In general, trade benefits the great majority of the population by increasing real incomes, and creates many more jobs than it destroys, but a small minority become losers from increased trade. The winners should, or have a duty to compensate the losers.
Read on and you will see how President Reagan tried to help the steelworkers in the mid-1980’s when the industry was being decimated by a skyrocketing dollar.
How Trade Helps The Majority And Creates Jobs
Here is a simple example I used to teach in my class on the benefits of trade. In particular, the income effect and how trade among nations creates new jobs:
One Reason Why Trade Creates More Jobs Than It Destroys
I used to pay $5,000 for a personal computer made and assembled in the United States. Ten years later, I now pay $500 because of trade and offshoring. That leaves me with $4,500 freed up to spend on other goods and services. That is the real or purchasing power of my current income has gone up because of the lower prices of goods and services as the result of trade.
I can now take my family out to dinner more and leave bigger tips for the waiter. This creates more jobs and income in the restaurant industry.
I can go to the movies more, creating jobs in the entertainment industry.
That new car I have been eyeing is now more affordable, creating jobs in the auto industry.
I can afford a landscaper, creating jobs for local labor.
I can better afford to do home improvements, creating jobs for local construction workers.
On and on and on….and very impressive when scaled to the national population. This is the case even if the trading partner is deemed to be “unfair.”
However, a small minority, those who made the computers in the U.S. in the above, example are hurt through trade and should not be forgotten.
The federal government has a Trade Adjustment Assistance (TAA) program to compensate them. It has fallen woefully short and needs to be beefed up considerably.
The above data are an outrage and a paltry or token attempt to compensate those who have lost their jobs to free trade. The losers have been swept under the rug.
The total amount spent on trade adjustment assistance is about equivalent to 20 thousand new dining tables that the HUD Secretary, Ben Carson, just purchased to beef up his office. That is not even enough tables for only the number of steelworkers employed at U.S. Steel!
Now you understand why the rust belt states are pissed off at their government, and rebelled in 2016 and voted for Trump.
Better Compensation For The Losers Of Trade
Here is a personal story from one of our earlier posts about a time when politicians and the country used to care about those hurt by trade but understood its benefits:
After finishing up my Ph.D. comprehensive exams in economics and in between the dissertation, I interviewed at the White House, Council of Economic Advisors (CEA), as a junior economist. They had a program where the CEA would hire graduate students for one year who were in between their comp exams and the dissertation.
Ronald Reagan was President at the time and the day long interview took place in April 1986, just a few days after the U.S. bombed Muammar Gaddafi. That day, security on the White House grounds and in the Old Executive Office Building, where the Council is located, was intense. Secret Service, dressed in their black garb and flack jackets, everywhere.
Beryl Sprinkel was Chairman of the CEA and Michael Mussa was the real intellectual heavy weight of the CEA. The entire council was made up of “Chicago Boys,” not Chileans, but academics from the University of Chicago. Very free market thinking in everything.
Note, this was during a period in the economy when the trade sector was getting hammered by the strong dollar. The trade weighted U.S. dollar index had increased almost 30 percent since Reagan took office and was causing real hardship in the tradable goods sector.
So, the first question I was asked at the beginning of the interview was, “there is a bill in Congress to write the steelworkers, who have been displaced and lost their jobs through trade, a check for $100,000 [$221,000 in 2016 dollars]. What do you think of this bill?
I answered, “no, I think retraining and other polices may be more optimal”. They replied, “that’s what the Democrats think.” I didn’t get the job.
The Chicago boys think the individual can choose their future and retraining better than the government.
That $100,000 was real money and compensation back then, much more than what the government offers to the losers of free trade and globalization today. And, let’s get real, at the end of the day, it was an “effective bribe” to the steelworkers to allow the country to keep pursuing free trade policies.
The day long interview ended in Beryl Sprinkel’s office where he asked me, “[Gregor], can you make good charts? The President likes his charts.” Indeed, President Reagan did.
When I was leaving the Old Executive Office Building (OEOB) after the interview, I thought of taking a little tour of the White House grounds. I walked out of the east end of OEOB onto the White House grounds, probably no less than 100 feet from the Oval Office. I was met by a Secret Service officer in a black flack jacket carrying a high powered rifle, who asked what I was doing there. He booted me faster than a fighter jet. But, oh, so close to power!
So, concluding, I ask folks — whatever happened to that kind of thinking among the policymakers? That is, really compensating and taking care of the losers from free trade and globalization as we, the elites, enjoy the benefits of free trade and globalization in lower prices of goods and higher profit margins and stock prices? Tariffs and shrinking free trade and globalization are going to hurt all of us, including margins and stock prices.
Better compensation for the losers and continue to pursue free trade. Tariffs help a small minority and hurt the majority — a Tyranny of the Minority, if you will.