Sunday, October 30, 2016

If You Lost Your Job to Free Trade, Tarriffs Aren't Going To Bring It Back.

Will abolishing Free Trade result in better wages and more jobs?  No.

A lot of ink been spilled about free trade agreements. For the most part, Economists believe that free trade helps the economies of all countries over time.   Republicans traditionally were against free trade, as the Republican mantra until the twentieth century was "God, Country, and the Tariff".

With the rise of unionism in the 1920s and 1930s, however industrialists saw the cost of labor start to skyrocket.  Finding an alternative to Union Labor seemed imperative, and overseas labor was an attractive option.

Thus, over time, the Republican party has morphed from the tariff to free trade.  The Tariff protected industrial interests in the early part of our history in that it allowed native factories to flourish in competition with more established overseas entities. However once we became the dominant manufacturing force in the world, the Tariff no longer made sense.

Of course this sort of sea change in political positions is nothing new. The Republican party was also once the party of abolitionism. The Democratic Party was the party of slavery. Today the Republicans would like to see many Civil Rights walked back while Democrats seem more interested in the rights of everyone including African Americans.  So it is not unusual for political parties to move 180 degrees in their political positions.

In the 1970s we experienced an economic condition known as "stagflation".  Stagflation was brought about when high union wages drove up the cost of goods so that the average American could not afford to buy American-made Goods. Thus, American workers went on strike for higher wages so they could maintain their standard of living.  This in turn led to higher costs putting the American worker right back where he started. The idea that we can just pay everybody more and make everybody richer was proven to be a fallacy during that period.
I've noted time and time again in this blog that many consumer items that today can be had very cheaply were quite expensive back then.  A basic tube television was over $500 for a 25 inch screen and received only a few dozen channels.  Today for $500 you can get a 45 inch television that interfaces with the internet and has a much higher resolution and picture quality.  For a 25 inch screen, you can pay as little as $100 for such a TV, assuming you'd even want one.

A lot of other basic consumer goods were also very expensive in that time period.  American-made lawn mowers, for example, would cost 100 to $200, comparable to today's prices which factoring in for inflation means they cost three to five times as much.  That's why back then every town had a lawn mower repair guy who would fix your lawn mower, because buying a new one was simply out of the question.

I recall vividly my father refusing to buy a Weber type BBQ Kettle as they were "too expensive"  even though he was a vice president of a small manufacturing concern.  The Weber kettle back then was $99 which was a lot of money.  Well today it is still $99 but in the intervening 40 years that's worth about a quarter of what it was.  My father also refused to buy a Coleman steel-belted cooler as it was about $100.  Today they could be had for half that amount, factoring in for inflation means they cost about one-eighth of what they once did.

The lower cost of Labor from overseas factories means we can buy more stuff for a lot less money.  I was going through my tool box the other day and noticed that I had 10 pairs of pliers I have acquired over the years.  And by 10 pairs of pliers I mean just basic pliers - this doesn't count all the esoteric specialty pliers I have also acquired, which would bring the total up to 30 or 40.  When I was a kid, we had one pair of pliers in the house, and my brother and I were always losing them which resulted in my father screaming "where are my God-damn pliers?".  The idea of buying a second or third set and never occurred to him because they cost about $10 which was a lot of money back then.

So this is the conundrum of protectionism. If we go back to "the good old days" and "make America great again" we will go back to where prices are higher.  Once tariffs are imposed on imported goods, domestic manufacturers will also raise their prices.  We saw this recently with the anti-dumping tax that the Obama Administration put on Chinese tires. The Chinese were severely undercutting tire prices United States and as a result a huge Tariff was placed on Chinese-made tires. Rather than reap the benefit of higher priced Chinese tires, American manufacturers simply raised their prices accordingly to obtain windfall profits.  The tire tariff did not improve competition or make things better for the consumer, it just made prices higher and provided excess profits for American manufacturers.  Once the tire Tariff was removed however we were right back where we started.

Plus, if we go back to the Tariff model as opposed to the free-trade model, you can expect prices of ordinary goods to rise dramatically.  Since so many consumer goods today or made in China, you can expect that almost everything overnight will increase in price by at least 10 to 20%.  While it is true that this price differential may encourage more manufacturing in the United States, it will take months if not years for American companies to ramp up production of these products.  Since labor costs are higher in the United States and since the tariffs make the competing products more expensive this does not mean that American-made products would be more competitively priced, but rather the same price as overseas products plus the Tariff amount.

In addition, almost every foreign manufacturer in the world has a factory or is planning on building a factory in the United States.  All the world's car makers have factories in at least three locations: their home country, United States, and China.  The idea that import tariffs would increase the price of "foreign" cars and force people to buy American is flawed.  People would simply continue to buy their Toyotas and Hondas, which are mostly made in America anyway.  And most of these "foreign" cars are made by non-union labor.

Thus, the idea that import tariffs would result in a Shangri-la for the union worker is a flawed idea.  Import tariffs will simply raise costs for everybody and lower everybody's standard of living accordingly.  We would go back to the old model of the nineteen-seventies where everything was so expensive that we had very little.  Remember back in those days most people had one telephone and one television.  It is not that the technologies we're not available, only that they were too expensive.   The idea of having two, three, four, or five televisions in one household was considered absurd.  Putting in telephone extension in the bedroom was costly and few can afford it.

It is true that some folks have lost their jobs due to free trade. Those who were working in industries which became obsolete or where Union organizations forced obscenely high labor rates on manufacturers, quickly found themselves out of a job.  When labor rates for union workers are four to five or even ten times as much as non-union workers, something has to give.

Thanks to free trade, a lot of industries such as the steel industry have moved overseas.  This is in part due to the high cost of labor, but also to the higher cost of regulation with regard to pollution and environmental hazards.  In addition, American steel mills were largely obsolete, both being built before World War II or during that war.  It was cheaper and more attractive to move plants overseas where labor rates would remain low and strikes were unheard of. The unions themselves made outsourcing attractive.

But even assuming you can make a direct connection between your job loss and free trade, there is no guarantee that eliminating free trade will bring your job back.  As I noted earlier, many foreign companies have built factories here, using non-union labor.  That's why the idea that your union job will come back to the United States once we slap a 10 or 20% import duty on foreign steel is somewhat flawed.

On the other hand, it is entirely possible that even with free trade, your job - your new job - may be created in spite of, or because of free trade.  One aspect of free trade that people don't think about is that when goods and services freely flow between countries, it raises the economic conditions in every country involved.  And we are already seeing the effects of this in China and India where labor rates are increasing as more and more people have jobs and us are able to demand higher wages. When unemployment is extremely low, people can pick and choose which jobs they want.  As a result we are seeing China becoming less and less attractive as a low-wage producer.

According to some studies, the advantage of building products in China is rapidly disappearing. When you factor in the cost of shipping and other long-distance related costs, China has only a 5% to 10% advantage over manufacturing costs in the United States. Throw in the uncertainty of the actions of a communist government and you have a good case for making products here in the US. Since the recession of 2008, America has moved from third place in manufacturing, behind Germany, to second place behind China.  Economists predict America will once again be in first place by 2020 which is only a few years from now.

So in essence, free trade is actually working, despite the naysayers. We all have a higher standard of living in that we can buy products for much lower prices. Granted, many in the middle class have found their incomes decline as they lost overpaid union jobs and are forced to work at jobs where they are paid what their labor is actually worth.  However even at these lower wages their spending power is much higher because the availability of low-cost goods.  If we go back to the old model of obscenely priced labor, we end up chasing our tail again, as the price of goods increases and the increased pay yields diminishing returns.

Of course, this is all  heresy to many folks, who believe that if free trade was abolished, we would all become millionaires overnight.  And of course, there are other issues besides wages involved in the free-trade argument.  Many correctly point out that some overseas companies produce more pollution and lack regulations that we have in the US.  Moreover many of these overseas companies do not have to worry about worker protection laws, and often they abuse their employees.  However, I think that as money flows into these third world countries, wages will increase to the point where workers can afford to demand more from their employers, and again we already seeing this in India and China.

It should also be noted that not a single economist in the world advocates the old tariff model.  Among all the major economists, free trade is viewed as the best mode for economic prosperity.  Tariffs and protectionism are viewed as a one-way trip to recession and depression.

And the market seems to recognize this. Whenever bad news has come out for the Hillary campaign in the last few months, the stock market has dropped by dozens or hundreds of points. The most recent revelation of additional emails being reviewed by the FBI caused a 100-point drop in the stock market. The prospect of a Trump presidency and the uncertainty of free trade under Donald Trump caused the market to panic.

And to me, this is the primary issue in this election - economics.  If Donald Trump is elected we will not live in an economic Shangri-la, but rather be forced into recession.  Dramatic tax cuts and huge tariff increases will only mean decreased trade and production in America as well as far, far higher prices for goods.  As someone who is trying to live on their accumulated wealth of a lifetime's work, this is troubling.  I suspect that if Donald Trump was elected president, my portfolio would decrease in value by 20% in the first week.  After that it is anyone's guess, although I doubt it would recover very quickly.

We have already seen this in a similar situation in the UK with the Brexit vote. The value of the pound has dropped precipitously and has remained low as people are nervous as to what to expect.  It doesn't appear that the EU will let the UK have a free ride without some sort of import duties which in turn would decrease the standard of living for those people in the UK, as their country's economy is based largely on exports and free trade.

Free trade is not a dirty word - or words.  Free trade helps the economies of all nations throughout the world.  It provides jobs in countries with high unemployment at lower labor rates and lifts their standard of living, as it is done for China and India.  For other countries such as the United States, it allows us to have much much cheaper consumer goods, thus also raising our standard of living, even if wages remain flat.

Wages today may not be much higher than they were 10-20 years ago, but our spending power has increased dramatically. What matters not how many dollars you make per hour but what those dollars can buy - your effective standard of living.  If we go back to the old ways, as some suggest, we will go back to the ways of stagflation and high prices.  We will go back to the days when owning even one television was an unheard of luxury and having more than one car made you rich.

Do you really want that?