Under the headline “Ultimatum Holding Up Trade Deals”, the New York Times reports that:
The Obama administration said on Monday that it would not seek Congressional approval of free trade agreements with Colombia, Panama and South Korea until Republicans agree to expand assistance for American workers who might lose jobs as a result.
I have said this before and I will say it again: Anybody who loses his job because of a free trade agreement was overpaid to begin with. The $20-an-hour American who loses his job to a $5-an-hour Colombian is an American who has spent the past few years charging his countrymen twenty dollars for something they ought to have been able to buy for five.
So if I were writing this article it would have read something like this:
The Obama administration said on Monday that it would not seek Congressional approval of free trade agreements with Colombia, Panama and South Korea until Republicans agree to extort additional money from American consumer/taxpayers who might stop being overcharged as a result.
I guess that’s why I never got that call from the New York Times.
You are always picking on Krugman!
What kind of assistance is being talked about here?
If “assistance” means “training to help them re-skill”, then your argument falls down.
After all, the slowness of human minds to picking up new skills is just as much a hindrance to economic efficiency as any breakdown in free trade negotiations. It makes sense, to me, to try to resolve both barriers, instead of just picking the one that can be solved at the stroke of a pen.
Why not read it as “Obama would not ask the Republicans to approve the removal of one hindrance to economic efficiency unless they also approve the removal of another.”
Let me propose an economically consistent reason for assisting Americans who lose jobs as a result of lowering of trade barriers:
Yes, it’s true that if trade barriers come down, then the gains to the consumers in dollar terms, exceed the losses to the workers in dollar terms. But that doesn’t take into account the fact that if the job losses are all concentrated in one place (like Detroit), they can have a snowball effect in terms of increased crime, decreasing property values as whole neighborhoods full of workers lose their jobs and houses fall into neglect, etc. These snowball effect costs don’t show up in the original economist’s chart, but they’re there, and in total they might exceed the benefits to consumers (which are dispersed across the whole population, and hence will probably not be magnified by a “snowball effect multiplier”).
That doesn’t mean that we shouldn’t lower trade barriers. But it does suggest that it would make economic sense to provide assistance to those who lose jobs as a result, to avoid a snowball effect whose costs would exceed the costs of the original job losses.
In fact, didn’t Paul Krugman ;-) get his Nobel Prize for proving that temporary trade barriers are sometimes beneficial, due to nonlinear effects of economies of scale? I doubt these results apply to the USA though….
“The current benefits include training programs, money to cover the cost of searching for a job or relocating to a new city, and tax credits for health insurance. ”
Not sure about the last one, but the first two just sound like they are aimed at lowering a worker’s switching costs. How can Steve dislike this? :-)
Mike H and others,
Would you also want to use taxpayer dollars to lower switching costs for workers laid off because of technological advances or changes in consumer preferences? Seems you’d be creating a massive new redistribution policy, with obvious efficiency consequences.
Andy: “Would you also want to use taxpayer dollars to lower switching costs for workers laid off because of technological advances or changes in consumer preferences?”
Yes, I don’t see why not. I think subsidies for re-training and education for unemployed people is a good idea. Perhaps crucially, in areas with high unemployment, for the children of the unemployed.
The article says $1.3 billion has helped 280,000 workers. This is $4600 each. I don’t know if this actually represents value for money.
What externality or market imperfection does a retraining subsidy solve? These are costs to the individual worker and should be foreseen when the worker chooses a line of work.
On the other hand, the taxation to support these subsidies does generate externalities.
What’s ironic here is that it seems as if it’s the American public in general that supports this kind of talk…when, on net and in general, they lose from this protectionism. The practical question becomes how do you get the average person to support the more hidden benefits of free trade (to any given person) over the more obvious disadvantages (to a few). And let’s remember this is an issue in both parties…but at least Bill Clinton tries to go the right way with nAfta and deserves credit for that.
The problem is that people are risk averse. Protectionism is an insurance strategy for everyone in that they can protect themselves from losing their jobs overseas. The cost is that they have to pay higher prices for other people’s services. Unions are on the forefront of this anti-trade stance, and if you think about it, there are so many unions whose members are producing so many different things that even those union members would benefit from the overall drop in prices. However, their membership is afraid of losing what they have and not being able to find new work to replace it. Retraining subsidies attack the heart of that problem by creating a different, much cheaper, form of “outsourcing” insurance.
I don’t get why losing your job to a foreign person/nation is any different to lose your job because another American company got yours out of business. Where was the outrage for example when Marriott overtook Howard Johnson or when Boeing pretty much destroyed Douglas? Where were the cries to “retrain the poor displaced” workers affected?
If it is that you feel it’s “unfair” because other countries don’t have the same environmental and labor regulations as this country, then talk to your congressman about it. You either believe in free trade or you don’t, I don’t want to pay $20 for something that could cost me $5. It doesn’t matter to me where it comes from.
Math_geek:”Protectionism is an insurance strategy for everyone in that they can protect themselves from losing their jobs overseas. The cost is that they have to pay higher prices for other people’s services. ” But that’s not right is it. It is generally the case that protectionism results in less production even just here at home — and so fewer jobs (actually fewer income streams). The higher costs we pay reduce production at the margin, including lost exports even in the absence of retaliation.
That it’s just a mistake and not insurance is quite clear if you don’t think about countries but about counties. Reduce trade between neighboring counties and what do you get? Insured jobs, or fewer jobs? Same thing with the east and west side of cities, or the north and south side of streets.
@Bennett Haselton: So you are arguing “pay me or I turn to crime” is not a form of extortion?
Ken B.
“But that’s not right is it. It is generally the case that protectionism results in less production even just here at home — and so fewer jobs (actually fewer income streams). The higher costs we pay reduce production at the margin, including lost exports even in the absence of retaliation.”
Not really relevant to the case of protectionism-as-insurance, because I completely agree that free trade makes us wealthier overall. I don’t think you can say much about where that wealth goes, or whether that wealth is enjoyed in increased goods or increased leisure.
“That it’s just a mistake and not insurance is quite clear if you don’t think about countries but about counties. Reduce trade between neighboring counties and what do you get? Insured jobs, or fewer jobs? Same thing with the east and west side of cities, or the north and south side of streets.”
You can often get more jobs in some place like South Carolina and fewer jobs in some place like Michigan. Also, since moving from one county to a neighboring county is much less expensive than moving from one country to another, it’s safe to say that unemployment clears a more easily.
@math_geek:
At this point I confess I cannot discern what you are arguing. Are you suggesting that if I have to stop working as (say) an architect earning 6 figures to work grubbing potatoes 14 hours a say but at least I have “insured my job” then I guess you have a point. Of course anything short of falling into a coma would suffice. But if you are arguing protectionism is a rational collective choice to sacrifice a small amount of income to secure all our *present* employments then you are just wrong, and Ricardo proved it 200 years ago.
In any large group a change in wealth will affect both goods and leisure. Just the law of large numbers.
You have not articulated a reason why country level restrictions should be in principle different from state or county level ones.
As for your state example, are you arguing that if SC restricted/abolished trade with the rest of the world it would have “insure” the jobs it has? I certainly agree that if MI sets up barriers we could see good results for SC, but that his hardly South Carolinians insuring their own jobs, that is Michiganders ‘insuring’ Carolinian jobs!
Not necessarily true Steve. One of the reasons you may pay an American $20 versus $5 for a Colombian is that they are more productive than their Colombian counterparts. In fact, it may actually be cheaper to pay the American worker the $20 than to pay the Colombian counterpart the $5.
You also have to consider PPP. $5 in Colombia could perhaps purchase the typical basket of goods in Colombia that $20 would purchase in America.
I’d like to add to what Richard said. I wish economists would stop feeding the idea that offshoring is about trading high wages for low wages. Jobs don’t go to nations where wages are low – they go to where wages are rising. This is a very important distinction, which turns the context of the discussion upside down. The wage levels in the two nations are not the cause of the changes in trade levels – they are both side-effects of the institutions in the two nations. In many nations, thank goodness, poor institutions that kept wages low are improving, so productivity is rising, jobs are moving there, & wages are rising from those low levels. So I think it is unfortunate that the difference between the wages is being made in this post. I don’t think this differential is relevant to the issue.
There are plenty of low wage countries that aren’t attracting any foreign production – because the low wages aren’t the point.
@Richard
Your argument makes no sense. If the American is more efficient, then the price should be lower than or equal to the $5 paid to the Colombian.
If the issue is purchasing power parity, and $5 in Colombia is equivalent to $20 in the US, it can be implied that neither one is more efficient than the other.
In fact, if a $20 basket of goods in the US costs $5 in Colombia, the question should be, “Why is this same basket of goods more expensive in the US?” To keep in line with Landsburg’s line of reasoning, that basket of goods is more expensive precisely because we’re overpaying for it. Import the $5 Colombian product, reduce the cost of the basket of goods, and it’s a win-win for people in the US. That same basket of goods will either stay $5 in Colombia or go up in price.
Ken B: If you can’t understand me than the feeling is mutual, because I am not understanding any of your last post.
First of all, if we’re going to say collective support for protectionism must be completely irrational that has ramifications for just about all of Economics, as it’s a significant enough issue to throw Rational Choice Theory out the window. People support protectionism (to my dismay) for some reason somewhere. It would be one thing if they were only really interested in protecting their jobs, but I think it’s stronger to suggest that many people support protectionism overall as a way to protect the possibility of losing their job, rather than individuals supporting specific protectionism to protect against the virtual guarantee of losing their job.
The architect to potatoes thing doesn’t make any sense. If we imported architecture from other countries, the parallel would be the architect taking another job for less money. You need a lot of people willing to work at a given rate in a specific location to work at a factory.
“You have not articulated a reason why country level restrictions should be in principle different from state or county level ones. ”
Yes I did. “since moving from one county to a neighboring county is much less expensive than moving from one country to another” Transaction costs are way way higher. That’s a difference.
And if you are reading what I’m saying as some kind of defense of protectionism you are beyond help. Furthermore, shutting down trade that already happens clearly would not fall under the motivating idea of protecting jobs that you have. If you want to talk about all the wonderful things new trade does that’s fine go ahead, but we all generally agree that new trade opportunities generates lots of winners and a few losers, and support free trade because of those tradeoffs. I’m saying many people don’t because they are afraid of being one of the losers.
I always say if GM was run as a charity to provide work for the otherwise poor they would not be building cars were in the USA. So Democrats be careful what you ask for.
@math_geek. I’ll try again. You state that protectionism is an insurance strategy. Why do I think that? Beacuse you write ” Protectionism is an insurance strategy for everyone in that they can protect themselves from losing their jobs overseas.”
So I naively assume that when you say it is an insurance strategy for everyone you mean it is an insurance strategy for everyone.
My observation is that it isn’t. I guess technically it’s a strategy, like “let’s poke holes in them” is a marketing strategy for condoms, or “let’s add liver” as a marketing strategy for oreos: its a bad one that won’t achieve the stated purpose. Neither will protectionism. That is true of current jobs as well as future ones. A simple example is rum manufacture. If your job is making rum from sugar and selling it abroad then a rise in the cost of sugar due to a tariff will raise your prices and at the margin cost you your job (income stream). True even if the other country does not impose a tariff. And this will be true if you are an architect working on a foreign contract and you are on the margin too. Admittedly there will be few architects in this situation but in principle they can and the argument applies quite well to rum makers, car assemblers, weavers.
You really I think should make an effort to understand what an argument about AT THE MARGIN means. (Think of a strictly monotonically changing derivative …)
All kinds of things affect costs. Relocation costs from Michigan to Ohio tend to be less than Michigan to Hawaii. That really has no effect on the logic of any argument. It might affect time scales etc but it won’t effect logic.
@Richard: “You also have to consider PPP. $5 in Colombia could perhaps purchase the typical basket of goods in Colombia that $20 would purchase in America.”
No, actually he doesn’t. That is all baked into the *price*. I can get X for $5 from you or $20 from Fred. Getting it from Fred would be overpaying no matter what the reason is.
@Several of you: It is important in this discussion to remember that jobs are bad things. I think some of you are not clear on this. Jobs are *costs*. And you can always have one: you can stop being an architect and grub for potatoes. Grubbing is your new job. So “losing your job” is not the problem; losing your income stream is.
This is why talk about “insuring your job” is nonsense.
Richard. — the American who is more efficient than the foreigner will not be displaced by a free trade agreement.
“In fact, if a $20 basket of goods in the US costs $5 in Colombia, the question should be, “Why is this same basket of goods more expensive in the US?” … Import the $5 Colombian product, reduce the cost of the basket of goods, and it’s a win-win for people in the US. That same basket of goods will either stay $5 in Colombia or go up in price.””
I don’t know if this is specifically true in the case of Colombia, but it may be that some things are cheaper in that country, but their purchase by foreigners is restricted by the government. This often happens with ownership of land or corporations, for instance.
Then of course there’s the problem that goods from the other country may be cheaper and the pay there less because the country doesn’t force people to pay for externalities that we have to pay for in the United States. Laws against polluting, for instance. One commentor above suggests that we should talk to our congressmen about this, which misses the point. I *want* people to have to pay for externalities caused by their activities. My congressman can’t force a foreign country to do that.
And then it may be that goods in the other country are cheap as a side effect of corruption in the government; for instance, companies can produce cheap goods because they can steal someone’s land, or break contracts without penalty, or freely cause damage to others and then bribe the judge not to pay for the damages. If goods or labor are cheap because of such factors, they are not cheap because of “efficiency”.
Other possibilities include goods or labor being cheap because the other country’s government has meddled with the markets–for instance, doing things that affect the exchange rate. Or granting monopolies to companies who can then underpay their workers with much less worry about competition.
@Ken
You can introduce complexity to an otherwise simple observation (which you’ve eloquently done) but it doesn’t negate an otherwise valid point.
If producers in a country like Colombia can manipulate the means of production through coercion or outright theft, how is that any different than producers in a country like the United States who are protected by a bureaucracy? One is not necessarily better than the other and neither has anything to do with efficiency.
And while you personally may *want* to have external costs included in the purchase price of the goods you purchase, others may *not* want to. If you want free range chickens then pay the premium. If not, buy caged up chickens like the rest of us. Again, neither one is right or wrong. It’s a matter of preference. Your forcing me to pay extra for every chicken I buy because you think I should only eat free range chicken isn’t any different than you telling me I should buy American cars instead of Japanese cars. Or Colombian widgets.
Hmmm. As I understand it, the basic proposition of economists on free trade is that relative to a status quo of no or limited international trade, permitting full free trade across borders will leave in its wake some immediate losers, but citizens who gain from such trade gain more than the losers lose. On a net basis, therefore, each nation gains over all from such trade.
The problem is that while free trade is beneficial over all to a nation, it can lead to significant redistributions of economic privlidge within that overall national benefit. There are winners, and there are significant losers (lose your job, lose your health care etc.) This is a valid and deeply personal concern, and it is this concern that pushes the issue into the political forum. Without taking the political dimension into account, the message of the economics of the thing will fall on deaf ears.
Without a solid, general economic safety net that helps all families whose economic base is disrupted through forces beyond their control, arguments for protectionism will always be loud and vehement because those who lose stand to lose everything, making the selling of the case for free trade that much harder.
This, I believe, is exactly how the debate is framing out inside the NYT article.
Regarding training…..
Let’s talk science fiction for a moment. Suppose there is a pill that will, within two days, grant me all the knowledge I need to become a specialist cardiologist – or whatever. One would expect that the existence of such a pill would reduce the cost of heart operations, to everyone’s benefit except that of existing cardiologists. The cardiologists might campaign to ban such a pill, just like US coffee growers might campaign against a free-trade agreement with Brazil.
Now, back to the real world. A failure to re-train retrenched workers is just like a failure to remove a tariff. The externalities will be similar in nature. Hence, it could easily be sensible for the government to spend taxpayer dollars retraining retrenched workers.
@Smithdew
No, your understanding of it makes no sense. Americans may be paid more because they are more efficient, and thus $20 is actually cheaper than paying a less efficient $5 to a Colombian. To simply say “If I can get in Colombia for $5 what costs $20 in America” ignores this point. Furthermore, I agree that if what costs $5 in Colombia is similar to $20 dollars in America, the issue isn’t efficiency. What’s apparent is the relative price levels and the value of each nation’s currency relative to the other. It may not be an issue of overpaying, but simply what the minimal amount needed when considering the cost of living in one country versus another, the central banking operations, the money supply, etc.
@ Ken B
You obviously don’t understand PPP if that was your counterargument (which is actually nonsensical to begin with.) All you did was try and restate in your own words Steve’s initial point.
@ Steve
I (mostly) agree, but that’s not what I was trying to demonstrate. I was trying to make the point that your assertion that anyone who loses his job due to a free trade agreement was obviously overcharging is wrong when you look at the bigger picture. That’s too reductionist and unsatisfactory to account for all cases, you have to take into account things such as relative price levels, PPP, and efficiency.
@Smithdew: I’m not sure I get your point ( but I agree with your free range statement). But what we are discussing here is tariffs — laws, coercion — raising the price of goods from Colombia. Which is like being forced to buy free range chicken, the opposite of what seems to be your argument.
@Richard: Yes indeed. What I did was re-explain in other words a point you misunderstand. What we are talking about is workers who at $20 can be EFFICIENTLY replaced by those at $5. That’s the premise. Maybe I get more work from 4 Colombians than 1.1 US workers for instance. That’s the PREMISE. From that it follows that unless I am prevented I will want to make that substitution. (If the ratio were 3.9 then the US worker would NOT lose his job. That is a restatement of Steve’s point in his response.)
So why if the ratio was 4.1 or 4.5 or whatever is the substition not made? Tariffs. So what should we call the “we won’t agree to remove the tariff until you pay up” line? Extortion. Maybe you consider it mild extortion — fine. It is still extortion because it is the use of force to compel me to pay more.
@DividedLine: So let’s take a hypothetical. Right now the police power is used to occasionally slash tires of parked cars. This benefits tire makers. I propose that we stop spending tax dollars and use=ing the police to slash tires. This will be a net benefit to society, but there will be losers. Well you say, that will hurt tire makers. I won’t agree to that unless you pay something to the tire makers.
Extortion? I think so.
The current tariffs are not so blatant as tire-slashing but they too spend taxes and use the police power to impoverish, and they too help some groups.
@Smithdew:
“If producers in a country like Colombia can manipulate the means of production through coercion or outright theft, how is that any different than producers in a country like the United States who are protected by a bureaucracy? One is not necessarily better than the other and neither has anything to do with efficiency.”
Well, yeah, that’s my point. The wages may be lower and the products cheaper in the other country because of reasons that have nothing to do with efficiency. The original argument is that if labor is cheaper in the other country, the other country is more efficient and Americans are overpaid. If the labor is cheaper in the other country because of coercion or theft, Americans are not being overpaid.
“And while you personally may *want* to have external costs included in the purchase price of the goods you purchase, others may *not* want to. If you want free range chickens then pay the premium.”
I think people should be *forced* to include external costs in the purchase price (or rather, should be forced to pay the victims, and can then raise the purchase price to make up for it), because those external costs are otherwise being imposed on unwilling victims. Imposing costs on unwilling victims is a form of coercion. If my factory shoots out fumes that disintegrate your house, I should be required to pay for your house. If my factory shoots out fumes that pollute your air, I should likewise be required to pay for the damage I have caused. The fact that the air is a commons means that the damage is spread out among everyone rather than aimed at a particular house, biut it’s still there and the factory owner should still be forced to pay for it.
The comparison to free range chickens is bad because the objection to other forms of chicken raising is that they harm the chickens, not that they harm other human beings. That’s not an externality, for the same reason that eating the chickens against their will isn’t coercion, and taking milk from cows isn’t theft.
Free trade of goods and services should entail the free movement of people to live/work where ever they would most like to sell their services (e.g. programming services, medical services, janitorial services).
So the error is that this agreement is not a free trade agreement. It is an agreement that restricts the exchange of services. So the more appropriate writing of the article would have been:
”
The Obama administration said on Monday that it would not seek Congressional approval of restricted trade agreements with Colombia, Panama and South Korea until Republicans agree to extort additional money from American consumer/taxpayers who might stop being overcharged as a result.
“
Ken B,
I understand what you are trying to say with the hypothetical, but I don’t find the analogy terribly convincing. Extortion is a strong word, and it is a criminal act. Lobbying the government is not.
You are within your rights to lobby to have laws passed against protectionism if you like, but the point of my post is that if you want to treat people simply as economic maximizers, leaving only a threadbare social safety net to pick up the pieces, then you should expect people to act like it is every man for himself in this world because that is what it is. You can throw all the economically rational reasons in the world at them to make your case, but to a person about to lose his job, his health care, and ability to provide for his family, with no net to help him through the difficult times, those arguments won’t land anywhere meaningful. Not sure why you would expect anything else.
@DividedLine: I fear you seem to have picked up WillA disease, the irresistible impulse to impute to me positions I have not taken. However let me address your first point. Extortion is an English word, and has meanings in common parlance. I think my and Steve’s examples both fit. It is not “lobbying” that is extortion; it is what is being lobbied for. (And in fact we are talking about the Obama administration not lobbiers, but I take it you mean the groups lobbying THEM.)
You spend some lines explaining why those benefiting from protectionsim might like it that way, and might fight to keep it. Doubtless. How exactly does that show they aren’t extorting? My hypothetical tire makers would feel the same. It seems to me from your safety net comments you are suggesting in essence “yeah well then extortion is OK in this case”. Are you arguing that? If not why is the bit about the safety net any more relevant than tales I can tell about the tire maker’s poor mother who needs a head transplant at great cost? If it is not arguing that their actions are justifiable how is it relevent, and if it is arguing that how is it disputing that its extortion?
I also disagree with your characterization of “laws against protectionism”. It is protectionism itself which relies on force — coercion. There currently are such laws inhibiting trade with Colombia. My position is *stop coercing*.
I think this topic can be argued ad nauseum and no one will ever emerge the victor. However, that being said, the one point I find very contentious is the issue of externalities and why these negative externalities should be factored into the price of what we consume.
This is not a particularly popular viewpoint, but being a humanitarian or an environmentalist is a LUXURY. Just because the spoiled rich Americans can afford to care about the environment or child labor doesn’t mean the Colombians can. (Just an example.) It’s easy to forget that our wealth was built on a foundation of pollution and child labor.
This is where my free range chicken example came into play. Some people can afford the luxury of caring about free range chickens. Others don’t particularly care. Those who can afford the luxury shouldn’t impose their will on those who can’t or choose not to.
I’m not advocating for dirty air and children working in coal mines. But, if a country has to do these things to bring themselves to some form of economic prominence (or to put food on the table), it’s not our job to artificially inflate the price of their goods to protect American producers.
Smithdew wrote: “I’m not advocating for dirty air and children working in coal mines. But, if a country has to do these things to bring themselves to some form of economic prominence (or to put food on the table), it’s not our job to artificially inflate the price of their goods to protect American producers.”
Indeed. Notice too how often those making the opposite argument are those who benefit from protectionism. If they really cared so much about Colombians they could just up and send them money. Instead they protest treaties these same Colombians WANT and ASK FOR.
@Smithdew
“I think this topic can be argued ad nauseum and no one will ever emerge the victor.” I have to disagree; I think the pro-free-traders have won this argument here and throughout economics.
“It’s easy to forget that our wealth was built on a foundation of pollution and child labor.” Yes, we had far more pollution, and children doing horrific jobs. But, to suggest our wealth was built on that is a vast exaggeration.
@ those seeming to side with the Obama administration:
Americans have decided that the safety net for those who loose their jobs is unemployment insurance and existing job training programs.
You might feel that we should do more for people who are unemployed. But this has nothing to do with a trade agreement with Columbia, anymore than it has to do with people who loose their jobs because of floods, recessions, etc.
An approach to a safety net policy that is based on individual events (trade agreements, floods, etc.) is a sign of a safety net policy that is not well thought out. Or policy that has been thought out, but is not being communicated.
@ Ken B:
Thanks for the shout out.
@Will A: Welcome. And in this thread: good points, well made.
@Smithdew:
Children working in coal mines may be bad, but it chiefly affects the children, not third parties. In other words, hurting child workers isn’t an externality.
And the factory owners are *already* imposing their will on others, and when I’m “imposing my will” on the factory owners I am doing so to prevent other impositions of will.
It may be clearer with a more direct example. Suppose the factory likes to send wrecking crews down the street and steal materials from people’s houses in order to get raw materials to build the goods. Suppose also that if the factory didn’t do this, it would cost more to make the goods.
Would you say that it’s a “luxury” to manufacture goods without stealing and that it’s not our job to demand that they artificially inflate the price of their goods by buying raw materials instead of stealing them?
@Ken
Are you suggesting that foreigners steal from their fellow countrymen to produce goods cheaper than they otherwise could? Or are you just supposing?
Hypothetical scenarios can always skew the logic behind an argument but they’re just that: hypothetical. I don’t think anyone could reasonably argue that Colombian companies send wrecking crews to steal raw materials that they then use to produce goods at a lower cost than American companies.
How about this? Suppose a company pays someone a very generous, union negotiated salary and provides very generous, union negotiated, fringe benefits. This person is just as efficient as his Colombian counterpart, but his Colombian counterpart earns half in total pay and benefits. This discrepancy in labor cost has a distinct effect on the price of the good being manufactured. Just suppose…
Ken B,
I’m sorry but I’m just not following. I understand extortion to mean a criminal offense which happens when a person unlawfully obtains money, property, or services through coercion. Slashing tires is unlawful, governments enacting trade protections, so far as I know, generally are not. So perhaps you could help me by sharing your definition of extortion, and maybe I can understand better.
In the meantime, I may not be the only one suffering “WillA disease.” My point all along has been that from an economists perspective free trade is good for the world, and I agree. Unfortunately, that’s where economists appear to want to stop. What I’m suggesting is that if economists want to just continue to shout “free trade is good for you” to people who know that it is not (because they are losing their jobs, health care and pensions), economists will quickly become irrelevant to the debate.
I’m also further suggesting that the likelihood of actually increasing support for unfettered free trade (lawful free trade please), is going to increase if there is a solid safety net in place to help people through the inevitable displacements that will occur (and, I should add, if you aren’t at least a little intimidated by the forces and rate of change in the global marketplace and what they might mean to previously immune professions, you might want to ponder it a bit).
@ DividedLine:
Per dictionary dot com, extort can mean “oppressive or illegal exaction, as of excessive price or interest: the extortions of usurers.” I can see how it would be consistent for some to argue that Payday lenders extort money regardless of whether they break any law.
Environmentalists talk about the raping of the environment. Using extortion (if one feels strongly against protectionist policies) doesn’t even come close to be as exaggerated.
If you agree that free trade is good for the world, then you would obviously support people being able to move/live anywhere they want. This puts your ideas at odds with almost every American Senator.
I’m suggesting that the vote in the Senate for the United States to enter into any unfettered Free Trade agreements with any country other than Canada would be 0 yes – 100 no.
I’m further suggesting that 80% of Americans think that Free Trade is what politicians and corporates say is Free Trade is and not what Economists say is Free Trade.
…if economists want to just continue to shout “free trade is good for you” to people who know that it is not…
On this topic, I’ve always understood that “economically efficient” meant “pareto optimal”. If I’m right, and trade barriers are not economically efficient, then they are not pareto-optimal. This means that if there is a trade barrier, there is a way to make everyone better off.
Removing the trade barrier makes the protected seller worse off, so that’s not it. What is it then??
Ken B: “@Bennett Haselton: So you are arguing “pay me or I turn to crime” is not a form of extortion?”
My interpretatiopn of what he said was that if you reduce the factors that lead to crime you will reduce crime. That is not extortion, but sense.
We all value security. If I am an individual that will lose out from a free trade deal, then I will oppose it, even if it increases the general good. If Obama wants to bring these people “on board”, then a little compensation may be sufficient to persuade them to agree, or not oppose as vehemently. Extortion is in my mind far too strong and loaded word to use in this case. We usually use words to communicate efficiently, and using the word extortion in this context obfuscates rather than clarifies, even if you can fit it into the strict definition (which I doubt).
What is more interesting is why the “losers” from the policy have so much influence. This is partly the “identified” rather than “statistical” life question again. If a factory closes because of the competition with Columbia and lays off 1000 people, then we would expect those 1000 people to shout and object. Those 1000 people on their own do not carry that much influence nationally. However, other workers can identify with them, they fear for their own jobs, and they also shout and object. So we might have 1,000,000 people objecting. If those 1000 jobs are replaced with 1500 others spread around the economy in twos and threes, nobody can directly attribute those extra jobs with the free trade policy. We cannot identify, or identify with, the “extra” workers, so there is nobody shouting on the other side.
There are two ways to counter this. Try to persuade those 1,000,000 people that they will be better off (this is Steve’s way), or convince those 1,000,000 people that the 1000 will be looked after, and therefore by implication that they will be looked after should they suffer the same fate. You are offering them security. This is Obama’s way. Steve’s way may be more honest, but Obama’s may be more successful in the short term.
Mike H: “Removing the trade barrier makes the protected seller worse off, so that’s not it. What is it then??”
I think this is a “non equilibrium” situation. At equilibrium, everyone is better off. It takes soem time to get there, so some people are worse off in the short term. This is where a famous “in the long run” quote comes in. If it takes too long to adjust, we as individuals don’t care what the equilibrium position is. I don’t know what economics has to say about the kinetics of the thing.
“the American who is more efficient than the foreigner will not be displaced by a free trade agreement”- surely this depends on exchange rates?
What if there is significant and systemic capital flight from Colombia to the U.S which depresses the Colombian currency way below its p.p.p value?
In the scenario I’m thinking off, Colombian entrepreneurs exploit the workers to build capital in the U.S to which they emigrate once they’ve feathered their nest sufficiently. These capitalists then reinforce the political power of American capitalists. Workers in Colombia and America pay the price.
It’s an emotive argument and, probably, a very bad one since at any point in time, some currency or other is bound to have ‘overshooting’ because of its monetary policy so this argument endangers the whole of International Trade.
There’s probably some neat piece of theory that disposes of this line of argument.
@Mike H: At a pareto optimal point — that’s the old terminology which I prefer; trendsetters like Landsburg prefer efficient — those who benefit can PAY those who lose out and still come out ahead. The change makes me $2 richer, you $1 poorer, so I can buy you off for $1 or $1.25 etc. Now whether they should or how they should is another question but that answers your query.
@vic: Exchange rates are baked into the price. The real cost already depends on the exchange rate.
@Smithdew: “Are you suggesting that foreigners steal from their fellow countrymen to produce goods cheaper than they otherwise could? Or are you just supposing?”
I am suggesting that foreigners who can produce cheap goods because they pollute in ways that hurt third parties, or cause other externalities, are acting similarly to foreigners who produce cheap goods because they steal.
I am also suggesting that foreigners who can produce cheap goods because of government corruption are acting similarly to foreigners who can produce cheap goods because they steal.
Avoiding harm to others and avoiding the abuse of government power are not “luxuries”, and if someone else’s goods are cheaper because of those things, the price of my goods isn’t being “artificially inflated”.
@Ken B- I was thinking of ‘dependency theory’- Graciella Chichilnisky (if that’s the right spelling!) and so on- no doubt there would be a counter-argument neatly expressed since then and I was hoping for a quick pointer to save myself the trouble.
No doubt there is some naivete at the bottom of my confusion on this but I still don’t see how a less efficient producer overseas can’t be cheaper than one of our own if his exchange rate is artificially depressed below what it ‘ought’ to be for current a/c balance by reason of a systemic capital flight.
For example, take two identical capital goods operated by identical units of labour in countries A and B. Now suppose massive capital flight from A to B. This depresses A’s exchange rate, hence giving it lower per unit labour cost and hence price. The worker in country A loses his job.. The worker in B keeps his job but at a lower real wage. Yet both workers are identical in efficiency.
What worries me is that this is sounds a lot like the ‘cheap labour’ argument. The difference arises from the greater mobility of capitalists who can now buy their way into citizenship, or domiciled status, in the ‘First World’. It’s an emotional argument and one that has probably been comprehensively rubbished already except I didn’t get the memo.
I am not too convinced that free trade is the wonder panacea for all the economic ills of the US. I would love to be convinced but I do not seem to find good enough explanation for the foll issues.
1. Would it not be very hard for persons who lose their jobs due to free trade to acquire new skills? Old and infirm people would be the worst hit. Plus there would be a question of what to learn. Because if these persons had that kind of vision they would not have waited so long till their imminent redundancy to start learning new skills .
2. The Indian or the Chinese worker replacing the American worker would have a field day. They would now be able to afford things that the American worker was till now producing and probably was in a position to buy. So who wins? Plus there is something like organisational culture. A worker under lifelong employment in one organisation gets emotionally attached to the organisation and contributes towards its excellence. While the quality of the goods and services produced outside will be influenced by the work ethics of the sweat shop owner of the third world country. We all know how bad the chinese products are!
3. The organisations who outsource would earn handsome short term gains but will lose their goodwill because they have disavowed their own countrymen and they will lose their edge due to technical excellence because all innovations would be carried out by the job runner at his site. Technical expertise which till now has been the domain of USA, Europe and Japan is now distributed on a platter to third world countries just for earning a few dollars more.
4. If one empties the contents of big container into a small one half its size, both containers will contain the same amount. Similarly by trading with third world countries, doesn’t the USA run the risk of losing its wealth and shrinking to the elevated level of the third world country? Instead of all countries getting pulled up to the spectacular heights of the USA, wouldn’t USA be dragged down. Third world countries have nothing to offer in terms of innovative products that America hasn’t seen. Isn’t it foolhardy for the US to continue dealing with countries who do not follow the same free trade ideas. I live in India so I know about India. Here I would need high level acquanitances to get a license to import from USA but would encounter very little governmental resistance to get a license for exporting to the USA. The businesses who sell to USA earn obscene profits and earn for India valuable US currency. Even an Indian who has migrated to the USA will not invest in the USA but will repatriate his earning legally or illegally. There again, you are left high and dry!
5. In the US, the cost of money is almost nill while in India one can earn 10% pa on a simple bank deposit. The current situation is that you people keep on spending and the lucky few Indians who trade you with laugh all the way to the bank. Recently a scam was exposed that allowed Indians living abroad to repatriate money without bothering to inform Uncle sam. USA lost a whole lot of taxes on those transactions and the amount I believe is quite substantial. This I believe is just a drop in the ocean. Knowing Indians I believe they would have devised a number of ingenious methods to fool the USA!
Previously when wealth was distributed equally among nations free trade would have made sense but in this modern era when most of the wealth is concentrated in USA, Japan and Europe, it is likely that the concept of free trade will beat them all to pulp:-)
@Kalind
1. “Would it not be very hard for persons who lose their jobs due to free trade to acquire new skills?”
In my opinion, economists who fully support free trade between nations but ignore this issue are missing something important.
After all, the inability of people to switch jobs or switch countries or switch currencies is just as much a barrier to the ‘free trade’ equilibrium as a tariff or trade restriction.
4. “doesn’t the USA run the risk of losing its wealth and shrinking to the elevated level of the third world country?”
This is the monetarist fallacy, debunked several centuries ago. The truth is, trade is not a zero-sum game. If the USA trades with foreign countries, it’s because people in each country want to trade. They want to because they benefit from it. This benefit is the correct definition of wealth – what matters to a US resident is not how wealthy people in China are, nor how wealthy they are as measured in Renimbi, nor even as measured in US Dollars. What matters is how much satisfaction they gain from life. A proxy for that is how much they can buy with their salary. Trade improves this (generally, in the medium to long run)
It is the big corporations who in their quest to maximise their profits want to trade but not the people. Because if the people wanted to trade, then their leaders would not try and discourage such trade. President Obama, if I am not mistaken, had announced certain populist measures to retain jobs in the US. Secondly, how much satisfaction would people get by using low quality cheap products is again debatable. They are left with no choice as the system is manipulated and controlled by a select few mega businesses. Here in India, for example, the services offered by all TELCOs are equally pathetic but people have no choice but to continue enduring them.
@Kalind How long do you think the bad telcos would last if the Indian government opened the country up to more competition? :-)
@Kalind
“It is the big corporations who in their quest to maximise their profits want to trade but not the people. Because if the people wanted to trade, then their leaders would not try and discourage such trade.”
People regularly vote for free trade. They vote for it every time they purchase a foreign-made item they consider a better item for the price. The fact that those with political agendas can muddle the waters sufficiently to obtain a populist majority doesn’t make it the correct stance. We can easily reject the notion that the majority is always right or the majority is always wrong.
“Secondly, how much satisfaction would people get by using low quality cheap products is again debatable.”
There is no debate here. We all regularly trade off price and quality in making buying decisions. Adding new choices won’t make us worse. I don’t have to buy the cheaper item and settle for low quality—I can just pay more. There a simple rule of economics here: adding more options without removing the current ones cannot make me worse. (Or making stochastically dominant improvements in some options must make me no worse off.)
I read about another fraud by a big big Indian IT giant which lends credence to my argument that US will lose out doing trade with countries like India because the cost of administering the rules will be far greater than the benefits derived from trade. Please check this out – http://capitalmind.in/2011/05/infosys-investigated-for-misusing-b-1s/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CapitalMind+%28Capital+Mind%29&utm_content=Google+Reader or http://online.wsj.com/article/SB10001424052702304520804576343070058872708.html.
Also most telcos in India are foreign players either going alone or with an Indian partner.
In cricket it is said that you can’t place fielders for bad bowling; similarly, you can’t formulate laws for people who just want to outsmart them.