Friday, February 01, 2008

What's wrong with free trade? Everything!

"Free trade aint free!" - Nat-Wu

In this op-ed in the NY Times, economics professor Steven Landsburg attempts to explain to us why free trade is always good, even when it costs Americans their jobs.

All economists know that when American jobs are outsourced, Americans as a group are net winners. What we lose through lower wages is more than offset by what we gain through lower prices. In other words, the winners can more than afford to compensate the losers.
What, really? I don't think so. What he means by "Americans as a group are net winners" is that cheaper goods enable those Americans who don't lose their jobs or take wage hits to buy more crap. Sure, that's a tangible benefit to a lot of people. But it does cost Americans jobs and wages. Landsburg is aware of this of course, but he tells us that even those people should be grateful for globalization.

Even if you’ve just lost your job, there’s something fundamentally churlish about blaming the very phenomenon that’s elevated you above the subsistence level since the day you were born. If the world owes you compensation for enduring the downside of trade, what do you owe the world for enjoying the upside?
Global trade has existed as long as humans have lived in societies where people specialized in production. This is not necessarily a bad thing. It enabled people of one locale to gain access to commodities they could not produce. But no matter how large the scale, this is not the same as exporting part of your own economy. For example, before and during the rule of the Inca empire, the llama herders of the altiplano would trade llamas (a source of meat and hide) to the lowlanders for vegetables they couldn't grow. But this was an equal exchange of goods neither community could produce both of. The difference between this sort of "free" trade that has always existed and the free trade that Landsburg is advocating is that it didn't do any economic harm to either economy.

Let me back up a moment here though, and offer an insight into the thinking of economists like him who view globalization as 100% good. To them, the entire world is one business community. There are no separate national labor pools, the world is the labor pool. That's why to them any kind of protectionism smacks of "bullying" (he makes this comparison later on). Furthermore, these guys have no problem with unequal distribution of wealth. They generally subscribe to the idea that extreme wealth in the hands of the few is as good as prosperity in the hands of the many because when you total up all the assets of a nation, it equals the same thing.

To bring this back to my example of the Andean communities, there can be no stratification on such a scale. One man may be lucky and his herd grow larger than a neighbor's, but both are still producers in a nonzero-sum system; that is, one man's business doesn't rob from the other's. In a competitive economy where both men work for the same reward constrained by the same environmental factors, there can be no such inequality. This changes in a consumer-driven economy where wealth is already concentrated. If one man did own all the llamas, you can say it makes sense for him to employ the poorest men of the community so they can demand lower wages of him. But even in this case, these are men of the same community. It's not fair, but at least money stays in the local economy. What Landsburg is defending is the llama herder completely moving his operations out of the area and giving the jobs to foreigners who are poorer than dirt so he barely pays anything in wages. To him, as an economist, this makes sense because it increases profit (the sacred object of capitalism). In a sense, this is definitely thinking beyond borders, and even somewhat altruistic. There isn't any reason we should hold other men down and keep all the good jobs for ourselves. Or is there?

I didn't state this explicitly before, so here it is: this kind of global free trade that Landsburg lauds is nothing more than a scheme to pillage the lower classes of Americans and foreigners by the wealthy. Americans have their jobs ripped away from them and sent overseas for workers who make pennies on the dollar of the American worker. Americans see reduced prices for things they can barely afford with their depressed wages or government assistance (read Barbara Ehrenreich's Nickeled and Dimed for more on that). Sure it's great for the middle class (if they're not losing their jobs, that is), but it's hell on the poor. Those foreigners don't enjoy the benefits of reduced prices in their own countries either. They're getting paid in the same currency, and usually substantially less than we are. Guess who most of the profit goes to? Either the wealthy business owners of our country or the wealthy business owners of their country. That's the way it always is, you know.

Landsburg blithely makes the claim that this is good for us. Well, it sure is if you're a rich person. It's not so great if you're a working stiff.

Middle-aged men moving in with parents, wives taking two jobs, veteran workers taking overnight shifts at half their former pay, families moving West — these are signs of the turmoil and stresses emerging in the little towns and backwoods mobile homes of southeast Ohio, where dozens of factories and several coal mines have closed over the last decade, and small businesses are giving way to big-box retailers and fast-food outlets.

Here, where the northern swells of the Appalachians lap the southern fringe of the Rust Belt, thousands of people who long had tough but sustainable lives are being wrenched into the working poor.
I could forgive Landsburg for being thoughtless about how this system treats real people, but he did say "Even if you’ve just lost your job, there’s something fundamentally churlish about blaming the very phenomenon that’s elevated you above the subsistence level since the day you were born." What, it's churlish to be resentful that you got shafted by rich people so they could make even more money?

Now how about this other claim, that this process has "elevated you above the subsistence level since the day you were born"? Ridiculous. Plainly and utterly ridiculous. The best time in America's history for America's workers was when we were the ones producing the goods (after WWII up into the 60s); when our workers were getting paid (adjusted for inflation) the highest wages they've ever made. I hear it wasn't bad for the United State's Treasury either. The US had plenty of money to throw around because Americans were making money and paying taxes. America relied on other nations to supply us with things we couldn't make enough of in the first place, like feeding our voracious appetite for beef (we've always produced a lot of beef and still had to import more), but we produced our own cars, our own houses, our own food (even our own oil!) and a million other things. It's always better to produce what you can on your own, even if, from a corporate point of view it's a slimmer profit margin. Landsburg also ignores the real and tangible evidence of what globalization is doing to us: destroying our economy! People are losing jobs left and right as they're outsourced, low wage jobs are replacing the solid ones they had and there's a drain on government resources as we support more and more jobless people (who can't get a job no matter what they do). You know what I bet Landsburg's reaction would be? "Move to India." Yeah, brilliant. What's India going to do with 20 million Americans?

Again, to reinforce the point I've already made, this is a scam! What happens to those profits the corporations pocket from the difference in wages between American workers and foreigners? Well they go to the shareholders, most of whom are not your granny but rather people (or other corporations) who own millions of dollars worth of stock already. What's so great about that, Landsburg?

Now I've already refuted this point, but just to make it clear, here Landsburg tries to equate trade specialization in local economies with global free trade:

I doubt there’s a human being on earth who hasn’t benefited from the opportunity to trade freely with his neighbors. Imagine what your life would be like if you had to grow your own food, make your own clothes and rely on your grandmother’s home remedies for health care. Access to a trained physician might reduce the demand for grandma’s home remedies, but — especially at her age — she’s still got plenty of reason to be thankful for having a doctor.
If this is the best you can do, Landsburg, then you need to rethink your career. What he ignores, avoids, or just plain doesn't know, is that the effect on the local economy of specialization is that people are allowed to be more productive overall, increasing the level of wealth thoughout the local economy as a whole. That's a closed system. Sure, you can also make it into a global system by specializing in many items and trading those with your neighbors (per the examples I gave above). But that's the exact same function on a larger scale. There's no internal decrease of wealth and as a matter of fact there should be a large internal increase of wealth using this system. Yes, workers in one closed system can demand higher wages to make their products than workers in another closed system. But that doesn't result in any cost imbalance. For workers inside one system, if products that come out of another system are cheaper they can increase their own personal net wealth by having to spend less. But only if they're guaranteed the kind of wages they can demand inside their own closed system. Theoretically, if all internal economies were truly free and laborers could bargain inside any closed system with the capital owners, all laborers inside all closed systems could demand higher wages and get them.

Furthermore, a rather obvious law (which Henry Ford used to his own advantage) is that the more you pay people the more they can buy. It may also work to a certain extent in reverse, that is the cheaper the good the more they can buy, thus enabling you to lower wages, but the fact of the matter is that there are absolute fixed costs you cannot lower. You can't make milk cost 29c a gallon again. You can't make gas cost 35c a gallon again, and that makes a ton of difference! There is an absolute floor to wages, no matter what Landsburg (and Wal-Mart execs) wants to think. That's why the US government designates a federal poverty level.

If you take two closed economies and open them up so that they can trade components, obviously the business owner who pays his workers more will seek to shift his business to the economy where they get paid less. This may create more jobs for those people, theoretically raising their wages (but not in practice, at least not to the extent economists claim should happen). What happens is you've impoverished one economy without enriching the other. There is no good here. There is no upside for the worker. All that extra money remains in the hands of the owner. The factor that keeps this going is that for a while most of the first economy will remain intact, thus providing the illusion that this is a winning strategy. Until the economy crashes, that is.

I'm not going to bother demolishing all his examples as it shouldn't be necessary for me to spell out why they're all wrong after I've given you this much ammunition for yourself to use on such arguments. I leave you with this: the number one factor of the current recession is the shrinkage of American wages which has been occurring since the 70s. Landsburg's global free trade only exacerbates the problem, and if that's somehow helping Americans, I fail to see it.


Xanthippas said...

But Nat-Wu, don't you understand that when the rich accumulate this vast wealth, it trickles down to those workers who build yachts, or to servants, or to immigrants who mow lawns, who then turn around and buy products at Wal-Mart which then sends the money to China? Wait...

Nat-Wu said...


Anonymous said...

We are "now a service based economy" ,The problem is service jobs dont pay poow!! Whoahh to "protectionism".From a moderate Conservative who desdains the Neo-wealthy pagans of the Bush white house!!