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Meeting the Objections to Trade Reform

   

The commercial media play a relentless game of promoting free trade. Often the anti-free traders are dismissed with labels such as “protectionist”, “Isolationist”, and worse. Occasionally there are substantive arguments said to “refute” positions such as mine.

In a link from the Minnesota Independence Party website (mnip.org), I find reference to an organization called “The Radical Middle” and to its February 2008 newsletter: “Could common ground on capitalism (and globalization) be at hand?” The views of several authors on trade are briefly summarized. Then an attempt is made to establish a “middle” position which, presumably, the Independence Party would want to embrace.

Among the views cited in this newsletter are those of Ed Gresser, who runs the Progressive Policy Institute’s Project on Trade and Global Markets. He was formerly a policy advisor to President Bill Clinton’s U.S. Trade Representative. (Remember, Clinton gave us NAFTA.)

“To buttress his case,” the newsletter states, “Gresser emphasizes certain telling facts. for example he shows that at least 95% of U.S. job loss is due to increasing productivity - not job flight. (Each year, American businesses lay off 15 to 19 million workers, and hire an approximately equal number ... something that’s forgotten by all sides in the trade debate.”

He also shows that U.S. factories account for a greater percentage of world production today than they did before NAFTA. So much for Ross Perot’s ‘great sucking sound’ of factories disappearing.”


I think we have three issues here that need to be addressed:

(1) that increasing (labor) productivity and not outsourced production account for the vast majority of U.S. job losses,

(2) that about as many new jobs are created as those which are lost when businesses lay off workers, and

(3) that the U.S. economy accounts for a greater percentage of world production today than in the early 1990s when NAFTA was established.


(1)

With respect to the first point, I would accept Mr. Gresser’s argument. Yes, it is true that capital investment in so-called “labor-saving equipment”, which drives increases in labor productivity, is a major cause of job loss. However, just because much of the loss is due to this cause does not mean that another cause does not matter. However jobs are lost should be of concern. In fact, these two factors, automation and outsourcing, are closely related from a public-policy standpoint.

The classic response to job loss through automation is to reduce the hours of work. That is how our industrial economy stayed on an even keel throughout the 19th century: Productivity increased and work hours fell. In the second half of the 20th century, we abandoned that approach in favor of Keynesian stimulus.

Working hours in the United States have lately failed to decline for a number of reasons.

First, the labor movement, who had long pushed for a shorter work day and work week, abandoned that goal in the years following World War II. Rank and file workers became less interested in leisure if it meant forgoing extra income. It may be that the time-and-a-half premium wage paid for overtime work acted as a perverse incentive for workers to seek and accept longer hours of work.

Second, the business community has remained strongly opposed to the idea of granting workers more free time because it would mean an immediate increase in labor costs (which in the long run would be more than offset by increased consumer demand). Business lobbyists and campaign contributors have a strong voice in public policy. Because shorter hours are such a red herring to business, no government can afford to enact them through legislation. Businesses would be quick to relocate production from such places, considered to have a “bad business climate”, to places where low wages and long hours prevail.

Finally, the U.S. government, while professing to be neutral about work-time proposals, had its own agenda that favored long hours. The issue came to a head during the Kennedy and Johnson administrations. Let me quote several of the key players. Arthur Goldberg, Kennedy’s secretary of labor, said: “It is my considered view that the effect of a general reduction in the workweek at the present time would be to impair adversely our present stable price structure.” John F. Kennedy himself said in the 1960 campaign: “In the face of the communist challenge ... we must meet today’s problem of unemployment with greater production than by sharing the work.” Lyndon Johnson said: “Candor and frankness compel me to tell you that, in my opinion, the 40 hour week will not produce missiles.” In other words, our nation’s leaders had the American worker suited up to work longer hours to pursue victory in the arms race, not to mention other government projects.

In retrospect, U.S. policy makers took a wrong turn when they rejected the shorter-workweek option. That was the opinion of one of that era’s chief policy makers, U.S. Senator Eugene McCarthy, who chaired the 1959 Senate Special Committee on Unemployment. I had the privilege of collaborating with the former senator in a book: “Nonfinancial Economics: the Case for Shorter Hours of Work” (Praeger, 1989)

In the context of discussions on trade, the hours issue becomes important because, due to business propensity to flee countries with higher labor standards, governments can only institute reductions in hours at the level of the global. My alternative to free trade envisions that national governments cooperate to regulate international business to further developmental objectives. Principally, we would have worldwide standards (though differentiated by differences in national development) that would encourage businesses to increase wages and reduce hours of work, using tariffs as an enforcement mechanism.

Therefore, it is a false choice whether we control job loss by trade protection or by reduced hours of work. We need both. The two can be pursued within the context of a single trade scheme. (For further discussion of the issue of shorter work hours from an economic standpoint, go to the website http://www.shorterworkweek.com.)


(2)

With respect to new job creation to offset job loss, I would say that Senator McCarthy’s and my book, Nonfinancial Economics, was entirely devoted to that topic. Generally we argued that much of what is produced in the new growth industries is not “useful production” but one or another form of what we termed “economic waste”. For example, as we continue to criminalize various forms of behavior, we will need to increase the size of the criminal-justice bureaucracy to deal with those emerging problems. Conversely, if we decriminalize the behavior, the need for the control functions goes away. Sen. McCarthy and I argued that society might be better off if those types of “work” did not exist and people simply worked shorter hours, producing less of commercial value.

It would serve no purpose here to belabor arguments made in this book. Those who are interested can find more discussion at http://www.shorterworkweek.com/econgrowth.html and at http://www.shorterworkweek.com/theories.html.

(3)

With respect to Mr. Gresser’s statement that the U.S. economy accounts for an increased share of world production, let me make several comments.

First, I have been trying to find a more detailed explanation of this alleged fact, which is quite counterintuitive. It makes little sense that manufacturing firms would move production from low-wage to high-wage economies, as the “fact” suggests. It also contradicts many people’s personal experience. I have seen examples of “fact” based on mere assumption to accept other such things without critical examination. Those who are interested can read my refutation of Gary C Hufbauer’s and Jeffrey C. Schott’s 1992 “study” showing that NAFTA would create 130,000 new jobs by 1995.

Second, assuming that Gresser’s “fact” is correct, it could be that increased capital investment in the 1990s and 2000’s allowed a greater quantity of goods to be produced in the United States in a cost effective manner. This does not mean that a commeasurate number of high-paying jobs were created. Furthermore, because the credit-driven U.S. consumer market greatly expanded in this period, it makes sense that more production would be located in the United States than in other countries where consumer markets were not growing so quickly. To a certain degree, ease of transportation and communication offsets the cost advantage of producing in a low-wage country.

But, again, I would need more information about how Mr. Gresser or colleagues came to that conclusion before I could make a more intelligent argument about it.

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