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THE SUCKING SOUND AND YOU
Part 1
What about those declining wages?
In his book, The Myth of Free Trade, Ravi Batra argues that free trade leads to lower incomes (lower real wages (adjusted for inflation)), and thus a reduced standard of living, for most Americans, and surely anything that makes most Americans worse off must be bad. He gives mainly empirical arguments, using a vast array of statistics and graphs.
Let's accept all Batra's data as accurate, since it is not our purpose here to become bogged down in a numbers contest. Even if his facts are correct, he fails to make the case why our freedom to buy foreign imports should be restricted, or why we should be punished with higher tariffs.
Batra's entire argument is fundamentally wrong for this reason, if for no other: the function of business in society is not to provide jobs or incomes to people. Its function is to serve consumers by providing products and services to them. And this truth alone refutes Batra and all the free-trade bashers.
And Batra is fundamentally wrong for this reason also: He ignores the obvious fact that it is only the less competitive workers who suffer a wage decline. He fails to distinguish wage-earners as individuals (the more competitive vs. the less competitive) and instead lumps them all together in one mass, as though whatever pertains to some of them pertains to them all.
It is typical of those who condemn free trade to think of people in large masses, such as "the working class," "the middle class," the rich, the poor, etc., in other words, like mindless cattle to be treated as a herd rather than as individuals buying and selling and competing in the marketplace.
Let's take a look at Batra's data. He says the U.S. was essentially a "closed economy" until the year 1973. In that year suddenly we became a "free trade economy," and simultaneously with this historic landmark there began a downward trend in "real earnings" for American workers.
Batra considers some different proposed explanations for the decline in wages and, concluding that none of them is satisfactory, declares that only the advent of free trade could explain the phenomenon, especially considering the coincidence of the two trends both starting in the same "watershed" year of 1973.
What happened in 1973, according to his figures, is that there was a sudden upturn in foreign trade. The lowering of tariffs had alrady begun as early as 1947 and had continued steadily. But trade as a percentage of GNP did not surge upward until about 1973, and it has risen sharply in most years since then. And from the same point in time there began a decline in average real earnings for about 80% of the U.S. labor force.
This, according to Batra, proves the U.S. standard of living is going down, and it must have been caused by free trade, or by the increasing level of foreign imports which began in 1973. By some other accounts, such as per capita GNP, the living standard has not declined but has continued upward, but Batra rejects this measure of the living standard and instead uses "average weekly earnings" figures as the proper measuring rod. These wage figures are for "nonsupervisory workers" and exclude executives, managers, and professionals, while including the vast majority of the labor force.
These figures give us "the best available measure for the standard of living." (p. 24) And "a country's average wage adjusted for inflation is a far better gauge of well-being than either GNP or per capita income."
So, is this then a devastating argument against free trade? Even if we accept all his facts and analysis there are at least two flaws to this kind of argument:
1) The decline in earnings, such as it is, is restricted to a particular group, perhaps a large group, but nevertheless a group which can be properly identified as less competitive than those not experiencing the decline, and thus, the phenomenon is a normal process within a competitive economy, serving the purpose of moving less competitive workers to where there is a greater need for them; and
2) Something totally different than trade is probably causing the stagnation/decline in real earnings among U.S. wage-earners, because other industrial countries are experiencing a similar phenomenon, even though they are not undergoing expanded global trade as the U.S. is, and also, at the time they did increase trade with other countries, they did not experience a similar wage decline or stagnation.
More competitive vs. less competitive
Let's assume that Batra's facts are all correct. His logic is that anything which reduces the real earnings of 80% of wage-earners must be something bad. Is that true? The reasoning is: well, gosh, anything which hurts a majority must be bad, and anything which benefits a majority must be good. What could be more obvious? Right?
Okay, if you agree with that logic, then consider this scenario: Suppose in a hypothetical country there is a law requiring that a certain minority of citizens, lets say blue-eyed people, must pay a special tax which the majority do not pay. And non-blue-eyed people are an 80% majority in this country. Now if this law comes under question and proposals are made to revoke it, the argument could be made that, well, gosh, that would hurt 80% of the population and benefit only 20%. So therefore the law should not be revoked?
No. Such a law should be revoked not just because it is "unfair" and "discriminatory," but also because it is bad economics. The truth is that even non-blue-eyed people in this hypothetical country will be better off in the long run if such a law as this is revoked. In other words, the economy which is best for everyone in the long run is one which operates on rules which are good, and yet, in the short run, could hurt the majority. The rules are not necessarily bad simply because a majority could temporarily be hurt.
So, how do we decide what are good and bad rules? In the scenario which Batra presents us with, why is it that 80% of the labor force experiences a bad result? What could justify this?
Well, the answer is obvious. This 80% of the labor force happens to be the 80% least competitive. The remaining 20% are more competitive and benefit from the economic changes. And in addition to these, there are the non-wage-earners--managers, professionals, entrepreneurs, the unemployed--the vast majority of these are better off as a result of the increased global trade, because they enjoy the benefits of cheap imports but are not threatened with the income loss cited by Batra.
However large the group may be, the harm described by Batra is only to the most uncompetitive wage-earners. The essence of uncompetitiveness is replaceability. These who are replaced (by cheap foreign labor or whatever) are ipso facto less competitive. As we shall see later, even Batra admits that it is good for the country as a whole when the less competitive are replaced, even though it is not good for them individually.
Furthermore, replaceability is really the cause of declining income (because more replaceable means less valuable), and there is no true solution for the "victims" except to become more competitive (less replaceable). And as they become more valuable, their incomes will stop declining, and the vast majority will become better off in the long run. The reason they become better off is that the increased competition is better for all, because it benefits all consumers. This gain for consumers offsets the losses to those who were less competitive.
No? You think the harm to those who lose in the competition is greater than any benefit from the competition, even in the long run? Well then, you must be against all competition. You must condemn the competitive economy altogether, all competition, even that within the country, not just the competition from foreign imports and cheap labor.
You must condemn competition between companies as well as between workers. Why? Because competition always penalizes the less competitive, inflicting a certain amount of harm on them. And there is no reason to claim that this harm is tolerable if the number of uncompetitive is small, but intolerable if their number is large, since the benefit to consumers increases with the larger number of competitors and the toughness of the competition.
There is no logical cutoff point where you can say "only this much competition and no more!" What is the basis for drawing such a line? "Only if at least 51% of the labor force are winning in the competition and 49% at most are losing out!" Why? What if 60% or 70% of the labor force are in out-moded jobs and could be easily replaced by robots or computers? They should be protected against having to change because they number more than 50% of wage-earners? They should stagnate in those uncompetitive jobs and progress should grind to a halt? On the contrary, the larger number of the uncompetitive only underscores the need for change.
The fact is that most of that 80% will be better off if the entire 80% are forced by the market to change, to improve themselves, and become more competitive. As the number of these changing ones increases, the gain per individual consumer (due to the benefits from competition) increases.
Let's exaggerate the situation: assume that 98% of the labor force are uncompetitive, not just 80%. If all 98% are driven by the market to change, and they are pressured into finding a more competitive place in the economy, the overall benefit of this to consumers will be twice as great as it would be if only 49% were forced to change. And seven times as great as it would be if only 14% were forced to change.
So Batra's argument based on the figure of 80% of the labor force proves absolutely nothing. Even if it were 100% of the labor force, the truth still remains that the competition is good for the economy, including for those wage-earners who lose their jobs and must change.
Even if 100% of the population were uncompetitive, if such a thing could be possible, they should still not be protected from having to compete, even if it means their business goes bankrupt. Still most people will be made better off, because everyone benefits from all the others being forced to compete. So the 80%-of-the-labor-force argument is utterly worthless.
More global trade = lower wages?
Batra's argument is wrong for another reason: there is no general empirical evidence that more global trade leads to lower wages, even though such a pattern appears in the case of the U.S. If more global trade caused lower wages in the U.S., why didn't it also cause this in other countries which did a transition to global trade? And why is there a similar slowing trend in wages in other countries which are not now doing such a transition? The causal link between more trade and lower wages cannot be demonstrated.
Let's consider Batra's numbers on wages in other industrial countries which are not going through a transition period to global trade as the U.S. has been. He lists several of them (pp. 88-123), and they do not at all support his theory about the decline of wages.
Canada has experienced only a slight increase in trade as a percent of GNP from 1950-1990. There is no adjustment period here to an "open economy" as the U.S. has experienced since 1973. But wage growth in Canada is declining. Real wages rose the most in the '70's, but by 1990 they had stagnated--down to 0%--not yet negative, but heading in a downward trend.
The same with Germany. A difference here is that Germany has experienced a steady increase in trade as a percent of GNP, a large increase over forty years, but no sudden increase as in the U.S. Expansion in trade occurred right along with increased wages until the mid-'70's when wage growth began to decline, and its period of lowest wage growth was not during the years of expanded trade (as Batra's theory would predict), but in the '80's when trade had tapered off at a high level.
Germany's economy is often proclaimed as one of the highest in performance, and its level of trade as a percent of GNP has come to be the highest of all the major industrial countries, contrary to what Batra's theory would predict. No indication here that expanded trade leads to lower wages. But there is the same recent wage stagnation observable in all the industrial countries.
In Japan, the level of trade has remained about level from 1955-1990, but wages began stagnating in the '80's and have not picked up. What's causing this stagnation? Not increased foreign trade.
Italy's foreign trade expanded a small amount and lately went back down some. Wage stagnation hit hard in the '80's and got worse. Expansion of trade obviously had nothing to do with it.
In France, the stagnation began in the late '80's, after trade stopped expanding, not after it started expanding in the '60's. Here wage growth occurred precisely when Batra's theory says it should not have, directly after the expansion of trade period. Batra's theory wrong again.
Australia is the only other country with negative wage growth--in 1990. Here too there is a gradual downward trend leading to it. The level of trade as a percent of GNP was virtually level for the 30-year period.
In Great Britain too the pattern of recent wage stagnation seems to exist, though in this one country the pattern is not so obvious.
All this wage stagnation, in one industrial country after another, should tell us something. Namely, that something adverse is happening to wages in all the industrial countries, but it is not caused by an expansion in foreign trade. Whatever it is, could the same trend not also be happening in the U.S.?
Furthermore, if all these other countries have survived generations of being "open economies" with high trade levels, why should the U.S. be considered any different? Why should the U.S. economy be the only one which is unable to join in global trade without falling on its face?
True, most of these other countries are more "protectionist" than the U.S.; but remember: Batra's magic year of 1973 has little to do with low tariffs--those had already been coming way down for many years. Batra's knockout blow to "free trade" is the fact that U.S. foreign trade shot up in 1973, not that tariffs were suddenly axed.
So, is there no connection whatever between expanded foreign trade and declining wages in the U.S.? Is Batra's theory all wet? Perhaps not entirely. There could be a connection, probably an "adjustment" period, as the U.S. joins these other countries in the world trading system.
Batra suggests this is the case when he compares the U.S. economy to that of Canada, which already had a high level of foreign trade going back to the turn of the century. " . . . Canada, which has been an open economy throughout this century, did not face the same kind of traumatic switch from a closed system to laissez-faire. The country did not suffer the wrenching adjustment that the U.S. economy had to undergo after 1973 and is still undergoing." (p. 89)
Note that word "adjustment." Batra implies here that the period of suffering will end, and once the "adjustment" is complete the outlook will be better.
The transition to global trade in the U.S. has taken place in a shorter time period than it did in other countries. Sudden changes can be expected to have an impact. The abolition of slavery in the South no doubt caused some disruption in the economy there. The transition to a market economy in Russia is causing disruption in that country's economy.
At the most, this is all Batra proved--that there is a transition period underway during which wages for a large number of workers are adversely affected. Not that all of them are really worse off. How many of them suffer a net harm during the transition period? How do we know this number is not offset by an equal number who gain a net benefit?
The overall benefit to consumers, including wage-earners, could very well be greater than the overall harm, even during the adjustment period, not to mention in the long run. Batra has not here proved a compelling need for the government to interfere with our freedom of choice as consumers and penalize us for buying foreign imports.
The real culprit: the declining value of labor
Meanwhile, is there not something else causing some wages to stagnate or decline? There must be--it is evident in all the other industrial countries, as Batra's figures show. It is not due to any increase in trade. So, what is the cause?
To put it bluntly, it's probably a decline in the value of labor. Let's face it--labor is just another resource which is bought and sold in the marketplace. What determines its worth? Why not the law of supply and demand? This determines the value of all goods and services, so why shouldn't it also determine the value of labor?
And this value would seem to be decreasing. The demand for wage-earning labor is declining while the supply of labor keeps going up. That's a formula for lower value, and lower wages.
This declining value of (wage-earning) labor is probably the fundamental cause of wage stagnation/decline, while the adjustment to free trade could be a minor secondary cause, since free trade means more of the free market competition which rewards the more competitive and penalizes the less competitive (whose wage declines). The solution is not to undercut the reward/penalty system of the free market in order to protect the less competitive wage-earners, but rather for these wage-earners to make themselves more valuable, i.e., more competitive, in the marketplace.
When the value of something declines, why shouldn't its price decline also? What's so sacred about wage-earning? Profits can decline, can't they? Where is it etched in stone that wages shall never decline? that they should be eternally exempt from the law of supply and demand?
This brings us to another basic fallacy of protectionism: the general wage level must always increase no matter what, even if the demand for wage-earning labor is decreasing and the supply of labor is increasing; in other words, regardless of the law of supply and demand, the "value of labor" always increases, and so the wage level must always increase.
This is a fallacy because the law of supply and demand does apply as much to labor as it does to anything else that is bought and sold in the marketplace. When something of value becomes more scarce or the demand for it increases, then its price should increase (or if it becomes more abundant and the demand for it decreases, then its price should decrease).
This economic principle serves a legitimate utilitarian purpose in society. When wages decline, it means we need fewer wage-earners and more employers or independent contractors or investors, etc., and the law of supply and demand is operating to lure some of the wage-earners away from those factories where we don't need them in order to relocate them to a more valuable place in the economic system. If there is anything "unhealthy" about declining wages, it is the failure of wage-earners to change, while instead they demand higher wages even though the value of their labor is decreasing.
But what about increasing "worker productivity"?
Shouldn't wages rise as "worker productivity" rises? Batra certainly agrees: " . . . not until 1973 was the generally positive link between wages and productivity--expected and preached by economists for decades--severed. . . . such is the devastation wrought by free trade." (p. 51)
But maybe those economists were preaching from the wrong sacred text. Let's face it--the term "worker productivity" is a misnomer. It's not the workers who become more productive, but the machines. The term should be "machine productivity," and there's no reason why a worker's wage should increase just because he's given a better machine to operate. No, supply and demand determine the value, and that value is decreasing, as fewer and fewer workers are needed to produce the same amount of goods.
So, what's the solution if you're a wage-earner threatened with a wage cut? Maybe the solution is to change careers, retrain, invest instead of spending, start a business. Make yourself more valuable. Prepare to depart from that factory where we don't need you anymore and put yourself somewhere in the economy where you cannot be replaced by cheap labor.
This much is certain: the solution is not to impose your burden onto the consumers by curtailing their freedom to spend their money on foreign imports. No one should be obligated to subsidize your job anymore than you should be obligated to subsidize theirs. Don't expect consumers (or employers) to subsidize you out of sympathy. Don't be a beggar! Be valuable to them and you won't have to go begging.
End of Part 1. Proceed to: Part 2: What about those high tariffs in the 19th century?
Return to Free Trade Forever front page
Return to The Sucking Sound and You Introduction
Proceed to:
Part 3: What about that deindustrialization?
Part 3: What about that deindustrialization? cont'd
Part 4: What about that multiplier effect?
Part 5: Compete? Yes, but not with them foreigners!
Part 6: Lower Cost vs. Higher Income
Do you have a bitch against free trade?
Post it in this web page (click here) or in the SocialContract.com
Message Board.
All arguments against free trade (total unilateral free trade) will be posted in this site and debunked.