Paul’s recent post on jobs versus the environment reminded me of a classic political economy problem deeply embedded into the whole discussion of freer trade.
The case for freer trade and open markets is overwhelming. Economic evidence and economic history alike support the view that freer trade over time invigorates economy’s by encouraging the spread of new ideas, new technologies, and new ways of organizing everyday life (to paraphrase economist Joseph Schumpeter). Consumers enjoy lower prices and greater choice. Competition from overseas rivals encourages corporate efficiency and innovation.
Here’s the thing: The benefits of a free trade and open border policy come with a considerable price tag. Not everyone benefits. As everyone who took Economics 101 knows, the gains from trade are dispersed throughout the economy while the costs are highly concentrated. Too many employees have felt the downside of “creative destruction.” Thanks to the routine corporate restructurings, downsizings, reengineerings–pick your favorite euphemism–during good and bad times (like now), there’s little job security and stagnant wages.
Combating the downside doesn’t mean adopting protectionist measures. (Just ask the 1930s protectionists Messrs. Smoot and Hawley or look at the experience of Cuba and North Korea.) But let’s agree on that and move on.
Instead of writing editorials and Op-ed pieces extolling the virtues of free trade, the economics profession should declare victory. The free trade debate has largely been won even though sometimes its two-steps forward and one-step back. Economists and other interested in the issue should focus more of their intellectual firepower on coming up with ways to support workers dislocated by international competition, deregulation, and technological innovation. In an era of high job loss, unemployment, wage stagnation, long-term unemployment, and underemployment, unaffordable or unavailable health insurance, and increasingly at-risk pension plans the truly important questions involve constructing a better safety net for workers (and not their companies). Healthcare reform is one potential step in the right direction. But much more needs to be done.
This way, the benefits of free trade are enjoyed and the downside minimized.