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Were the Mercantilists Right After All?
An imaginary seaport with a transposed Villa Medici, painted by Claude Lorrain around 1637, at the height of mercantilism.
I have found my views on free trade “evolving” over the past year or so. The Red Fish of 2010 or so would have happily provided a lengthy dissertation on the benefits of NAFTA and free trade to any group who wanted to listen. Or didn’t want to listen. 2010 Red Fish was like that.
I read this morning over at The Federalist an interesting piece detailing the way many Republican Party candidates no longer support free trade. Why is a base that went ballistic a year ago over the attempt to force the Ex-Im Bank back into existence now ready to back candidates who don’t support free trade? And more importantly (to me), why am I starting to agree with them? It’s 2016 now, and Blue Fish is starting to make sense to me.
I used to hear more from Mickey Kaus in the Ricochet podcasts, particularly when he was so dead set against immigration for economic reasons. He would always tie that back to how NAFTA and other free trade agreements hurt working class people. In response, Rob and Peter would talk about how free trade lifts all boats, provides new types of jobs and new industries, and results in a net positive economic effect. I still believe that’s true.
But what I am now having a hard time reconciling, particularly as I watch Trump do what he does, is that the benefits of free trade, which are near-impossible to identify in individual lives, don’t seem to compare very well to the very real impact that free trade has on specific people who lose their jobs and see negative pressure on their wages. If we make that argument about immigration, why shouldn’t we make that argument about free trade? One is shipping the job overseas, and the other is importing the employee. But it’s the same effect on the American who lost his job or took a pay cut, no?
Okay, so goods are cheaper. But what does that mean to someone without a job? Again, a benefit that is generally available (cheaper goods in the market) and a specific harm (an employee who lost his job).
The new information (to me at least) that’s weighing heavily on my mind is a better understanding of how the rest of the world is manipulating markets, providing subsidies, setting up barriers, etc., to limit our access to their markets or pull our businesses away. Yes, Boeing is in fact moving a plant overseas because the Ex-Im Bank is no longer giving them what they did previously. In the real world, where dismantling the Ex-Im Bank means Boeing planes are moved to factories overseas, isn’t subsidizing Boeing a good way to spend taxpayer money? It’s better than endless unemployment insurance and welfare, right?
Is it right to disarm mercantilist protections in a world where we’re the only ones really doing that? Why aren’t we protecting those workers from foreign competition?
Ricochetti — explain to Blue Fish why he is just wrong on this.
Published in Economics, Foreign Policy, General
Also, how do you deal with the Ex-Im Bank scenario, where without it, other countries lure away American business with goodies while we unilaterally disarm?
As an American, I really do not want our workers and businesses at a disadvantage in that way. As a conservative, I am angry that the politicians keep sending goodies to the Americans that they like off of my dime.
Yes.
Currency manipulation only gets you so far, and it wasn’t done to hurt us so much as stop internal bleeding. Sure, afterward China can import less for a while, and export more for a while, but the internal trade-offs are painful. In other words, they are not exactly recouping from us.
Trump is playing the nativist populist here, but he really knows that we benefit greatly from China. He also knows that China is itself getting scuttled by other nations who can undercut them.
I don’t know that it is free trade so much as offshoring that directly hurts American workers. Maybe they go hand in hand.
When I worked for GE Financial in my misspent youth, I worked on a team that handled new annuity applications. We “scrubbed” the apps looking for errors that would invalidate them, entered “clean” apps into the system, followed up with broker/agents and financial institutions transferring funds, sent out the contracts, and processed payments. All of that was done in-house in one building. The team had a mix of people from young college grads just starting out to older professional people nearing retirement. We had specialized training provided by the company on how to deal with various states’ and federal tax compliance to ensure the right forms were used and that both we and the customers were in compliance.
After about six months, our manager informed us they were going to start imaging the paperwork and sending it to India. We would still be scrubbing the apps and doing the follow-up work on the phones, but the data entry was going to be done in India at night, our time. This sent up a red flag to me because it seemed like the first step towards our jobs going overseas.
They started off with just a percentage of the apps going over, and it soon was apparent that there were a lot more processing/data entry errors coming from India than from the domestic office. Simple things like place names that were slightly illegible on the app that an American could figure out but had no meaning to a foreigner. We had one agent who would abbreviate MPLS for Minneapolis but expected the city name to be spelled out on the contract. We tried to game the system by doing the entry faster ourselves before they could send them overseas, but we were told to stop because India was complaining they had too little work. We began getting calls from the broker/agents yelling at us about the number of errors, but we weren’t allowed to explain it wasn’t us doing the processing anymore. Morale plummeted. No one likes getting harangued for someone else’s mistakes all day.
We had a meeting with our manager and begged her to let us do the processing, but she claimed this was a cost savings for us. I had had enough so I walked to the white board while she was talking and wrote two simple math equations. When she stopped talking, I told her, “You are paying everyone in this room collectively X. If you are paying the entire India operation 1 cent, it is mathematically impossible you are saving money. X + anything is more than X.” She hemmed and hawed about savings some more, and that was the end of the meeting. I started looking for another job in the company that day.
About a year on, the manager was fired and the supervisor abruptly took a new job with another department. A week later, the entire new business department was let go without warning. Clearly the supervisor had gotten word and covered his own rear, but his department was blindsided. I saw this behavior repeat itself at the low-skill/entry level segment of the business over a decade working there. I found out later that GE had made an arrangement with Tata over in India that if GE would hire data entry personnel from Tata, Tata would hire some technical staff from GE. So GE did make money on the deal, but the domestic workers did not benefit from this.
The end result was the top level of GE made a killing. The grunts were left high and dry looking for work. Any new jobs created here were more technical in nature and not jobs the people laid off were qualified for so it is not a given that new jobs created means old employees are filling them. The Financial division ended up being a failure, and GE spun it off into what is now Genworth. Genworth has suffered massive losses and layoffs over the last few years, and their CEO at one point was ranked the worst in America by Forbes. Of the 25 people on my team, two are still working for Genworth 20 years later.
I see this repeated now in the steel fab industry that I work in. And I hear the lie repeated that there are jobs Americans won’t do. I find what is more accurate is there are jobs Americans won’t do for the wages companies would prefer to pay Third World immigrants they’re trying to have imported in. The workers on the floor that I encounter are by and large conscientious and take pride in their work. They are not highly educated, but they are proficient at what they do. They’re willing to work hard for honest pay. They are not benefiting from cheaper goods or corporate profits when their factory is packed up and sent to Canada or their office is shut down and offshored to India.
Ex-Im is a prime example of rampant cronyism. The notion that other countries lure away “our” businesses is nothing more than propaganda from people who want their payola. The real reasons businesses leave have a lot more to do with our criminally stupid tax laws (high taxes, taxes on repatriated foreign earnings, taxes on income earned and already taxed abroad), insanely stupid labor laws (minimum wage laws that are themselves really just more subsidies), and the high regulatory costs (and years of legal hurdles) for opening any large scale manufacturing operations here.
http://www.lmgtfy.com/?q=benefits+of+unilateral+trade+liberalization
Everyone can see what is happening in China right now, right? Their currency manipulation isn’t getting them very far. The buck eventually has to stop somewhere.
Also, take a look at Japan, one of the most famously protectionist regimes in the world. All of these current fears are just a repeat of the 80s and Japan. What has happened since? A two, going on three, decade long recession for Japan.
Unfettered immigration is a different issue from free trade. It is also, sad to say, another example rampant cronyism. It is still getting the government to put its thumb on the scales.
And China is starting to look rather shakey.
Agreed, but you don’t need to import the workers if you can just send the jobs where they are instead. That has direct costs to domestic workers when two countries are at different levels of economic and industrial development. Low-skill work will always be cheaper in the less developed country. It’s essentially their comparative advantage.
That is all well and good at a macro level. But it has adverse consequences for the unskilled worker in a highly developed nation. It is unreasonable to expect that worker to move to a lesser developed nation to find work. The financial costs, the cultural differences, distance from family, legal barriers, different political systems and freedoms all preclude that from being realistic or pragmatic. Not every worker can simply move where new jobs are being created, and to be blunt, not every worker has the intellectual capacity to be trained to do any job. Those who are best inclined toward mechanical proficiency or physical labor are left structurally unemployed and are demonstrably worse off from the increasingly technical sophistication of the economy.
Is that a local, state, or federal problem? Debatable, but we do a disservice in making the argument for free trade while neglecting to acknowledge the real costs it imposes for swathes of society. It also increases resentment and hostility among that segment and makes them less likely to listen to our proposals on other topics or to vote for our candidates.
Part of solving this problem, though, is to drop the minimum wage here, and cut back on the myriad of weird labor and wage laws we have. Every time we jack up the minimum wage (a form of price support / subsidy, which we all agree is destructive in every other type of commodity), we knock away the rungs of self support for those who need it most.
All of them. We have federal wage and labor laws, state wage and labor laws, and now Seattle and SanFran are distorting the labor market still further.
Artificially raising price floors, no matter the market or product, lowers demand while increasing supply (unemployment in this case).
The local and state laws are less of a problem due to freedom of movement of the labor force within the US.
Amen, brother. I was talking to a friend who is a chef for a catering service around the time Obamacare was passed, and he told me they had more work than they could handle. The company chose to burn out their existing employees by assigning more and more work to them even resorting to mandatory overtime because it was cheaper to do that than to hire a new worker because of all the costs imposed by government to hire a new worker. It is a perverse policy, indeed, that parades itself as a boon to the low-skilled while directly costing low-skilled job opportunities.
That’s true. Where the problem in the US comes in is the assumption by many economists that people will just up and move where the jobs are. There are a number of reasons why this isn’t the case. If I have a mortgage and lose my job, I can’t just up and move to go get a new one. I have to have someone else willing to buy my old house, or I have to be willing to take on more debt. If I have family obligations, let’s say an aging parent who requires assistance, that may be another reason I’m reluctant to move. I have had friends in both of these situations, and the costs imposed on them from losing a job put them through the wringer.
I had another friend who had spent several years bouncing around low-skill jobs trying to raise six kids. When the bills got too high, he left his family here and moved to work on the Bakken Formation in ND. The pay was good, but his marriage fell apart. If you asked him today if gaining financial solvency at the cost of wrecking his family was worth it, he’d tell you no. Too often we focus only the financial pluses and minuses when we evaluate trade, and we ignore the human and social side.
Economics is all about tradeoffs. Economists recognize all the things you mention and if people are unwilling to make those hard choices then they bear the consequences. It sounds harsh but its the way the world works.
My God. Their currency manipulation and other policies got them an enormous amount of the economic activity that used to take place in the United States. This made China vastly wealthier and more powerful, and the US less so.
Do you understand that there are rather large differences between China, Japan, now, and the 1980s?
I know you can.
Right. Do we know that the benefit of cheap goods outweighs the benefit of increased domestic production activity?
I understand that if you have $500 and want a TV, it’s more efficient and effective to buy a TV from someone else. The trouble is that dollars don’t grow on trees and neither do jobs. Very soon your $500 runs out, at which time, if you continue to want/need things, you either need to start making your own stuff or…… what? It’s at this point we run up against the reality that most people have a ceiling on what they’re capable of learning/doing; most people have legitimate ties to the place they already live and can’t chase the next boom. What then? In our case I think the answer has been to continue living on stored wealth, incur debt, and/or income redistribution via government.
If we’re not producing our own items for consumption then we need to trade existing resources for the items to be consumed. Where will those resources come from? Where does the displaced buggy whip laborer of today go get himself on his feet again?
How do you know this?
I suspect they are vastly less painful than the alternatives, especially for the ruling class.
They sure seem to be doing pretty well off us, although they’re also running into their own problems. It appears they intend to recoup from us yet again, as their currency manipulation etc allows to extract yet more economic activity from the US.
This is an assertion yuuge numbers of Americans dispute.
So what? They can also undercut us, which is yet another problem the US government does nothing about except dispense lectures.
Not good enough.
I think there are plenty of policy proposals to address these things before we ever get to minimum wage and protectionist policy arguments.
Over regulation, over credentialism, monetary policy which automatically favors inflation, poor tax policy, poor immigration policy, federal policy when it should be state and state policy when it really should be federal. I believe these are problems for which there are popular and mostly achievable solutions – easily understandable solutions anyway.
It is not even remotely true that the US is less wealthy today than it was 20 years ago. I can’t believe I have to explain this on a conservative website, but economics is not a zero sum game.
He doesn’t. He gets a Bridge Card- or his wife does. Or, alternately, he never marries the mother of his children, because it would cut their income too much. Or she never marries any particular baby daddy, which concerns her not at all, because Uncle Sugar is there for her, based upon the tax money squeezed out of the still-employed or simply monetized into existence by the Federal Reserve.
And, bit by bit, the inhabitants of the various Fishtowns- weary of the insipid lectures from the richy riches of the Belmonts- learn to hate their guts.
Hence, Trump- and Sanders, too.
Keep the lectures coming, free traders. It’s all you have.
Can’t or won’t? I’ve lived in something like 10 countries and 2 states “chasing the next boom”.
Well that and empirical evidence, the weight of history and essentially the entirety of economics.
I can’t believe I have to explain this on any website, but just because economics isn’t a zero-sum game doesn’t mean no one ever loses.
Your problem is that too many people have noticed that too many of the losers are Americans, which is a grim a terrible problem for the regime.
Lectures and assertions aren’t winning you your argument.
These aren’t assertions they are well documented empirically proven economic principles. That said you are probably correct that I can’t reason someone out of a position they did not reason themselves into.
This is nothing new – it happened in the late 70s/80s with Japan. It happened in the 20s/30s. It was the main impetus behind Marx and his wonderful theories. The cycle of history and the irrational men who propagate bad ideas always comes around.
Right, economics is not zero sum. More accurately, it doesn’t have to be zero sum. Sometimes, though, it is exactly that depending on which timeframe you consider and which subset of the total human economy you consider. For some people, those Fishtowners or Detroiters for example, it’s not so likely that their pie is expanding.
I’m not arguing that there is definitely something we can do to help those situations more than intervention would harm. I am suggesting, though, that these are legitimate concerns and that there are things we already do that are net harmful distortions and that we can stop doing those things for starters. I’m just not optimistic that that will be enough and I’m pessimistic that more intervention will be a net help.
Depends on your criteria I guess. All my family lives here and will likely need my physical assistance in the near future. Is that a can’t or a won’t?
Do you think that’s a reasonable choice for most people?
Ed, no one is arguing that there isn’t creative destruction in a free market system. What matters is that the creative part outweighs the destructive part and he evidence of history is quite clear on this: Free trade results in more wealth, more jobs and higher standards of living for everyone.
Those denizens of fishtown and Detroit are not victims of free markets or free trade but of a government bent on controlling those things.
Sure, sure. Another assertion. That’ll work.
I won’t attempt to speak for anyone else here, but I used to be a free-trader and I reasoned myself out of it. Too many negative trade-offs that never came up in the glorious discussions of economic theory.
No one is calling it new, so far as I know. And recalling the Japan era, I note that Reagan imposed “voluntary” import quotas upon Japanese autos, tariffs on other things, and I strongly suspect twisted arms to motivate direct Japanese investment in the United States. In other words Reagan ignored free trade dogma, to his credit and success.
Quit picking on Jeb Bush. You’ll make him cry.