My latest musing on the economy....
Two Cheers for Free Trade
Pacts like Nafta are essential to the health of the U.S. economy, but we could do a lot more to relieve the unpleasant side effects
by Chris Farrell
Remember the "giant sucking sound"? That was 1992 Presidential candidate Ross Perot's colorful auditory description of how multitudes of Americans would lose their jobs to low-wage competitors in Mexico.
Well, it's more than a decade and a half later, and Perot's bÃªte noir, the Nafta agreement, is once again the subject of heated debate in a campaign for the White House. Democratic Presidential candidates, Senators Barack Obama (D-Ill.) and Hillary Clinton (D-N.Y.) have both criticized the agreement (BusinessWeek, 3/19/08).
But the regional fears Nafta inspired in 1992 have gone global in 2008. In addition to Mexico, most of the world's dynamic emerging markets, including China, India, and Brazil, have become strong players in the global economic arena. Americans worry about competition from overseas companies and workers from other lands emigrating to the U.S., especially with the economy faltering amid falling home prices, tottering financial markets, and shaky consumer confidence.
The case for freer trade and open markets is overwhelming. Economic evidence and economic history alike support the view that freer trade over time invigorates economic growth by encouraging the spread of new commercial ideas, new technologies, and new ways of organizing everyday life. Consumers enjoy lower prices and greater choice. Competition from overseas rivals encourages corporate efficiency and innovation.
The Politics of Trade
To be sure, free trade is a powerful economic medicine that can have some unpleasant side effects, and policymakers could do a better job of ameliorating attendant job losses and other economic dislocations. But the problems associated with free trade are manageable compared to those caused by closed economic borders. (Just ask Messrs. Smoot and Hawley.)
Yet many economists worry that election-year pressure from voters to "do something" about income inequality, stagnant wages, and pink slips is pushing Washington toward protectionism. Invoking the Harry Potter books, Greg Mankiw, Harvard University economist and former head of the White House Council of Economic Advisors, writes in a recent New York Times opinion piece that "no issue divides economists and mere Muggles more than the debate over globalization and international trade." Mankiw sees the crux of the problem as this: "Where the high priests of the dismal science see opportunity through the magic of the market's invisible hand, Joe Sixpack sees a threat to his livelihood."
With all respect to Mankiw, a terrific economist with a best-selling textbook, that's nonsense. First of all, give Joe Sixpack credit. The knowledge gap between the "high priests" and ordinary Americans is exaggerated. It seems to me most voters have a pretty good grasp of the gains from freer trade with the rest of the world. Protectionists and immigrant-bashers garner plenty of media attention, yet voters have handed over relatively little power to the apostles of protectionism over the past three decades or so. Just ask free-trade opponents Ross Perot, Pat Buchanan, and Tom Tancredo, each of whom failed in a Presidential bid. Meanwhile, Bill Clinton and George H.W. Bush each pushed through a number of free-trade agreements during their Presidencies.
Yes, the politics of trade is often a dance with two steps forward and one step back. Yet at the end of the day the embrace of globalization is strong.
Keeping the Faith
Even more important, it's not Joe Sixpack who is at fault. It's economists such as Mankiw who bear much of the blame for the current backlash in many quarters against international competition. As everyone who took Economics 101 knows, the gains from trade are dispersed throughout the economy while the costs are highly concentrated. Too many employees in recent years have felt the downside of "creative destruction." Thanks to the routine corporate restructurings, downsizings, reengineerings--pick your favorite euphemism--in Corporate America, there's little job security and stagnant wages.
Yet the economic priesthood continues to devote enormous intellectual firepower to making the case for freer trade and writing op-ed pieces extolling the benefits while ignoring the downside and dismissing the losers. "They have been quick to denounce opponents of this [free trade] agenda as 'protectionists' who should not be allowed in polite circles," writes Dean Baker, co-director of the Center for Economic & Policy Research in the latest issue of the Real-World Economics Review. "Yet, they rarely acknowledge the unavoidable implication of trade theory--that a large segment of the U.S. workforce will have to endure lower living standards as a result of the current course of trade liberalization."
In the battle of public-policy ideas, American economists do wield influence. It's time to claim victory in the free-trade debate. But if economists want Washington and the general public to keep the free-trade faith they need to get more involved in helping out the "losers." And it doesn't matter whether the culprit is international competition, deregulation, technological innovation, or some combination of the three.
No, protectionism is not the answer. Let's all agree on that, and move on. But preserving the economy's dynamism calls for the considerable brainpower of the economic profession to help come up with ways that offer workers better security in an era marked by rising fears of wage stagnation, job turmoil, long-term unemployment, and underemployment, unaffordable or unavailable health insurance, and increasingly at-risk pension plans. Now that's a challenge worth taking up.