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Is Free Trade Really Wrecking the Union?

February 15, 2006

Tags Free MarketsValue and Exchange

For years Paul Craig Roberts has been a leading academic critic of free trade, outsourcing, and "globalization" in general; his latest article, "Bush's Untrue State of the Union," issues the direst warnings — and hurls the strongest insults — yet. After criticizing Bush's foreign policy (an issue where Roberts and I totally agree), Roberts cites economist Charles McMillion to demonstrate the "disastrous" state of the union:

During the past five years private business has added only 958,000 net new jobs to the economy…. McMillion reports that the largest sources of private sector jobs have been health care and waitresses and bartenders. Other areas of the private sector lost so many jobs…that had health care not added 1.4 million new jobs, the private sector would have experienced a net loss of 467,000 jobs between January 2001 and December 2005…Without the new jobs waiting tables and serving drinks, the US economy in the past five years would have eked out a measly 64,000 jobs. In other words, there is a job depression in the US.

Now it is true, if my son informed me upon his eighteenth birthday that he had decided upon a career as a bartender, I would certainly give him a paternalistic lecture. (Even so, "serving drinks" isn't as terrible as it sounds; counting tips, a bartender can earn anywhere from $400 to $900 a week.)

But is the net addition of 958,000 new jobs really a "job depression"? And notice how Roberts dismisses the addition of 1.4 million new jobs in health care — an industry that apparently has his approval as acceptable for American workers since he doesn't describe the work as "popping pimples" or "changing bedpans." Roberts's rhetorical device is quite simple: He points out that if we ignore these new jobs, then things would look really really bad for American workers. Yes, that is certainly a true statement, but by the same token if we pretend for a minute that all the schoolteachers got laid off, then unemployment would go through the roof.

After citing alarming job losses in the manufacturing sector, Roberts tells us the cause of these problems: "Free trade, offshore production for US markets, and the outsourcing of US jobs are the culprits." He then asks, "If the free trade/outsourcing propaganda were true, would not at least some US export industries be experiencing a growth in employment?"

Strictly speaking, that's not true. The case for free trade really isn't about jobs at all, but rather living standards. In a free labor market, wages and salaries would adjust until all who wanted to work (at the prevailing market rates) could do so. In such a scenario, dropping tariffs wouldn't create jobs, it would merely shift workers from less to more productive lines. Now it's true, in our heavily taxed and regulated labor market, a worker needs to possess a minimum productivity to make him employable, and thus if his productivity goes up (because of free trade) then he is more likely to pass this threshold, so in that sense one could argue that free trade leads to net job growth. But I just wanted to correct the popular misconception that the case for free trade concerns jobs.

In any event, Roberts's rhetorical question struck me as suspicious. Although he didn't explicitly say it, he certainly leads his reader to believe that no export industry in the US is experiencing employment growth. Well, software applications are an export industry, and according to the BLS, in 1999 there were 287,600 software engineers (in applications) with a mean annual wage of $65,780, while in 2004 there were 425,890 such jobs with a mean annual wage of $77,330. That sure looks like growth to me; maybe the outsourcing propaganda isn't so crazy after all?[1]

THE MUCH MOURNED MANUFACTURING SECTOR

But what about the alarming hits in the manufacturing sector? First, I have to take the heartless economist approach and state that there is nothing intrinsically special about manufacturing jobs. Surely we wouldn't expect hundreds of thousands of Americans to be involved in the assembly of automobiles in, say, the year 2050. By the same token, countries that are currently dependent on a few cash crops will — if they experience healthy growth and development — see their agricultural employment shrink over time. This is evidence of progress, not depression, as it takes fewer workers to do the old jobs thus freeing up workers for the new tasks that could not have been fulfilled in decades past.

Second, even if one dismisses the above as naïve Panglossian fiction, there is little evidence that the manufacturing slump is due to cheap imports or outsourced jobs. (Ironically, to the extent that "trade" accounts for some of the job losses, it is primarily because of a drop in US manufactured exports, not because of cheap imports destroying the domestic market.) According to the McKinsey Quarterly:

After 2000, as the economy fell into recession, US exports fell. We estimate that more than 3.4 million manufacturing workers were producing goods for export in 2000; by 2003, this number had fallen below 2.7 million. All told, the export slump destroyed 742,000 US manufacturing jobs.

On the import side, though, the picture was very different. It isn't true that manufactured goods flooded into the U.S. after 2000. In fact, growth in manufactured imports was quite sluggish from 2000 to 2003. And as we will explain, this weakness in imports actually boosted manufacturing employment in 2003 by some 428,000 jobs.

Overall, then, trade accounted for a net loss of no more than 314,000 jobs (a reduction of 742,000 because of weak exports and an increase of 428,000 owing to weak imports), representing only 11% of the total manufacturing job loss of 2.85 million. The other 2.54 million jobs disappeared because of the economy's cyclical downturn, which dampened domestic demand for manufactured goods.

OUR OLD FRIEND THE TRADE DEFICIT

No anti-free trade article would be complete without a non sequitur or two regarding the trade deficit:

If free trade and outsourcing benefit the US economy, how did America run up $2.85 trillion in trade deficits over the last five years? This means Americans consumed almost $3 trillion more in goods and services than they produced and turned over $3 trillion of their existing assets to foreigners to pay for their consumption. [Bold added.]

To answer Roberts's rhetorical question, let me offer the glib response: "Allowing people the freedom to use their property without artificial regulations or taxes definitely benefits the US economy, even if those people decide to buy more manufactured goods from foreigners than foreigners buy from them." Following Roberts's logic, we could just as easily "prove" that credit cards and even mortgage institutions hurt the US economy.

At this point, let me repeat my standard disclaimer when discussing the trade deficit and the low savings of US households: I personally think Americans (and just about every other human being) ought to save a larger fraction of their income. As one who got in over his head with credit card debt in college and grad school, I will definitely warn my own children (and anyone else who cares to listen) about seductive introductory APRs and all the rest. But as an economist, I acknowledge the obvious fact that it would be silly to, say, place extra regulatory burdens or taxes on credit card companies in the mistaken belief that government policies should check private foolishness.

Now that I've clarified my views on consumer debt, let us return to an analysis of Roberts's quotation above, specifically his claim (placed in bold) that a trade deficit represents a forfeiture of existing assets, that it is consumption of the "seed corn" and hence unsustainable. Although this may be true of certain profligate Americans, it need not be true in general, and to the extent that the United States has experienced massive trade deficits for several years in a row, it is probably not the norm.

To see why, let's adapt an example from Frank Shostak: Suppose an American entrepreneur wants to start a business doing freelance consulting but he needs office space, a fancy computer workstation, fax and copier, etc. Suppose further that a frugal Chinese merchant sends him all of these items, in exchange for 10 percent of all future revenues that the American earns from his business. Does this sound like a sinister development that will eventually wreck the US economy? Well, according to conventional trade statistics, this arrangement would contribute to the US trade deficit with China (because the American would be buying manufactured goods from China while the Chinese merchant would be buying equity in the American firm) and people like Paul Craig Roberts could point to the shortsighted American entrepreneur living beyond his means by selling "existing assets."

Am I arguing that the admittedly huge trade deficits are all due to such benign scenarios? Of course not. My tale simply illustrates that the deficits alone mean nothing. However, the fact that foreigners continue to use their surplus dollars to invest in US bonds and equity leads me to doubt the most extreme warnings of the doomsayers, such as Roberts's patently absurd prediction (issued in January 2004) that "the US would be a Third World economy in 20 years."

After all, if things are so obviously precarious, why do all of these silly foreigners keep sending us TVs, radios, cars, and medical diagnoses in exchange for "worthless" pieces of green paper or stock shares? As Harvard economists Hausmann and Sturzenegger argue in a recent provocative article, the conventional statistics overlook the ways in which US organizational know-how, brand-name recognition, insurance, and "liquidity services" can yield indefinite returns to Americans. These authors offer various scenarios to explain the superficially puzzling fact that Americans earn a higher rate of return on their foreign investments than they have to pay foreigners who provide the capital to finance the projects.

WHO BENEFITS FROM GLOBALIZATION?

Near the end of his article Roberts plays the populist card. His initial articles (such as the one with Charles Schumer) were very timid, and I for one was disappointed to see how many libertarians attacked his principles rather than simply criticizing his faulty arguments. But it now seems that my colleagues' suspicions were justified:

[The loss not only of low-skill but professional jobs] is what I have been writing for years, while the economics profession adopted a position of total denial. The First World gainers from globalization are the corporate executives, who gain millions of dollars in bonuses by arbitraging labor and substituting cheaper foreign labor for First World labor.

Wait just a minute, Dr. Roberts: Don't American consumers benefit just a tad from all of this cost cutting? While he's at it, Roberts might as well add machinery to his list of job destroyers; after all, greedy CEOs would gladly lay off ten workers if a new machine could do their job more cheaply. But the best is yet to come:

For the past decade free market economists have served as apologists for corporate interests that are dismantling the ladders of upward mobility in the US and creating what McMillion writes is the worst income inequality on record.

Globalization is wiping out the American middle class and terminating jobs for university graduates, who now serve as temps, waitresses and bartenders. But the whores among economists and the evil men and women in the Bush administration will sing globalization's praises.

As an economist who sings the praises of globalization I am not only a whore but (as anyone who writes for Mises.org knows) a cheap whore at that. Perhaps that is why I can't help but chuckle at a former assistant Treasury secretary in the Reagan Administration now criticizing economic policies because of their alleged impact on income inequality.

Moreover, if Roberts is so concerned about the gap between rich and poor, then shouldn't he praise the millions of high-tech jobs that outsourcing is bringing to Indian and Chinese professionals? After all, even Roberts admitted that globalization makes the world (though not the United States, he insists) richer per capita. If you're really concerned about smart, hardworking people being able to earn a decent living, then you should be all for free trade and multinational corporations, as they are the escape routes for hundreds of millions of wretchedly poor (but smart and hardworking) people around the world.

CONCLUSION


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In the present article I have not provided a detailed theoretical critique of Roberts's view that outsourcing will destroy the US economy, as I have done this elsewhere.[2] Rather, here I have opted for the minor goal of rebutting popular (yet fallacious) arguments by giving hypothetical counterexamples as well as statistics that tell a different story.

My final comment, however, is a reminder that we do not have free trade in the United States. Yes, Bush talks about free trade and globalization, and the economy is definitely weak in many respects. But George Bush supports trade freedom for Americans in the same way that George Bush supports political freedom for Iraqis. (Remember the episode with steel tariffs?) There are definitely many policies the government could change to strengthen our economy, such as cutting the bloated "public" educational sector, cutting the federal budget, and reducing bureaucratic regulations on business. However, interfering with consumers' spending decisions, or with firms' hiring decisions, do not fall into this category and will only make things worse.

Robert P. Murphy teaches economics at Hillsdale College and is an adjunct scholar at the Mackinac Center for Public Policy in Midland, Michigan. He prepared the Home Study Course in Austrian Economics, which is available for $350. See his archive. Send him mail. Comment on the blog.

1. I came up with these statistics by using Google and trying to find an estimate of software jobs. Because they are broken up into so many subcategories, I picked "applications" because that seemed like a good one; it was the first and only subcategory that I checked. However, there are other sources that claim that US software jobs have declined since 2000; they must be including other types of jobs (besides what the BLS calls "applications") in the figure as well. Nonetheless, the point remains that when I tried to home in on an obvious example of high-tech occupations doing well, my suspicions were totally confirmed in the first place that I looked. The interested reader can play with the figures for 2000 and 2004 and include whichever categories he or she wants to paint either a very pessimistic or optimistic picture.

2. See my articles, "Free Trade and Factor Mobility," "Who Benefits From Free Trade, and How," and "Can Trade Bring Poverty?" all on Mises.org.


Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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