It's Still The Economy, Stupid

Monday, February 16, 2004  

Protectionism by any other name

Bush Chairman of Economic Advisors Greg Mankiw gets a defense this weekend from both Jagdish Baghwati and Brad DeLong.

This type of argument is where everybody begins to look silly. It's true that very few economists will favor protectionism, and for the record, I agree with Mankiw in principle. More important issues abound, however.

First, it was a tremendously impolitic thing to say, for two reasons. First, you don't want to remind Americans, who are down 2.4 million net jobs, that natural economic forces will send jobs overseas. Second, it focuses light on the Bush Administration's total incompetence and incoherence with regard to the jobs issue. More than three years after employment peaked, Bush is just now making noises about job retraining (nothing in the 2005 budget, but he's in favor of it, reportedly) and continues to espouse that tax cuts are creating employment (which they aren't). There's also the issue that he's previously supported steel tariffs, and continued to push for a NAFTA for the Americas, which is less about free trade than intellectual property rights, patents, which are protectionist whatever you call them. Add to that the Department of Labor advising employers on how not to pay overtime, passing bills eliminating overtime for millions of Americans, interfering on the side of management during the ILWU/PMA conflict (and still losing). This is an Administration that is anti-labor to the core and anti-free trade whenever it runs against their constituency.

Secondly, it highlights the flaws in the assumptions made by economists on trade. We assume free movement of labor and capital, which clearly does not exist for labor. As a result, capital becomes more mobile and factories move overseas. We assume there are no economies of scale, and yet midwestern wheat farmers on hundreds of acres are much more productive than Central and South American land tenants forced to till their small plots. When the consumers that benefit from lower prices are all in the U.S., and the producers that lose are all in developing nations, don't think people haven't noticed the reality for the last fifty years.

There was a push during NAFTA for international labor standards (union protection, minimum wages, etc) that would have only allowed countries to join free trade areas had they met these minimum requirements. This would have been a much better setup than the nothing that was actually in the agreement. When factor prices head to equilibrium, it's much better for labor to see foreign wages increase than domestic wages fall. But this type of forward thinking has sadly been lacking from trade agreements, including the ones under Clinton, Bush the former, and Reagan. They have instead been focused on keeping cheap goods coming in for American consumers, to the detriment of the developing world in the short-run, and to our own detriment over time.

Now is certainly not the time to usher in another round of protectionism, which occurs in many forms, as Ron Paul indicates in his questions for Alan Greenspan.

"...But you mentioned the condition of protectionism. You worry about protectionism, which I think is characteristic of all societies that destroy their currencies, and especially when you have fluctuating fiat currencies. People yield to the temptations of protectionism. But once again, there are different ways of bringing about protectionism. There are tariffs, but there is also the competitive devaluations and the exchange rate of the dollar, which is a reflection of monetary policy."

Not surprisingly, the Bush administration recently jettisoned support for their "strong dollar policy", something that was really not under their control, but as speculators had decided that the economy could not function well with the dollar at previous levels, the administration must have just decided to accept reality and project the image that they were in favor (and thus somehow in control) of the policy all along.

As Mr. Paul illustrated above, this is not a free trade policy. The people it directly benefits are U.S. capitalists who have overseas operations (their sales and profits denominated in foreign currencies are worth more). It benefits foreign capitalists who want to buy U.S. assets (now much cheaper in their currencies). It forces our largest creditors in East Asia
to devalue their currencies by buying our debt (or suffer the consequences). It's not helping our workers, who now consume more expensive foreign products while losing jobs, pensions and income, in the least.

An administration trying to restore credibility with average Americans would be better served not to openly snub them with an election coming up. Economists trying to restore credibility as a discipline would be well served to temper their textbook theory with a smattering of reality. Furthermore, it's time to actually do something, paying something more than lip service to the challenge of creating employment in the current economy.

posted by Teddy | 7:08 AM |