[Jon Henke]
Free trade is a difficult concept for politicians to advocate, in large part because of the concentrated costs/dispersed benefits problem. While comparative advantage and competition can be exlained, there's a long-standing maxim in politics: if you're explaining, you're losing. But today's Wall Street Journal - in a story with the great title, "Change You'll Have to Pay For" - makes a point that should be emphasized much more often in the trade debate.
Here's one "change" presidential candidate Barack Obama apparently believes in: higher prices. Witness his letter last week urging President George W. Bush not to submit the U.S.-South Korea free-trade agreement to Congress for ratification. Mr. Obama's objection, as stated in his letter, is that the deal "would give Korean exports essentially unfettered access to the U.S. market and would eliminate our best opportunity for obtaining genuinely reciprocal market access in one of the world's largest economies." In other words, ordinary American consumers would get too good a deal.For an idea of how good, look at automobiles, about which Mr. Obama professes particular concern. The free-trade agreement would eliminate America's 2.5% tariff on most Korean car imports. Even better, it would phase out the 25% tariff on pick-ups and light trucks. Overall, the Korean trade deal would boost the U.S. economy by $10 billion to $12 billion. Mr. Obama thinks this benefit to U.S. consumers isn't worth the risk that South Korea might not live up to its promise to eliminate its own 8% tariff on U.S. autos and cut its bewildering array of nontariff barriers, such as arcane safety standards. This despite the fact that the deal includes enforcement provisions if Korea backtracks.
Obama is offering a subsidy to Unions, paid for by higher consumer prices. Needless to say, Obama is supported by quite a few powerful Unions...whose election-year financial and mobilization support is essentially crucial to Democratic Party success. Incidentally, as the WSJ points out, Obama "inserted a statement opposing the Korean trade deal into the Congressional record only days before securing the endorsement of the powerful Teamsters union."
But only a small percentage of the US labor force is unionized - meanwhile, 100% of the US labor force are also consumers. That Obama endorsement was awfully expensive for you and me.
That's a point we should make more often. As McQ once wrote, Unions are opposed to free trade because their "priority isn't the consumer." Their priority is maintaining their own advantage, and "if the consumers suffer because of that, well, you know - tough."
It's difficult for politicians to make that case because it requires a bit of explanation, but pro-trade advocates and politicians should do more to emphasize these two points:
(1) Opposition to free trade is opposition to consumers.
(2) Opposition to free trade is opposition to freedom.
(3) Free trade is the world's greatest anti-poverty program - both abroad (where it lifts people out of desperate, wretched poverty) and at home (where benefits mostly accrue to average Americans) - and some of its greatest foes are the relatively wealthy benefactors of the Democratic Party....which purports to be deeply concerned with poverty and consumers. Until it jeopardizes their own wealthy contributors.
I recently read something about support for free trade in 19th Century Britain. Apparently, British exporters noticed that they could not sell anything to non-Brits unless the foreigners could pay for it.
Which they could not do unless they were able to sell something to people in Britain. So import tariffs were abolished to help British export industries.
Some of the benefits were concentrated. On the country’s most efficient industries at that (the ones in which Britain had a comparative advantage).
It occurs to me that the same argument should hold for a country today.
Buy American, and cripple Americas most efficient industries!
Unless you are an Evil Foreigner, in which case:
Buy American, and benefit your own country’s most efficient industries!
The proof is already in that George Bush supports higher prices. Much higher. Of course, the WSJ would never mention that.
It also appears that, free trade aside, we'll be paying more for energy as well as anything else that was manufactured with carbon as an output. It doesn't matter if it's McCain or Obama. It doesn't matter if it's a cap-and-trade plan or a carbon tax.
Unions are opposed to free trade because their "priority isn't the consumer." Their priority is maintaining their own advantage, and "if the consumers suffer because of that, well, you know - tough."
1) Why *shouldn't* the unions champion their own well-being?
2) Aren't consumers opposed to trade barriers because their "priority isn't the worker"? Their priority is maintaining their own advantage, and "if laborers suffer because of that, well, you know - tough."
If I go down your train of thought, it's hard for me to justify saying, "I will put you out of a job to save myself $0.30 on [product]."
pro-trade advocates ... should do more to emphasize these two points
We should also emphasize our two chief weapons: fear, surprise, and ruthless efficiency.
The argument that cheap imports benefit low income people more is a classic example of your accepting any argument put out by right wing think tanks argument without a second thought.
If you have a low to moderate income fo $35,000 a year and spend 15% of your income on imported goods you are spending $4,500 a year.
If you have a middle class income of $60,000 a year and spend 10% of your income on low price imports you spend $6,000 a year.
If you have an upper income of $100,000 a year and spend 5% of your income on low cost imports you spend $5,000. annually.
Your thesis is that the person spending $4,500
get a greater benefit from low cost imports then the person spending $5,000. Yes the low figure is a larger share of the lower income individuals consumption, but they are still receiving a smaller benefit then the upper income individual spending only 5% of their income on low cost imports.
You are arguing that $4,500 is greater than $5,000.
Why should anyone take this argument seriously?
Remember when you look at retail sales-- the main place low cost imports show up -- the top 40% of the income demographics account for 60% of total retail sales.
Obviously we should block the sun because hurts candle makers.
Same arguments, different year...
http://www.econlib.org/library/Bastiat/basSoph.html
Presumably Spencer would argue that higher food prices hurt the rich more than the poor because, after all, they spend more on food.
of course unions are not loyal to comsumers. unions are nothing more than workers organized collectively. the chief goal of a union is to improve the lives of working people, not to make sure consumers can buy more shit they don't need at cheaper prices.
the 10 to 12 billion dollars in economic input by a Korean trade agreement is 10 to 12 billion that will benefit very very few Americans.
what obama is doing is not scratching the back of unions, he's watching the back of the american people. regular american people.
Actually, "the chief goal of a union" is not "to improve the lives of working people", but to improve the lives of members of that particular union. No matter how hard-working they are, workers who belong to other unions or to no union at all can all go to Hell, as long as members of the one union can "buy more shit they don't need", even at the higher prices that they can now afford but no one else can.
Dr Weevil is clearly the lesser of two.
the role of my union for instance is to improve the lives of all healthcare workers in california, union or not. we do this by dedicated a large percentage of our dues to helping not yet union workers organize and by raising industry standards for all workers.
certainly part of our role as an organized body is to organize ourselves not to buy shit we don't need even if that means a period of reduction in work and wages for our brothers and sisters in the auto industry.
2) Aren't consumers opposed to trade barriers because their "priority isn't the worker"? Their priority is maintaining their own advantage, and "if laborers suffer because of that, well, you know - tough."
The difference is that unions want to use the strong arm of the government to coerce consumers into paying inflated prices (for the benefit of union members and at the expense of consumers).
Consumers, on the other hand, don't want the government to coerce anybody to do anything -- they just want to be left alone to carry out commerce in peace.
It's perfectly fair for union members (or anybody) to try to negotiate as high a salary as they can. But it is not fair for any person or group (or corporation) to raise their income by using government coercion to limit competition.
I'm of a mixed mind on trade issues.
On the plus side, goods cost less and so I can get more stuff.
On the minus side, increased competition leads to lower wages so I have less money to get stuff.
I lean towards trade overall because I believe that it improves an economy by increasing the productivity and creativity demands needed to match the competition.
ad-- is that the best you can do?
Having studied the history of the automotive industry, from the conflicts that have cornered the market in oil (the House of Saud) to the overt government style welfare that has emerged to build roads...etc., it is very difficult for me to understand how anyone can assert the existence of "free market" in this particular industry.
I would agree with you that opposition to the freemarket is opposition to consumers, but where in the history of the automotive industry do you find a free market indicator (except in the very early stages of it).
Within the history of the automotive industry, I can find corporatism, non-freemarket capitalization, and any number of market related concepts, but I can find little evidence of the presence of "a" free market.
So, it what you suggest would do little good, as it is blatantly false as a premise from the very building blocks of the argument.
unions cannot coerce the government or consumers to pay inflated prices. if consumers wise up and stop buying gaz guzzling suv's no one can do anything but build smaller cheaper cars.
and union cars are not really more expensive that non union cars. take the toyota corolla, union made by uwa members in america. competitive, and efficient. great car, union made. we need more of these and less ford f-150's.
spencer:
You made a good start on the analysis, but you didn't finish it.
Say a hypothetical non-free trade regime increases costs on imported goods by 10%. This increases the low income family's cost by an extra $450, or 1.3% of their yearly income. The middle class family's costs increase $600, or 1% of their yearly income. The upper income family's costs increase $500, or .5% of their yearly income. Using the numbers from your hypothetical, the lowest income family is the one most harmed (on a percentage basis) by increasing the most harm from trade restrictions. Alternatively phrased, the low-income family receives the most benefit from free trade.
Furthermore, if the low-income family's income comes from service-based employment (as I believe the majority of US workers do), the trade restrictions don't even benefit them on the employment side of the ledger.
But as your hypothetical concedes, all of the families are benefiting from the low-cost imported goods. Even if the upper income family did receive a greater benefit, how does that justify harming the lower income family? Is your desire to punish the well-off so strong that it doesn't matter that it harms everyone else too?
Can you better explain what you see to be the positive aspects of trade restrictions? I understand your argument to be that low-cost imports are pareto-optimal, but since the well-off derive more benefit (albeit not on a percentage basis), it's worth changing in order to punish the well-off. Spite and envy can't be your argument; what am I missing?
Consumers, on the other hand, don't want the government to coerce anybody to do anything -- they just want to be left alone to carry out commerce in peace.
I think most people would approve of government coercion if they think it's going to benefit them and/or hurt people they don't like.
But it is not fair for any person or group (or corporation) to raise their income by using government coercion to limit competition.
And everything that happens when the government isn't involved is fair by definition, eh?
Furthermore, if the low-income family's income comes from service-based employment (as I believe the majority of US workers do)...
If you ignore non service jobs, then you've already decided that jobs that depend on exports or that are lost because of imports don't matter.
...the trade restrictions don't even benefit them on the employment side of the ledger.
Having your costs increase by 5%, or 10%, or 15% isn't in the same league as losing 100% of your income by losing your job. It's easy to justify anything as long as all of the benefits accrue to you and all of the drawbacks accrue to other people.
It's easy to justify anything as long as all of the benefits accrue to you and all of the drawbacks accrue to other people.
Absolutely. See "trade unions" for further examples.
FWIW, I didn't actually state my opinion on the matter - I was only pointing out that spencer's hypothetical doesn't (remotely) prove what he set out to prove.
As a general rule, I support free trade, but I could be convinced to support trade restrictions in some circumstances. As Lawrence points out, a true "free market" is a pretty rare commodity, and I'd be willing to pay more for some stuff if it meant keeping some of my fellow citizens gainfully employed. If forced to choose (and I believe we are), I'd rather subsidize our domestic employment and industrial base than China's. It's not economically optimal in the short run, but I think it's in our long-term national interest to do so.
I don't see any harm (only mutual benefit) in free trade with Colombia, though.
100 years ago (or so), around 40% of our employed workforce worked in agriculture. Today that number is 3-4%. Why? Are we worse off because of it? Those people are working in all sorts of fields that make our lives better - technology, medicine, pharmaceuticals, telecom, etc. What would be the result if we went back in time and told Teddy R that ag employment would fall so much? I'm sure some protective legislation that ensured that farmers would keep their jobs would have been the Congressional response. Our lives would assuredly be worse. As we imported food from other countries and developed better technologies that increased crop yields, we needed fewer workers to grow the food we needed. Yes, it was hard on the farmers that lost their jobs, but the kids of those farmers knew they couldn't count on the farm for a living, so they went to school instead.
We don't need overactive governments pandering to special interests (unions, farmers, etc) to get elected and trying to pick winners and losers for us. We need government to stay out of the way so we can make the decisions ourselves. Someone already metioned it, but we've rarely, if ever, had a true free market economy in the US. The government always finds ways to subsidize this group, penalize that group, or otherwise protect another group. We need to get over the romantic idea that elected officials have a higher ideal than ourselves and can see things we can't and have as their overriding goal to serve us. The system is set up in a way that has aligned their incentives with gaining power and keeping that power through re-election.
My impression of unions is that they set up rules for a feudal system. In practice this tends to end up being a sort of set of rules for the relationship of the Marquis de Sade and his girl friends. This can be fun in its way but does lead to production ineffeciencies.
The issue with free trade is that it calls for unequal sacrifice. Ideally some fraction of the benefit to the whole would be directed to those who have lost out in economic competition.
Two other thoughts.
First, I don't buy the argument that we should buy from Americans because it's in the national interest. The only real interest I have is to put food on my family's table, clothe my children and put a roof over their heads, and generally do the best for me and my family I can, all the while being as honest and ethical as I can. I don't have a problem with anyone else doing the same thing, no matter where they live or how they choose to do it, as long as they don't impede my ability to do the same. Tariffs, subsidies, protective regulation, etc prevents all of us who are impacted from doing that.
Second, I take issue with the idea that free trade alone "calls for unequal sacrifice". Forcing me to sacrifice by paying more for what I buy so someone else doesn't have to take a lower paying job or improve their skillset to get an equal paying job is no different. Actually, they are different - free trade lets people choose while other policies don't.
of course unions are not loyal to comsumers. unions are nothing more than workers organized collectively. the chief goal of a union is to improve the lives of working people, not to make sure consumers can buy more shit they don't need at cheaper prices.
the 10 to 12 billion dollars in economic input by a Korean trade agreement is 10 to 12 billion that will benefit very very few Americans.
what obama is doing is not scratching the back of unions, he's watching the back of the american people. regular american people.
What you meant to say was that the goal of a union is to improve the lives of union members, and if you really wanted to be specific, at the expense of everyone else.
I'm sure the other ~299,999,999 Americans appreciate your judgment that they don't need the "shit" they buy. I mean, when I think about freedom, and what it means to be an American, "having other people tell me what I need" is definitely at the top of my list, wouldn't you agree?
Finally, I would bet you $5 that each and every American who buys something at retail in say, the next year, will buy something made in South Korea, and thus will benefit from part of that 10 to 12 billion. I think that beats out the number of union members that would be harmed by a good 3 or 4 orders of magnitude.
Jon writes: "Obama is offering a subsidy to Unions, paid for by higher consumer prices."
This is a VERY striking summary of an extended quotation in which the word "union" NEVER APPEARS! That seems to me a pretty big flaw in your analysis.
What's more, it seems to me that one can make a reasonable case, based on economic theory, that American consumers have actually been getting too good a deal. Wouldn't that be a pretty straightforward interpretation of a negative savings rate? Prices too low, consumption too high.
If Chrysler goes out of business at least marginally because of Korean competition and my job doesn't, the workers at Chrysler are out of jobs and we both get to pay lower prices for cars. To get there, there was 'unequal sacrifice' to the effects of the international marketplace which is why the Unions and Obama, their representative, take the position they do.
Again, if I have to pay higher for similar cars because Obama decides to protect Chrysler workers from losing their jobs and taking a lower-paying job somewhere else, that too is unequal sacrifice. Why must government interfere to force me to sacrifice so the guys at Chrysler don't have to?
Free Market only works when all participants enjoy the same economical standings. Otherwise all the jobs flow to the suppliers with the lowest paid workforce, where such jobs are supported by international corporations. So, while SK autos may be cheaper to buy in the US, the consumers have far less money to do so because their jobs all disappeared.
Also, the Union argument, same in my mind as the stockholder's bottom line argument from public corps, never seems to acknowledge that the demographics of their membership overlap the demographics of the customers, i.e. union members - and stockholders - are also consumers.
The US is rapidly becoming a country with only service indistry jobs. A self-defeating proposition, since we need wealth-producing work to support the service industry and those jobs are rapidly being exported.
"the role of my union for instance is to improve the lives of all healthcare workers in california, union or not. we do this by dedicated a large percentage of our dues to helping not yet union workers organize and by raising industry standards for all workers."
In other words, you dedicate a large percentage of your dues to pressuring others to join your union. And your goal is to drive up healthcare costs, not to make sure consumers can buy as much healthcare as they think they need.
No wonder you're so dismissive of people being able to afford what they want! Does someone really need a hip replacement when they only have 5 to 10, or maybe 15, years left anyway? Isn't it more important that your union members get money for a larger TV or a nicer car?
Like it nor, free trade is a political loser for the moment, and probably for quite some time. About the best advocates can hope for is that it doesn't become an issue in the election, because it's a no-win for several reasons.
There are valid arguments in its favor, but they don't really _matter_ at this point. Also, there's the core policy question of whether we should be encouraging greater economic and industrial interconnectivity in a world that remains (and will remain for some time to come) divided into politically sovereign nations. Something can be in the economic interest of the consumer and still be a bad idea in terms of national interest.
For example, the armed services are concerned about the fact that so many components of key weapon systems are imported now, they're worried about 'back doors' and supply issues and the problem of information security.
For a concrete example of this problem, consider 911: when the borders shut, a number of just-in-time supply chains broke. A globally integrated economy may well be more efficient, and raise people out of poverty better than any other approach, _but is it in our national interest_?
Put another way, what happens if a _big_ war breaks out, cutting right across these integrated economic networks? It could well happen. The world is getting less and less stable even as the global economy is interconnecting more and more.
At the very least, this needs more consideration than its been getting.
"A globally integrated economy may well be more efficient, and raise people out of poverty better than any other approach, _but is it in our national interest_?"
Yes. One: Trade improves our standard of living. Two: Countries that benefit from trading with each other are less likely to go to war against each other.
"For example, the armed services are concerned about the fact that so many components of key weapon systems are imported now, they're worried about 'back doors' and supply issues and the problem of information security."
There always has to be balance. The back doors you're talking about are small by nature (less they be easily detected). The weapon systems won't be totally disabled by them. We're pretty good at figuring out ways to kill people and blow things up even if we have to develop "work arounds" for hardware/software problems. For example, if a radio isn't properly encrypting messages, the aircrew can carry out their mission under radio silence.
Spending too much hurts us militarily as well. If we spend our defense money on the wrong type of weapon system now (even if it's 100% US and not compromised, it still may be the wrong tool for the task at hand), we'll have less money "in reserve" for directed spending toward whatever task we're trying to accomplish when the time comes.
Lastly, even if we decided to source all of our military equipment from US suppliers, that doesn't mean we shouldn't open trade for normal consumer goods like sugar and cars.
No wonder you're so dismissive of people being able to afford what they want! Does someone really need a hip replacement when they only have 5 to 10, or maybe 15, years left anyway? Isn't it more important that your union members get money for a larger TV or a nicer car?
And if you got the same result and the unions and their government backers weren't involved, then you would have no complaints, right?
If you want hip replacements for anyone who wants it before anybody else gets a new car, how are you planning on bringing that about? I gaurantee you the free market won't do it.
'Yes. One: Trade improves our standard of living. Two: Countries that benefit from trading with each other are less likely to go to war against each other.'-- Nelson
The evidence of history does not support this contention. It might be true, but it can't be demonstrated.
For example, the West's economy, esp. in Europe, was fast becoming very interconnected in the 19th century, borders were economically permeable and the argument was made then that this made war less likely, almost right up to August 1914.
'"For example, the armed services are concerned about the fact that so many components of key weapon systems are imported now, they're worried about 'back doors' and supply issues and the problem of information security."
There always has to be balance. The back doors you're talking about are small by nature (less they be easily detected). The weapon systems won't be totally disabled by them.' -- Nelson
This too is more-or-less unproven and unprovable. In fact, the back doors they're worried about come in many varieties, ranging from software code that sits idle until the trigger conditions are met, to blocks of circuitry in integrated circuits that don't do anything until the trigger is met.
Testing for and finding these hidden booby-traps is _hard_, there are DARPA projects going on right now seeking ways to do it. It's made the harder by the fact that many chips and components have masses of unused circuitry (for a particular application).
If a common chip got used in an entire run of a given SAM, for ex, or a given radar system, or a communications descrambler, and it only _slightly_ degraded performance, that could prove to be disastrous in the event. _Little_ problems can be catastrophic.
I'm not saying that free trade is bad, I'm saying it hasn't been properly looked at and considered from the point of view national security and inevitable war. (And yes, wars are inevitable sooner or later.)
Jeff-
Even granting your counterpoints, that still leaves 2 arguments in favor of free trade:
1. Trade increases our standard of living
2. Even barring military trade, we should still have consumer trade.
And I'll add:
3. Trade is a great way to spread our influence (aka soft power)
4. Trade makes people in the *other* country better off. We should, according to common decency, wish good fortune for our fellow humans.
Also, over time, working and trading with other countries makes us better off in ways beyond the initial goods and/or services traded. For example, the rise of industry in Japan and South Korea has indirectly brought us all kinds of cool things, including fuel efficient cars, inexpensive computers and fun video game systems.
Hutch, like the blogger said, it's a 'concentrated costs/dispersed benefits' problem. "Forcing me to sacrifice by paying more for what I buy so someone else doesn't have to take a lower paying job or improve their skillset to get an equal paying job is no different." Well, actually it is, you get only a small economic 'dipersed benefit' by the lower car cost but the Chrysler worker feels the 'concentrated cost' in losing his job.
Jobs aren't "lost" they just change over time.
'Jobs aren't "lost" they just change over time.' -- Probably true, but not very useful politically.
Part of the problem from the POV of defenders of free trade is simply that a lot of the opposition to it is _visceral_. Regardless of the reational pro and con positions, many people look at free trade and see Americans unemployed and Outsiders gaining. They see economic trends they hate and the only question they have for politicans is "How are you gong to make thsi stop?" And they conflate this with other issues.
For example, to many people, being against free trade and against permeable, porous borders are the same issue, and free trade generates the same rage in them that the unguarded border does. I've heard anti-free trade people, not advocates but ordinary people in everyday life seriously use the word 'traitor' to describe politicians who advocate free trade. That's how strong the emotions run.
You can't argue someone out of a position by use of logic, if they didn't arrive at that position by means of logic.
Jobs aren't "lost" they just change over time.
DNA isn't lost either; it just changes over time. However along the way there have been many angry dinosaurs, not too mention saber tooth tigers. Now you will never make these 'folks' happy with change but you might make them more comfortable which compensates them for acceding to change for the greater good and lessens the likelihood that their allies will put our economy in dinosaur mode.