All arguments against free trade (total unilateral free trade) will be posted in this site and debunked.
THE SUCKING SOUND AND YOU
What about that deindustrialization? cont'd
Batra began on p. 54 by saying he would establish the causal link between three facts: 1) that the U.S. has become a free-trade economy (the cause), 2) that real earnings have "plummeted" for over three fourths of Americans (by which he probably means three fourths of U.S. wage-earners), and 3) that the traditional direct link between real wages and productivity has been severed (i.e., for the first time ever, an increase in productivity is accompanied by declining wages).
All three of these points can be disputed. 1) There is plenty of protectionism left in the U.S. And NAFTA and GATT both contain protectionist elements, such as anti-dumping provisions and other foolish nonsense; 2) the word "plummeted" is way out of line; this does not describe the experience of typical wage-earners, even if general wage stagnation is admitted; and 3) where was it ever proved that there should be any link between real wages and "productivity" or that any such link did exist before free trade? The very example of declining farm income proves that the opposite can happen: incomes declined while productivity increased.
Nevertheless, let us grant that Batra did establish some such linkage as he claims here. At first reading it sounds like he's really delivering a knockout blow to free trade with these strong words, a crushing indictment. But, after examining it more closely and seeing the substance, rather than the just the sensationalist language, what is free trade really guilty of? Has he really shown that free trade causes a net long-term harm or that high tariffs ever produced a net benefit?
Points 2 and 3 above could also be said of U.S. farmers, with the cause (point 1) being the improved farming technology plus intense competition among farmers. Neither points 2 or 3 establish that a net harm has taken place (other than perhaps a temporary changeover adjustment from the "closed economy" of the past to the free-trade economy of the future), unless he is willing to say that a similar net harm occurred in agriculture because of technology advances, and that therefore these advances were a net harm and should not have occurred, just as free trade should not have occurred. Since he doesn't make such a judgment against farming technology advance, which depressed farm income, he is not entitled to condemn free trade for depressing factory-worker income, even if free trade is "guilty" of all that he says.
But, you ask, how can something be good for the economy if it is adverse to 75% of the labor force? Surely this is different because of the large number who are adversely affected. No, even if we grant that it is adverse to that many people, you would still have to condemn the technology progress in farming for the same reason, because 200 years ago Americans were even more than 80% farmers, and technology gains were already suppressing their incomes and have continued doing so up until the present time and have driven out so many farmers that today only 2% of American workers are in farming. Do you condemn this or not? (Batra says it's good for "society" or "the nation as a whole.") If not, then neither can you condemn free trade for the similar competitive pressures it puts on factory workers.
Those dislocated farmers and farm workers had to adjust, and so do today's dislocated factory workers, and some other workers too, whatever their numbers. And these dislocated ones today have far more opportunity and security, even without protectionism, than the vast majority of those dislocated farmers of the last two centuries.
But, are manufacturing jobs inherently superior to farming jobs or service industry jobs? Is it good for the economy to shift workers from other sectors to manufacturing, but not in the reverse direction? I.e.,
This is what Batra and most free-trade bashers seem to think. They believe manufacturing jobs have some inherent value, so that if workers are shifted from farming (or anything) to manufacturing--Bingo!--more prosperity is automatic. Why do they believe this? How do they explain it?
Basically they don't. Two or three factors explain their obsession with factory jobs. First they are mesmerized by the fact that traditionally manufacturing jobs have been higher-paying than most others, and they have come to imagine that high wages are inherent to manufacturing, as though we could raise everyone's income by herding them all into manufacturing jobs, whether or not the market needs them there. Sometimes language like "value added" is used to characterize factory work, as though other kinds of work do not also add "value." The truth, of course, is that all work adds value, and that value is measured by the demand for it and by the scarcity of the available workers.
In reality, manufacturing jobs are not the highest-paying. Construction jobs have generally paid higher. So, why don't protectionists clamor for more construction jobs instead of for manufacturing jobs? Because foreign imports don't compete with construction jobs.
Foreign imports are an easy target. Due to primitive instincts, many people, otherwise rational, are easily incited to rage by the sight or sound or smell of anything foreign. So, for example, when they find themselves replaced by a low-paid foreigner, they go into a rage, but when they are replaced by a computer, they notice nothing wrong. The computer is progress, while the foreigner is an encroachment onto their turf.
The protectionist's attention has been drawn to manufacturing, not because there is anything special about manufacturing or because there is any real problem in America's manufacturing sector, but simply because of the increase in foreign manufacturing. The enemies of free trade are not basically interested in promoting manufacturing, but rather in eradicating anything foreign. Nothing negative is happening to U.S. manufacturing which didn't also happen to U.S. agriculture. So why does the "decline" of manufacturing cause an uproar but not the "decline" of agriculture? Because the latter was not caused by them damn foreigners!
The demands of protectionists are basically knee-jerk emotion-based impulses, like those of a young child who comprehends only a few immediate images and cries when its most-desired objects are not present. Some free-trade bashers are laid-off factory workers who understand only one thing: money comes from factories, factory shuts down, no more money. Waaaaaaa! Others are ideologues or social intellectuals (like Ravi Batra) who see factories as the ideal place to put people who would otherwise get into mischief or go on welfare. All these ideologues understand is: factory absorbs these unneeded ones, takes care of them, but factory shuts down, unneeded ones are abandoned--what to do with them? Bring back factories!
Batra tries to give intellectual substance to the emotion-based idea that manufacturing is inherently superior and that prosperity is a result of more manufacturing. But all his arguments are false for this fundamental reason if for no other: if he is right, then the entire economy should shift to manufacturing--not just the U.S. economy, but the world economy; every country should divert all its resources and energy and labor into manufacturing and eliminate all other sectors entirely.
Batra's analysis leaves no room for any limit to be placed on manufacturing. What limit can be imposed? There's only one--the competitive market, i.e., free trade, the forces of supply and demand, which dictate how much of one commodity, and how much of another, is needed. Once this is overruled, as Batra and the protectionists do, in favor of an industrial wage-centered policy, there is no guideline left for deciding where to limit manufacturing and let resources go into services or agriculture, other than perhaps to set up a national industrial Politburo that will undertake all decision-making for industry and allocate all the nation's labor and other resources.
The basic belief seems to be that manufacturing jobs inherently pay higher wages, and so if we can just cause more manufacturing jobs and get people into those factories, everyone will become more prosperous. And conversely, any loss of a factory job will be replaced by one that pays less.
When you lose that factory job and move to a lower-paying department store job, not only do you become poorer, but so does the nation, Batra says: ". . . for the GNP now declines by the amount of your loss." (p. 160) The trouble with this reasoning is that it equates the nation's well-being with the sum total of all the wages that are paid, regardless of the work performed.
Suppose that factory job you lost is still being done by cheap foreign labor. But the low-wage department store job you took was not being done before by anyone (because it paid too low to attract anyone qualified). So, now that you've moved to your new job, more work is being accomplished than before. Your old work in the factory is still being done (maybe even more, since now the labor cost is so much lower that the company can afford to hire more workers than before), PLUS your new work in the department store is now added to the total work being done, adding up to more total work. Now, how can society be poorer if the total work accomplished has increased? (Doesn't a higher living standard for all require that more total work be done?)
True, you individually are poorer, just as a farmer who is subject to intense competition becomes poorer as a result of mechanization. But Batra says "the nation as a whole" is still better off. Well then, why isn't the nation as a whole better off, even if the sum total of all the wages goes down because of factory layoffs, just as long as all the total work performed has increased as a result? Why doesn't the increased work done make the consumers better off on the whole, just as it does in the case of agriculture?
The silliness of Batra's wage theory is shown by the following hypothetical case: suppose a factory worker somehow swindles the company into paying him for a year, even though he really quit and didn't show up during that year. Then the error is corrected somehow and the paychecks are stopped. For a year he was paid but didn't work. According to Batra's logic, not only does this ex-worker now become poorer when the paychecks stop arriving, but so does the nation, "for the GNP now declines" by the amount of the paychecks which had been coming to him.
Is it the work done which makes the nation richer, or is it the wages paid to the workers which make it richer? If the latter, then the nation would become richer even if workers do nothing but receive their paychecks, do nothing but call in sick everyday, or show up but just sit and twiddle their thumbs. Just as long as they keep getting those paychecks (and the higher the wage the better) the nation keeps getting richer.
This is worse than voodoo economics. It is
Snake-oil Economics
Definition of "snake-oil economics": Any theory (usually something to do with money, or spreading money around) which claims prosperity or well-being is created by some means other than performing work, or producing, to meet consumer demand (to satisfy people's needs/wants).
The opposite of snake-oil economics is this truth: It is the performance of needed work which enriches the nation, not increases in the wage level, or any other form of spreading more money around.
What is the point of working, if Batra is right? Let's just all quit working but keep receiving our wages, if that's all it takes to make our nation prosperous!
Yes, manufacturing wages have been higher in the past, but that is subject to change, it is not a fundamental law of physics, or of nature, that manufacturing wages must be higher. These wages are changing now (decreasing), and this is probably because factory workers are becoming less valuable than before, due to supply and demand. There is nothing inherently special about manufacturing jobs or the wages paid to manufacturing workers. They are subject to the law of supply and demand like everything else.
Many of these jobs have actually been overpaid for many years, which is precisely one of the reasons why so many of them are being shipped abroad (it is easier to ship the job out than it is to reduce the wage to a more competitive level), and under global trade now there is an overdue correction or adjustment taking place.
These laid-off factory workers are not being gyped out of anything that is rightfully theirs. On the contrary, they should be grateful to have done as well as they did for so long. And those still in factory jobs who may be threatened should prepare now for the inevitable layoff which may soon be coming. They should save and prepare to retrain or invest, and those who don't will have only themselves to blame when they are finally laid off and find themselves unable to adjust to the new demands of the marketplace.
It's not their employer's fault or the economy's fault, not even the politicians' fault. And it's not the fault of consumers who spent their money on cheaper foreign imports. The time has come to liberate consumers from the responsibility to subsidize the jobs of those who are less competitive.
Batra's task was to prove that free trade necessarily makes our country worse off. The burden of proof is on him and the protectionists because they propose to deprive us all of our freedom of choice in the marketplace by cutting us off from foreign-made products. To let us have this freedom and control over our own lives is "laissez-faire" and not in the interest of some U.S. producers/workers who want our money and our lives to serve as a market for their goods, because that's what consumers are essentially -- needed receptacles for their products, not free agents making choices for our own ultimate benefit.
To justify this denial of our freedom and this manipulation of us the protectionists must make a strong case, like the prosecution must do in a criminal case. They must prove we will all be better off in this kind of social system where consumers are kept on this economic leash. If they can't make the case, then their social order must be rejected on fundamental grounds of human dignity if nothing else. Free trade is innocent until proven guilty.
What kind of proof does Batra give us? As is usually the case with free-trade bashers, his arguments take us into the realm of intellectual lunacy. He requires us to accept dogmas which are preposterous -- even he himself must laugh at them in private. How can we be made better off by paying someone more money, while at the same time they don't do any more work or any better work than they did before, or satisfy any further need than they did before? This is what he's saying.
". . . If a policy shifts high-wage manufacturing jobs abroad or workers into low-wage services at home, the country cannot but lose." (p. 163) Superficially, at the emotional level, this sounds impressive and sparks a lot of breast-beating. But think: since those "high-wage" manufacturing jobs will now be done at lower cost, that manufacturing will now increase -- there will be MORE of it than before, MORE of the manufactured goods (assuming the demand is there); meanwhile, add to this increased production the new work now being performed in the "low-wage" services at home, and there is more total being produced than before.
How can this be bad for the country? That's exactly the same result that automation gives, technology innovation. If free trade is bad for the kind of reason he gives, then so is new labor-saving technology. Batra's argument is based on logic which would also condemn any new labor-saving technology that replaces high-wage workers.
Batra's argument is based on an illusion that if someone's wage increases, all else being equal, then the country is better off. Or if it decreases, then the country is worse off. This is a purely emotional argument which can come only from a sentimental attachment to wage-earners. And, of course, since most people are wage-earners, it is received with much applause. And it is only because most people are wage-earners that Batra gets away with claiming such rubbish. He even uses the "most people are wage-earners" argument to prove that higher wages must be good for the country.
To show how ludicrous this notion is, let's change it from wage-earners to right-handers. If everyone who is right-handed should be given an increase in income, just because they're right-handers, would this then make the nation wealthier, because the "GNP" increases? By Batra's logic, yes. After all, if most people's incomes increase, doesn't that mean there is an increase in the standard of living? Most people are right-handers. The ones who bear the cost for it would be a minority.
Free trade is supposed to make consumers better off. But Batra argues: "Are consumers different from workers? Aren't they one and the same people?" Since the onslaught of free trade, "as much as 80 percent of the labor force has suffered a hefty loss in real income. These people and their families, aren't they consumers as well?"
Sound logical? Okay, let's apply the same logic to right-handers. Suppose we had a policy that gave subsidies, or job preference, or tax credits to right-handers. Then, a "free trade" policy is enacted to take away all this preference to right-handers, and the right-handers are told they must now compete in the free market. Why? Because it will be more efficient and will produce more benefit for consumers. Couldn't the crusaders for right-hander protection use Batra's argument: "Are consumers different from right-handers? Aren't they one and the same people?" "If right-hander subsidies are withdrawn, as much as 80 percent of the population will suffer a hefty loss in real income. These people (right-handers), aren't they consumers as well?"
Batra scoffs at those who say things like "free trade still makes the nation better off, although it may harm the workers." Noting that wages of employees constitutes most of the national income, he answers: "Any theory that ignores wages and focuses only on national aggregates such as . . . GNP or national income is really worthy of storage in a dustbin." (p. 158)
But then must not his own accounting of the fate of farmers be rendered to the same dustbin? He said that despite their income losses, "the nation as a whole benefits," and "Competition among farmers may hurt agriculture, but society is better off . . ." Isn't Batra focusing on "national aggregates" when he speaks of "the nation as a whole" and "society"?
Even when farming was 80% of the economy (even higher than that), still "society is better off" and "the nation as a whole benefits." How can that be? What nation? The farmers were the nation. How can we ignore all these farmers' lost incomes and casually say "society is better off"? Answer: for the same reason we can now say the same about the labor force as a class. We needed fewer farmers then, and we need fewer wage-earners now (or at least fewer in certain categories, like manufacturing).
Yes, wage-earners as a class (though not all wage-earners) could suffer a net negative impact from free trade, at least those who don't buy many foreign imports. But even though this class is a majority of the population, it does not follow that therefore free trade is guilty of harming the country, anymore than it was harmful overall to let farm incomes decline, or than it would be harmful to take away subsidies to right-handers. In fact, the stronger case could be made for pretecting right-handers, because these people cannot change and become left-handers, so they have a permanent interest in preserving any advantage they can put in place to protect them.
But wage-earners can change, or at least most of them can. And if the economy needs more entrepreneurs, more investors, more professionals, and fewer wage-earners, then what is wrong with an incentive system to reward those who answer the need, even though they may be fewer than 50% of the population?
To prove his case, Batra must show that this is not the reason wages have declined. He must show that the demand for labor is just as high as ever and that there is no oversupply of job-seekers during the period of wage decline, and that it would not benefit the economy if many wage-earners should abandon the labor market to become entrepreneurs or investors or professionals.
But free-trade bashers don't even imagine such possibilities. To them, you were born a wage-earner, and you could never be anything else, probably because you're too stupid to be able to change. Your stupidity and ultimate worthlessness -- that is the fundamental premise of protectionism and the bottom-line argument against free trade.
Another protectionist who seems to think wage-earners are worthless is Gus Stelzer. He argues that wage increases in this country since the 1930's are the result of government laws. Average wage increases from 50 cents an hour in the early '30's to today's (1992's) $19 an hour (with fringe benefits) "did not happen by accident," he says. "It happened because millions of people prevailed on federal, state and local politicians to pass laws designed to raise the living standards of working people [i.e., wage-earners]." (Nightmare of Camelot, p. 176)
That statement should come as an insult to any self-respecting wage-earners. Because it means you aren't really worth the wage your employer pays you. You are paid not according to your worth or your value to the employer, but according to a law forcing the employer to pay you more than your real value. Stelzer's logic here is the same as Batra's: merely increasing the wages (not the work performed) brings prosperity and a higher standard of living. Why? Because most people are wage-earners. It is the same logic as that of paying extra income to all right-handers.
What really raised the living standard of this country since the 1930's? Laws passed by Congress mandating that the living standard be raised? Don't be ridiculous. It was produced by more (and better) work and more technology advances and more wise investing in the future. And the more competitive wage-earners gained their rightful share of the new created wealth mainly because their labor was needed to help produce it and businesses had to pay them enough to get the work out of them.
It was their work that produced the wealth, not their higher wages; but some higher wages were necessary as a means-to-an-end to get them to do the needed work. Higher wages are not due to laws passed by politicians, but are generally the result of higher worker value and greater bargaining leverage based on the employer's need for the workers. When this leverage goes down and wages decline, it is because the workers' value is going down, and when this happens, all the laws and edicts and decrees and papal bulls in the world mandating higher wages will not accomplish anything except to make things worse.
Such laws are merely symbolic during times when workers' value is increasing anyway, as it usually did in the 1960's and earlier. Then the laws were innocuous and did little harm. Living standards rose in spite of the government's interference. But when worker value declines, as it gradually did until recently, especially in certain sectors, such laws only compound whatever is wrong.
And reducing access to cheap foreign imports will make things worse, because it will reward only those who are the less competitive in the economy and will encourage them to remain as they are even though they need to change and become more competitive, while it will penalize those who are more competitive (who don't need "protection") by taking away their access to the cheap imports. When we reward those who are doing the wrong thing and penalize those who are doing the right thing, we do not make the country better off -- most or all of us will be made worse off, even though the ones doing the wrong thing may be numerous and may gain a small benefit for a period.
"The wrong thing"? To make a company pay you $15 or $20 an hour to do a job which can be done just as well by cheap labor is the wrong thing to do. No amount of snake-oil economics can justify such waste. That company should be allowed to replace you with that cheap labor just as surely as it should be allowed to replace you with labor-saving technology. How can it hurt the economy or the country to replace a high-paid worker with cheap labor but not hurt the country to replace that worker with a labor-saving robot or computer? Many of these replacements of workers by machines are done for one purpose only: to save on labor cost.
Free-trade bashers need to come to grips with this fundamental reality: Most of their arguments against free trade are also arguments against labor-saving technology and automation. Deindustrialization is caused partly by new technology, as was pointed out earlier in the Krugman article, and as Batra has also pointed out indirectly, by showing the parallels between the "decline" of agriculture and the "decline" of manufacturing.
Will those who condemn free trade also condemn labor-saving technology? Their silence on the subject of automation speaks volumes. It tells us more than all the speeches of Ross Perot, Pat Choate, and Pat Buchanan combined. They want to save jobs? Why don't they declare war on all those job-stealing computers and robots? There's a second sucking sound taking away "our" jobs and "our" factories. Grab your pitchforks, U.S. workers! or better yet, your sledge hammers!
End of Part 3. Proceed to: Part 4: What about that multiplier effect?
Return to:
The Sucking Sound and You Introduction
Part 1: What about those declining wages?
Part 2: What about those high tariffs in the 19th century?
Part 3: What about that deindustrialization?
Proceed to:
Part 5: Compete? Yes, but not with them foreigners!
Part 6: Lower Cost vs. Higher Income
Do you have a bitch against free trade?
All arguments against free trade (total unilateral free trade) will be posted in this site and debunked.