Category: Economics

Sharpening The Knife To Kill The Goose That Laid The Golden Egg

Larry Kudlow notes that the Democrats are preparing to rescind several of the pro-growth tax cuts passed earlier in the Bush Administration. To do so would be economic suicide, especially now. The US economy has done astonishingly well over the past few years, mainly because the government made the right pro-growth moves at the right time. In 2004 we were supposedly in the “worst economy since Hubert Hoover” — that assertion was laughable then, and even more so now.

To undo that would be to erase the millions of jobs created in the past few years, introduce a huge amount of uncertainty into the market, and ensure that businesses would delay job-creating capital investments until they know what the tax consequences of those choices would be. The Asian markets had a massive sell-off because of similar fears, and the same would happen in America if there was a credible threat of a major capital gains tax increase.

James Pethokoukis of US News and World Report identifies why the Bush Administration made four key mistakes in their prior tax policies which have hurt the future viability of these crucial tax cuts. Indeed, Bush’s two biggest economic mistakes have been in failing to cut spending and failing to meaningfully deal with entitlement reform. Those mistakes will have long-running repercussions for the future.

However, the worst thing that could happen is for the Democrats to raise taxes, spurring another selloff and then add more to the already burdened entitlement system. That is also precisely what the Democrats want to do — which is why the President should be prepared to veto any bill that raises capital gains taxes beyond the current level.

The economic reality is that capital gains taxes are economically wasteful — they don’t generate much revenue and they hurt economic growth, reducing tax revenues in other areas. Even if a 0% capital gains rate isn’t politically acceptable, neither is a return to a time when capital gains rates were acting as an anchor on economic growth.

The Democrats are sharpening the knife they’ll use to kill the goose who laid the golden egg — and they cannot be allowed to sacrifice the US economy and millions of jobs for their high-tax agenda.

Walter Reed And Misplaced Priorities

Greyhawk at The Mudville Gazette does an excellent job of highlighting all the pork that Congress funded while Building 18 at Walter Reed Army Hospital was falling apart. The reality is that we have a political system that encourages waste and pork and leaves programs that need funding high and dry.

Ultimately the failure is systemic in government — short of significant procedural reforms in the entire budgetary process, the impetus for pork remains just too high. While efforts such as extended rescission authority and pay-as-you-go budgeting may help, even those won’t necessarily be enough to prevent the kind of rampant fiscal mismanagement. Nor is either party much better than the others — the Democrats view of federal power makes them more likely to spend and the Republicans have consistently betrayed their small-government principles in the name of political expediency.

The reality is that as long as a Congressperson’s constituents want pork, they’ll get pork. For all the hue and cry against pork-barrel spending, it’s what keeps Senators and Representatives in office. The only way to fix that is to limit what the federal government can do and allow local governments more control over their own affairs — which would mean undoing the “mission creep” of the federal government that has been going on for decades and decades.

Alexander Tyler once famously observed that democracy dies when the public figures out that they can vote themselves the largesse of the public treasury. The Founders were rightly suspicious of direct democracy for that very reason — which is why the United States is a republic rather than a democracy.

In any event, the failure at Walter Reed was a bipartisan and systemic failure — while the typical partisan blowhards in Washington trade barbs, the problems go much deeper than that — and it seems as though no one in Washington outside a few isolated crusaders have any desire to delve into the real reasons why government continues to consume more and more and do worse and worse.

The Face Of “Universal” Healthcare

Ron Bailey writes that the Walter Reed scandal shows what government-run medicine would be like for the rest of us:

Crappy hospitals, endless waits, mountains of paperwork and, at the end of the day, no real accountability from the people who run the joint. Folks, if the government can’t or won’t take good care of our injured soldiers, what makes you think that it will take good care of little Sally or Uncle Bill?

Health care in the United States is screwed up. This is largely due to bad government policies, e.g., third party payment encouraged through the tax code and multiplying state insurance mandates that unnecessarily boost costs. As the example of Walter Reed is warning us, putting total control of all health care in the hands of those who wrecked it in first place–Congress, states and federal agencies–is the wrong way to go.

The VA system has been broken for a long time — despite massive increases in funding in recent years. And as any vet who has gone through the VA system will tell you, it’s been broken for a very long time. It isn’t that VA doctors are necessarily any worse than anyone else or that the VA doesn’t have enough equipment, it’s that there’s a bureaucratic mentality that adds tons of needless complications to everything.

The Walter Reed scandal will hopefully make things better for America’s injured servicemembers — but it should also serve as a warning to the rest of us. The essential problem with a government-run healthcare system is that it lacks accountability. Eliminate the ability for people to choose another system and the only remaining choice will progressively get worse. The situation at Walter Reed is the result of a military bureaucracy run amok while those who were responsible for providing care had little authority. That isn’t a particularized fault to this instance, but a systemic one to any government-run bureaucracy.

UPDATE: Kevin Drum reminds us that Walter Reed isn’t part of the VA system. He’s quite right, although the larger point remains. Any government bureaucracy, be it the VA or the military medical system experiences the same pressures due to their makeup. The source of both their problems are the same, and the same would happen to the civilian system were it centralized in the same way.

Democrats Put Unions Over Worker’s Rights

The House has passed legislation that would give unions broad new powers to unionize without holding a secret ballot of employees, which could very easily lead to intimidation of workers who choose not to unionize. This legislation is purely a sop to Big Labor and a strike against the rights of American workers to have their decisions to unionize or not be a matter of individual concern, free from intimidation.

Megan McArdle makes a very valid point about this legislation:

Let me put it another way. What do pro-union organisers think of card check–and delivering the cards to employers as well as union organisers with no penalty, should the union fail, for firing or otherwise making life miserable for the yes votes? If you think that this is in some way wrong on principle, then how is it not wrong for unions?

The reality is that not every worker wants a union. The mythology that unions are the great protectors of the interests of the American worker is largely one of viewing unions through rose-colored glasses. Is a worker in a Toyota plant so much worse off than a worker in a GM plant? The answer is clearly no — those workers know that they are far more likely not to get laid off in the near future, and still make nearly as much as their unionized counterparts while enjoying roughly equivalent benefits. That worker has a right to make an informed decision about the benefits and drawbacks of unionization and do so without worrying that either the union or their employer can retaliate against them for their vote.

Mickey Kaus raises yet another important point:

The idea of requiring a union, without a secret ballot election, if labor organizers can obtain a majority of “cards” from employees seems like both a big idea and a bad idea. (See below.) If Republicans were smart and confident, wouldn’t they make a big deal of this–drag the debate in Congress out to give it more prominence, highlighting Obama’s support for this change which (more than any tax cut) would alter the very texture of the economy?Voters–even many socially liberal peacenik voters–traditionally worry that if Dems gain full power they will a) serve their special interests and b) cripple American capitalism in a fit of leftish nostalgia. This bill legitimately triggers both fears. …

He’s right. This is an extremely ill-considered bill that hurts American workers. Only a small minority (7%) of American workers are unionized, and that isn’t due to the usual claims of employee intimidation. As Kaus notes, the union system isn’t a good thing for most workers, especially in an age of unprecedented economic flexibility. One can make an argument that in a system where one works for the same company all their working lives it makes sense to have a union — but that just isn’t the case anymore. Collective bargaining has its place, but the idea that unionization is an absolute good ignores the reality that union workers are losing their jobs while non-union workers have more economic stability without sacrificing much in the way of wages and benefits.

Even if one thinks that unions are generally good for workers, it’s still ridiculous to argue that eliminating secret ballot requirements is a smart thing to do. If the requirement cut the other way — the law required unionization votes to be reported to employers, the labor movement would be up in arms. So why should the same principle not apply to unions?

This was a sop to the Big Labor base that is exercising a disproportionate amount of control over the Democratic Party these days. It’s poor policy and it is wrong for American workers. Kaus is right — the Republicans should be all over this and they should be highlighting why it’s wrong for American workers. The choice to unionize should be a real choice, and removing the ability to force a secret ballot on this issue invites unions to engage in coercion and intimidation. The Senate should ensure that provision dies, and if they do not, the President should ensure that this bill is vetoed.

The Rise Of Economic Populism

Amity Shlaes, writing in Commentary has a good overview of how middle-class anxiety is fueling economic populism:

There is no denying the mood to which Hacker, Stern, and Dobbs—to say nothing of the leaders of the Democratic party—are responding. Americans are more worried about their economic well-being, and the uncertainties we face are daunting. Many defined-contribution programs like 401(k)’s will indeed fall short when retirement arrives. And even at its healthiest, the economy will not be able to outgrow the budgetary challenge posed by Social Security. This problem, in turn, will be made worse by the expansive prescription-drug plan pushed through by President Bush and the Republican Congress.

At the cultural level, too, the new economy can be deeply disconcerting. Are the Goldman Sachs partners and employees who, last December, divvied up some $16.5 billion in bonuses really worth that much more than the rest of us? Then there is globalization, which, no matter what our social background, challenges us in both superficial and fundamental ways. A son cannot hope to work at the now-shuttered factory that once employed his father. A middle-class applicant to Princeton, the University of Michigan, or a local magnet school finds himself in competition with the children of Asian immigrants, who often perform significantly better on standardized math tests. Americans of an older generation now wonder if their success—and the country’s—owes something to the fact that the U.S. was a protected enclave for much of the postwar period. It is hard to discover that you are no longer the smartest person in the room.

Still, even such warranted concerns demand a reality check. A good place to start is with several of the crucial details in the populists’ indictment. Consider, for example, Hacker’s table of downward-plunging family income. To present a chart that consists only of such plunges, with no rises, may serve his point, but Hacker himself knows that this is not the full story—after all, one can only plunge from a height. Unfortunately, the reality of regular upturns in family income, which robs the chart of much of its polemical force, is neatly tucked away on a distant page.

There’s a deep disconnect between how people perceive their neighbors are doing and how they perceive themselves to be doing. The worries about the economy seem to be general worries — consumer confidence is at a five-year high. People are more confident about their personal economic situation than they are about the state of the economy in general, which is a curious phenomenon.

I think this is largely a self-fulfilling prophecy — the media keeps selling economic bad news, and people’s impressions of the economy are largely driven by what they hear in the media. The other big factor is gas prices and the stock market — those are visible economic factors that give people are benchmark for economic performance. Productivity, interest rates, unemployment in general, all those other economic benchmarks that are of interest to economists don’t have much relevance to people’s lives in general. If gas is cheap and stocks are high, people tend to be more economically confident. If gas is high and stocks are down, people are more worried.

It’s not that all these concerns are imaginary. College costs are still skyrocketing, health care costs continue to rise, and even staunch defenders of capitalism can’t find that CEO pay is truly merited by the performance of the CEOs that are making those multi-billion dollar deals.

The problem is that economic populism is exactly the wrong solution for America’s economic problems:

Taken as a whole, the wish list of Hacker, Stern, and Dobbs represents a plan to turn America inward. They would like to see higher taxes and mandated wages, stronger unions with international reach, and a range of new state-run entitlements. If this recipe for economic security looks familiar, it should: it is reminiscent of the platforms of, say, the old British Labor party or Germany’s Christian Democrats in the 1950’s. What the economic populists seek is management and redistribution from above. Reading their manifestoes, one forms a picture of gray-suited men arriving for quarterly meetings in national capitals, somberly calibrating over conference tables the rate and direction of economic growth.

The ideal held out by Hacker, Stern, and Dobbs is more dangerous than the galloping capitalism that they lament. Moving toward a social-democratic model would likely bring about the very sort of dire economic circumstances conjured up by their books. Raising the scale and scope of American government to a European level would deal a permanent blow to our competitiveness. It would, among other things, make the U.S. a far less interesting and dynamic place in which to work. Whatever Senator McCain’s worries about the future, younger Americans still expect to do well. They are not in the same position as the youth of France, to whom the Archbishop of Paris recently declared, “I do not believe that anybody can guarantee you this security, no more than [they can] guarantee that you will have a standard of living comparable to your parents.” It would be ironic indeed if, just as Europe is starting to come to grips with the crushing burden placed upon it by its statist policies, the U.S. were to adopt such arrangements wholesale.

The worst thing we can do is centralize and ossify our economy. The “social model” of Europe barely struggles over there, if it were applied to a country much larger and more diverse, it would fail faster and more spectacularly — with all the consequences being that much larger. The model espoused by the populists has already failed — and trying to adopt it here would have the same results.

In the case of health care, the reason why costs are skyrocketing has little to do with a lack of government control — it comes from too much government control. There’s no reason why health coverage should be tied to employment. It makes little sense for one’s employment situation to determine the level of one’s health insurance. Health insurance should be as portable as any other asset — if we tied car ownership to employment, cars would be prohibitively expensive too. The “company store” mentality ensures that employers have incentives to keep costs down and employees have reason to utilize as much as they can get away with — which makes everyone unhappy. While the current system can be done better — such as encouraging more preventative measures — even that only ameliorates the situation rather than fixing it. Health insurance needs to be decoupled from employment and needs to be subject to individual rather than bureaucratic control. Only then will the people who utilize the system and the people who pay be the same people — and only then will there be a real incentive for people to demand the best quality treatment at the same price.

Economic populism centralizes authority and control, which goes against the principles of basic economics. A strong economy requires decentralization as much as is possible — prices should never be determined by fiat but by the signaling methods of the market. Job growth requires more innovation and less bureaucracy. Instead of fearing globalization, we should be realizing that the benefits of global markets have created millions of jobs right here at home. To try to turn back the clock to the protectionism of the past would be to put those people out of work.

Economic populism is stuck in the past. Technology has meant that heavy manufacturing is less crucial than it once was — materials technology means that automobiles can go 100,000 miles without a tuneup and washers can last for a decade rather than a few years. We all benefit from those advances, but they also mean that there’s less demand for manufactured goods. The old days when everyone worked for the same employer for life and had a guaranteed pension are long gone, and nothing we do can (or should) bring those days back.

Our economy is about skilled labor, services, and high technology. It requires more investment in education (which means educational reform, not throwing more money into the system), more economic literacy on the part of consumers, and an understanding that we’re part of a global economy and can’t engage in the kind of paleo-populism of decades past.

Ultimately, the concerns about the economy are largely psychological rather than economic. For all the talk about how things were so much better in the past, would anyone like to go back to the economy of the 1970s, the 1960s, or the 1950s? Would anyone care to engage in the protectionism of the 1920s which exacerbated and may even have provoked the Great Depression? Would we be better off if the poor quality vehicles being sold by GM were the only affordable cars for American workers?

The populists want to paint a dire picture of the US economy, but it doesn’t take much questioning to understand why their view just doesn’t work. We can’t turn back the clock, but we can face the realities of the future. Change can be a frightening thing, and it does produce winners or losers. However, we are the beneficiaries of years of technological and social advancement, and the rise in homeownership, the rise in workers with college education, and the fact that we’re all living longer and healthier lives are direct results of these changes. Populism serves to embrace the failed strategies of the past, while the solutions we need are solutions that acknowledge the changes of the future.

The Chinese Flu

The Dow plummeted today, following the mass selloff in the Shanghai markets. The Chinese markets, which have been growing at unsustainably high rates over the last few years are now beginning to see a restoration of economic equilibrium, which is sending shockwaves across the world financial markets.

I’ve argued before that the Chinese economy is not going to grow forever, and this may be an indication that the China bubble is bursting. The Chinese have some deep structural problems in their banking system that could make things even worse for them. The Chinese economy is in many ways similar to the Japanese economy before their major economic downturn.

In many ways, this is reminiscent of the October 27, 1999 “mini-crash” that also originated in selloffs in the Asian market and eventually spread to the rest of the world’s financial markets. Despite that crash, the US was largely unaffected and the US economy continued to do well. Hopefully this “mini-crash” will follow suit.

The fundamentals of the US economy are still solid, but this is another reason why policymakers can’t kill the goose that laid the golden egg. Things like tax hikes, protectionist measures, or increases to regulation all make the US economy more prone to international effects rather than less — and if that happens, it could mean that another downtown in the Chinese economy could have lasting harmful effects for the US economy.

More On The Minimum Wage

The Economist has a good piece on the realities of the minimum wage increase:

We have written a fair bit about the question of minimum wages over the last few months. It is probable that the minimum wage increase will not cost enough jobs to make its effects readily distinguishable from random economic variation. It is also probable that it will improve the lot of a few poor people, though not many, as fewer than 20% of those who earn the minimum wage live in poor households now. On the other hand, it also seems probable that much of any benefit that goes to poor families will come out of the pockets of other poor people—very probably even poorer people, such as convicts, who are currently barely hanging onto the fringes of the labour force.

The left wants to argue that the minimum wage is a transfer of assets from the rich (business owners) to the poor. The reality of the minimum wage is that it ends up being an asset transfer between poor people — or more likely an asset transfer between disadvantaged people and less disadvantaged people. Any increase in the marginal cost of labor tends to be felt most strongly at the bottom — if labor costs rise, businesses are less likely to hire workers who have a higher likelihood of producing less value for their costs. That means people who have families, less reliable access to transportation, or other personal problems. Single mothers, ex-convicts, people on drug treatment, all of those groups that are the most disadvantaged.

Increasing the minimum wage is pure political theater. All it does is assuage the guilt of wealthy white liberals while doing little to nothing to help people. In fact, it’s even a form of corporate welfare:

CEO’s who support higher minimum wages are not, as the media often casts them, renegade heros speaking truth to power because their inner moral voice bids them be silent no more. They are by and large, like Mr Sinegal, the heads of companies that pay well above the minimum wage. Forcing up the labour costs of their competitors, while simultaneously collecting good PR for “daring” to support a higher minimum, is a terrific business move. But it is not altruistic, nor does it make him a “maverick”. Costco’s biggest competitor, Wal-Mart, also supports a higher minimum wage, and for the same reason. Wal-Mart’s average wage is already above the new minimum; it will cost the company little, while possibly forcing mom-and-pop stores that compete with Wal-Mart out of business. This seems blindingly obvious to me. Though I don’t expect we’ll see “the minimum wage—it’s great for Wal-Mart!” in many Democratic campaign commercials.

In in all, raising the minimum wage has low societal costs — it won’t raise unemployment all that much. What it will do is impact the most vulnerable and benefit the least vulnerable. It won’t affect McDonald’s all that much, but it will affect the small-town cafe that can afford to pay its cooks $6.00/hour but not $7.25/hour. Big business doesn’t have much incentive to fight — why take the PR hit when most of them already pay more than the minimum. It’s the small fry that get the shaft.

Raising the minimum wage has nothing to do with poverty, or justice, or any of the other high-minded ideals that are used to justify it — not after rationally looking at what it really does. All this is about is pretending to care rather than actually doing something constructive — which seems to be enough for politicians and the American public. For those who actually need the most help, it isn’t enough and never will be.

Hat tip to Instapundit)

How The Unions Are Killing The American Auto

The Los Angeles Times notes that the Big Three automakers are trying to blame their woes on Japan rather than try and fix the problems which are making American automobiles non-competitive. As the piece notes:

The Big Three have hurt themselves with overly generous union contracts, including lavish health and retirement benefits and restrictive work rules; an overemphasis on light trucks and sport utility vehicles that have lost their appeal amid higher gasoline prices; and a lack of exciting new models. No appreciation of the yen will save the Big Three from competition against nonunion plants turning out stylish, dependable and fuel-efficient cars in the American heartland.

CNN has some interesting background on why Ford is hemorrhaging the equivalent of a new Ford Mustang every minute:

Other labor costs add to the bill. Contract issues like work rules, line relief and holiday pay amount to $630 per vehicle – costs that the Japanese don’t have. And paying UAW members for not working when plants are shut costs another $350 per vehicle.

Here’s one example of how knotty Detroit’s labor problem can be:

If an assembly plant with 3,000 workers has no dealer orders, it has two options. One is to close the plant for a week and not build any cars. Then the company still has to give the idled workers 95 percent of their take-home pay plus all benefits for not working. So a one-week shutdown costs $7.7 million or $1,545 for each vehicle it didn’t make.

If the company decides to go ahead and run the plant for a week without any dealer orders, it will have distressed merchandise on its hands. Then it has to sell the vehicles to daily rental companies like Hertz or Avis at discounts of $3,000 to $5,000 per vehicle, which creates a flood of used cars in three to six months and damages resale value. Or it can put the vehicles into storage and pay dealers up to $1,250 apiece to take them off its hands.

The Big Three are facing a “perfect storm” of factors — better quality competition, higher gas prices, poor labor management, and greedy and uncompromising unions. The massive losses at Ford can’t be blamed on anyone but the management and union leadership that have tried to preserve an unsustainable system. Union rules have made Big Three plants far less flexible that non-union shops, and skyrocketing labor costs add thousands of dollars in costs to each and every American car.

Sooner or later the system will collapse, and it appears that collapse has already begun. The union activists who demanded the moon and the executives who caved will end up both losing together — while the American workers who have jobs in the non-union plants in the South continue to make just as much as their counterparts in Detroit and have more job security thanks to a system of labor that doesn’t encourage workers to try to take everything they can get from their employers.

For all the talk about how unions protect the interests of American workers, the only ones who seem to be benefitting are the influential few who have been gaming the system to their advantage to decades.

UPDATE: Robert Kuttner argues that GM’s biggest problem is that they produce crappy cars. I won’t argue against that one, although I have a feeling that the reason that they produce such crappy cars is that they can’t hire enough good engineering talent because of the costs of their manufacturing labor. The Japanese automakers, despite having roughly equivalent labor costs, save so much on shop flexibility and healthcare costs that they can afford to reinvest in other areas. In some ways it’s a chicken and egg problem — which means that if the Big Three want to survive, they’re going to have to fix the whole system rather than just replace the management at the top.

Minimum Wage Increases Vs. The EITC In Povery Reduction

Greg Mankiw points out a CBO study showing the effects of a minimum wage increase versus expanding the EITC in reducing poverty. Unsurprisingly, the EITC increase does more to help people below the poverty line rather than an increase in the minimum wage. The CBO notes that only 15% of the amount added by a minimum-wage increase would go to people below the poverty line. In contrast, 60% of an EITC increase went to families below the poverty line. The study uses the figures for 2004 as a baseline to determine what the effects of each change would have been in that year.

36% of an increase in the minimum wage would have gone to families who make 300% more than the poverty line — most of whom are either secondary income earners or teenagers.

Trying to sell an increase in the minimum wage as an anti-poverty measure isn’t accurate. 85% of the increase will go to those who don’t need it. What we need to fight poverty are targeted solutions like expansions of the EITC or tax changes to make health savings accounts viable. Sadly, it’s much more politically expedient to just go with a minimum-wage increase rather than deal with the problems of poverty. After all, if we significantly reduced poverty, who would politicians use as backdrops for their constant efforts to expand the scope and intrusiveness of government?

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.