers state otherwise.

Here’s how you tell an economic bullshit artist from someone with a clue: if they start resorting to sob stories about how little Mary Jane Pityme lost her job at the mill because of some big bad corporate fatcat, you’re dealing with a bullshit artist. Real economists go for the head, not try to pull wool over people’s eyes with sad stories. Senators Dorgan and Brown are bullshit artists, as will soon be demonstrated.

Yet supporters of free trade continue to push for more of the same — more job-killing trade agreements, greater tax breaks for large corporations that export jobs and larger government incentives for outsourcing.

Yup, free trade sure kills jobs. Just look at what happened with NAFTA! Negative millions of people lost their jobs and the unemployment rate skyrocketed to historic lows! In two paragraphs we’ve had so much smoke blown up our asses that the EPA should be filing a complaint…

Last month voters around the country said they want something very different. They voted for candidates who stood up for the middle class and who spoke out for fair trade. They did so because they understand what’s at stake.

Of course! Why just as the average American voter what the Doha Round is about, and they’ll probably think you’re coming on to them. The reality is that most voters don’t understand trade, and if they did, they wouldn’t be voting for people like Dorgan and Brown. Even if it were true, your mother was right: just because everyone else is jumping off a bridge doesn’t mean you should do it too. When it comes to trade, most people have been fed a steady diet of populist bullshit over the past few years: which is why getting things straight is so critically important.

Over the past 100 years, Americans have built a thriving middle class. It’s the envy of the world, and it didn’t come easily.

At the turn of the 20th century, child labor was common; working conditions were often abysmal; there were no enforced workplace health, safety or environmental requirements; no unemployment insurance; and no workers’ compensation. Workers were attacked and killed for the sole reason that they wanted to form a union; there was no 40-hour week, minimum wage, job security, overtime pay or virtually any other limit on the exploitation of employees.

However, none of that has anything to do with why America has a middle class. As a real economist, Greg Mankiw, points out it has a lot to do with market growth, entrepreneurial activity, and technology. At the turn of the 20th century, there were no computers, no advanced materials, almost no one had a car, and people tended to die of diseases that are now easily treated.

Coincidentally, at the turn of the 20th century, trade was a very small part of the American economy and protectionism was commonplace. Tariffs and trade barriers were all the rage on both sides of the economy. Dorgan and Brown would turn back the clock to those days.

America was split dramatically between the haves and have-nots. It was a harsh work world for many: nasty, brutish and, too often, short.

And we had to walk to school through foot-deep snow both ways! And half of us would be eaten by wolves on the way!

Worker activism, new laws and court decisions changed all that during the past century. As they did, a middle class grew and thrived. By mid-century, it became the engine that drove an ever-expanding economy in which benefits were shared by tens of millions of Americans. The American Dream of a secure, well-paid job with benefits, a nice house and a high-quality public education seemed within reach of everyone who worked hard and played by the rules.

Yup, it was worker activism, new laws and court decisions that changed everything. Not technology, not entrepreneurial activity, and certainly not expanding international trade that created opportunities in new markets that had never existed before. This is typical Democratic talking points, and it’s also pure bullshit. Interesting, isn’t it, how Dorgan and Brown are basically saying that the reason that the middle class exists is because of Democrats isn’t it? They could just go right out and say it rather than dress everything in the rosy façade and stop pretending we’re all too dumb to get it.

That is what’s at stake when we talk about trade policy: America’s middle class and the American Dream.

Yeah, the American Dream of the proletariat rising up and seizing the engines of production from the hated bourgeoisie!

The new mobility of capital and technology, coupled with the revolution in information technology, makes production of goods possible throughout much of the world. But much of the world at the beginning of the 21st century looks a lot like the United States did 100 years ago: Workers are grossly underpaid, exploited and abused, and they have virtually no rights. Many, including children, work 10, 12, 14 hours a day, six or seven days a week, for only a few dollars a day.

Whisky. Tango. Foxtrot.

Seriously, does anyone believe this crap? That we’ve all of a sudden gone back to the Gilded Age? I can’t believe that any reasonably intelligent Democrat (are there any left) really believes this garbage. Workers have virtually no rights? Give me a break here. The America that Dorgan and Brown are describing has absolutely no relation to the America that actually exists. This kind of political pandering is so at odds with the reality of American life that it’s damn near delusional.

Of course, given that Dorgan and Brown want to take our trade policy back to the days of the Smoot-Hawley Tariff, I guess things really are going back 100 years. Next thing you know they’ll be talking about how it’s absolutely imperative that we bring back the gold standard.

The result has been a global race to the bottom as corporations troll the world for the cheapest labor, the fewest health, safety and environmental regulations, and the governments most unfriendly to labor rights. U.S. trade agreements paved the way for this race: While rejecting protections for workers or the environment, they protected investors and corporate interests.

Here’s the problem with that argument: it isn’t true. Let’s pretend it was true for a moment, abandoning all semblance of economic truth in the process. We had a major free trade agreement with Mexico in 1994. If there was a “race to the bottom” the Mexican economy should have gotten a huge boost from all those American jobs moving down to Mexico to take advantage of Mexico’s low wages and lax to non-existent labor standards. Yet even on the border, the place where such an effect would be at its greatest there’s absolutely no evidence that such a thing happened.

All it takes is a little thinking about what a corporation really does. For instance, let’s say you make widgets and you want to take advantage of the cheap labor in Reallynastystan. The problem with this is that Reallynastystan has incredibly low wages, but you get what you pay for. For one, there’s no reliable electrical grid, so you have to pay to have generators to mitigate the frequent blackouts. Also, the workers are ill-educated and prone to making mistakes, so the quality of your widgets suffers. Also, the government is corrupt and it takes millions in bribes to get the red tape cut. Oh, and there’s the small amount of having to ship your widgets from Reallynastystan to the United States. It was working great until a herd of yak pushed the truck off the mountain…

Again, there’s bullshit economics and there’s real-world economics. If it were such a massive cost savings to move jobs overseas, we’d be losing thousands upon thousands of jobs every month. Yet that just isn’t happening. It isn’t cost-effective. As Pat Cleary of the National Association of Manufacturers points out, people build factories close to their customers. No real-world manufacturer is going to save money by moving overseas, because the fixed costs of doing so are prohibitively high. Changing our trade policy won’t add a single new manufacturing job, but it will cost tens of thousands of jobs as those manufacturers who are based in the US lose access to key international markets.

The results of such trade agreements are skyrocketing trade deficits — more than $800 billion this year alone — and downward pressure on income and benefits for American workers. Why? Because these agreements enable countries to ship what their low-wage workers produce to the United States while blocking many U.S. products from entering their countries.

Equally important, by enabling this kind of trade, the agreements force U.S. workers to accept cuts in their pay and benefits so their employers can compete with low-wage foreign producers. And those workers are the lucky ones. Millions of others have lost their jobs as corporations moved overseas to build the same products with cheap foreign labor. It is no coincidence that salaries and wages today are the lowest percentage of gross domestic product since the government began keeping track of this in 1947.

90% of our trade deficit is with countries we have no free trade agreement with. The whole point of such endeavors is to mutually reduce trade barriers. Again, if the biggest thing that mattered were wages, the whole thesis of Dorgan and Brown’s argument is wrong. The American economy expands and wages go up. If it were all about “downward pressure” from low-wage markets, that should never be possible. Trade should always go to the place with the lowest wages. But again, that doesn’t happen in the real world. Haiti isn’t a mecca of manufacturing. Wages aren’t the most important thing: they are important, but the argument that everyone’s going to set up shop in Mexico because you can pay someone a dollar a day rather than $14/hour just doesn’t fly. After all, exactly what stops people from doing that now? If Dorgan and Brown’s nightmare was true, the US economy should be in a state that would make the Great Depression look like a picnic. Yet here we are, chugging away with solid growth year after year. How someone could make an argument that flies in the face of even the most cursory look at history is astonishing.

Wait, no it isn’t. Dorgan and Brown think we’re all idiots.

Salary and wages at the lowest point since 1947? Again, this is an example of someone making an argument that sounds impressive, but means absolutely nothing. For one, salaries and wages don’t include health care costs. They don’t include what your employer contributes to your retirement savings. They don’t include the tax-saver programs that many workers use to pay for things like child-care on a pre-tax basis. The figures say the opposite – according to the Commerce Department’s figures from 2005 the total share of GDP that went to employment compensation was 65.0% – that’s about where it’s always been. It’s pointless to use such a figure, because workers in 1947 didn’t get a 401(k). They didn’t get health insurance. They didn’t have to worry about child care because Mom stayed at home. You can’t compare apples to donuts, no matter how politically expedient it may be.

It took a century to build a thriving middle class and economic security here in America. We need to protect that for which we have sacrificed.

Yes, by making sure that doornails like Dorgan and Brown can’t screw it up.

We must insist that all trade agreements have labor, environmental and other protections so that American workers can compete on a level playing field. Trade agreements must also be reciprocal. The American market is the most desirable in the world. Every country wants access to it. That gives us a great deal of leverage, if only we’d use it. Barriers to U.S. products overseas should not be tolerated.

I’ll give them credit for the latter half, but the argument that we should make a developing country play by our rules isn’t a “level playing field” at all. It’s like saying that you can play on the company softball team, but only if you hit like Barry Bonds. What they want is to close American doors to foreign competition and try to retreat behind the walls of Fortress America. What country is going to take the argument that they have to have the same standards as we do, and then they can’t engage in any protectionism themselves?

That dog won’t hunt. We can’t enact protectionist measures and then demand that no one else follow suit. It’s crap like this that led to the collapse of the Doha Round — this world needs less protectionism, and that starts at home.

Free-trade agreements have protected drug companies, international investors and Hollywood films, yet failed to protect our communities, our workers and our environment.

We believe there is a better way. Fair trade is not the enemy of more trade. It’s how we expand international trade without reversing U.S. economic progress.

This is a repudiation of one of the few things that the Clinton Administration got right. Clinton dramatically expanded the reach of free trade, helped found the WTO, and all of that helped the US economy reach soaring heights. Now, the Democrats have abandoned their commitment to free trade, preferring to wrap themselves in the cloak of protectionism once again. The US economy will suffer because of it.

One of President Bush’s bigger policy failures was damn near provoking a trade war with the EU over steel tariffs — using the same protectionist justifications that Dorgan and Brown use. Our economy depends on trade and foreign markets. To cut off access to them by making ridiculous demands will only hurt the American worker in the same way that protectionism has always hurt the American worker.

Free trade has expanded American opportunities dramatically. It’s even good for the environment (see Werner Antweiler, Brian R. Copeland, M. Scott Taylor, The American Economic Review, Vol. 91, No. 4 (Sep., 2001), pp. 877-908). The reality of the situation is that Senators Byron Dorgan and Sherrod Brown have bought into a protectionist fairytale spun by powerful special interests like the AFL-CIO. In the real world, the standard history of labor is completely wrong — at least the popular standard history. Our economic strength doesn’t come from liberal interest groups, it comes from the ability of the American people to make their dreams into a reality. What is killing American job growth isn’t free trade, it’s protectionism and government interference. If you want to kill the goose that laid the golden egg, make the American entrepreneurial system weaker through onerous regulations and stifling amounts of red tape. Sadly, that’s just what economic illiterates like Dorgan and Brown would do.

6 responses to “Turning Back The Clock On Trade”

  1. Seth says:

    Wow. Republicans are so busy looking at these wonderful numbers that they don’t have time to talk to the middle class. Because those people are feeling the squeeze and are experiencing more economic angst than at any time since the Depression.

    Free trade is a race to the bottom. Some estimates puts job loss due to NAFTA alone at nearly 900,000, and most of those good-paying jobs. But don’t take my word for it, ask Mark Kennedy, who voted for CAFTA and then went to sugar-beet country and tried to tell people he was with Peterson on trade. Then Klobuchar reminded people that if Kennedy had switched his vote, we wouldn’t have CAFTA, and Kennedy’s rebuttal was booed. We’ll just see what Norm Coleman does with that issue in 2008.

    When you say consumer confidence is high, you mean less low than it has been throughout the Bush presidency. In fact, the consumer confidence index is lower now than it was throughout the Clinton Administration.

    The fact that there is no development on the Mexican border proves nothing. It just proves that most of the capital and infastructure is not in the mountainous, rural region of northern Mexico.

    Workers have rights, huh? Unless they want to form unions. Yes, they aren’t getting a club over the head any more, but now they’re being challenged by lawyers, “activist judges” (the real activists judges who tell you a contract isn’t a contract, not the fake ones you righties make up), people who tell them everyone is a supervisor, etc. It’s essentially more restrictive to form a union now than at any point in the past 100 years.

    You are shreiking about this red tape and all of this regulation the Democrats are going to heap onto government and the poor CEOs, but there’s no evidence of that. Basically, what the Democrats are saying is: You want to ship your company’s jobs overseas so you can “compete” better? And then you want to take the money you save and invest it in your CEOs second billion? That’s fine, but as long as you’re screwing over the American taxpayer, he doesn’t need to be giving you subsidies to do it.

    Two big themes here: 1.) Maybe you guys could win an election on economics if you didn’t sound like you were trying to get into the pants of the executive boards of the Fortune 500, and 2.) People have been making arguments like this for over 100 years, and just because they don’t agree with you, it doesn’t mean that it is “bullshit” or that they are stupid or that you are the smartest guy in the room. I understand you have no respect for rational debate and that asking you to respect anyone with differing views of your own would be too much, but at least have a little respect for the office of a United States Senator.

    Basically, economic populists are committed to the idea that the American worker should directly participate in more of the prosperity that he creates. It’s a pretty simple concept, and one that rejects the failed policies of trickle-down economics. We tried laissez-faire, and it didn’t work, and we didn’t like it. You’re trying to return us to Hoovervilles and Dust Bowl economies, and I hope you run your party right over the cliff with it.

  2. Aaron B says:

    I have to say one thing. Those of us who have families and earn under $100k a year are getting kiiled. My yearly salary increase for each of the last 4 years has been 3-3.5 percent. I am a college educated engineer working for the largest telecom company in the world. That being said, my salary has fallen well behind the cost of living and I can barely get by. I hear the same complaints from co workers and friends, all of whom are college educated, hard working people. Corporate America is not looking out for its employees in any fashion. We get small salarly increases combined with large increases in benefit costs. We just cannot keep up.

    For those in the higher income levels, maybe the economy is great but for those under 4100k, we are barely getting by. All this while Government spednign is out of control, our leaders are doing nothing to fix the healthcare problem, and they continue to approve massive subsidies for Oil Companies earning Billions…..enough is enough. Jay I am a consrvative leaning republican and I can tell you I am fed up with the GOP.

  3. Microharman says:

    Does anyone else agree that barley keeping up with the Jones next door is a little different then barely getting by?

    Ps. Oh yeah, I’m way under 100k a year.

  4. Erica says:

    Does anyone else agree that barley keeping up with the Jones next door is a little different then barely getting by?

    If the Jones’ prosperity drives prices up, no, I don’t see the difference.

  5. zzx375 says:

    Any protectionist policies that the US enacts will be met with the same kind of action abroad and that will not benefit anyone.

    From personal experience, the worst government red tape on the planet now is that thing called Sarbanes-Oxley aka The Public Accounting Firm Full Employment Act. It has consumed more of my employer’s resources for no real return and those are resources that could have been directed to more profitable activities.

    Stockholders are the ones who drive what company CEO’s do (with the financial analysts following a close second) whether that executive is Larry Ellison, Bill Gates, or Larry Mulva. And asking the government to ‘soak’ companies because they happen to be in a particular industry or just large (whatever that is) makes no sense.

  6. Aaron B says:

    Let me make, we are not only not keeping up, we are barely getting by…we can barely pay all our bills each month…..with 3-.35 percent pay increases which are wll behind the cost of living increase, we are quickly losing our footing….