–ADAM SMITH
If you think of opportunity in terms of the Gold Rush, then you’d be pretty depressed right now because the last nugget of gold would be gone. But the good thing is, with innovation, there isn’t a last nugget. Every new thing creates two new questions and two new opportunities.
–JEFF BEZOS
If there is one area that has provided prima facie emotional support to the plight of those who feel left out of the new global economy, it has been the impact of free trade and global economic exchange. The narrative is a powerful one of a blue-collar worker losing a job—and worse, value in the marketplace—as cheap foreign labor replaces his or her skill set. It evokes great emotion and sympathy—and so it should. We shouldn’t ignore the impact of trade policy and market interventions on real people in real communities who are simply seeking to be part of a virtuous humanity. Policymakers have a fiduciary responsibility to seek an optimal framework for civic life.
It diminishes the credibility of free trade advocates (like myself) to deny that in particular cases and specific circumstances, the advent of a globalized economy has created challenges or pain. Free traders such as me assert that, in a macro sense, the free exchange of products, services, and even labor has dramatically benefitted the economy. (In this sense I do mean the domestic U.S. economy, though I would also argue the same for the global economy). Nevertheless, my vehement argument for the macro benefits of global exchange does not negate those individual circumstances where an individual, a family, a neighborhood, or a community experience great angst because of those changes.
Our task is threefold: (1) understand what has actually transpired across the global economy over the last two decades or so, (2) evaluate the benefits and challenges these developments have created, and (3) suggest a framework by which a responsible society can respond to a rapidly changing world.
The above caution applies both ways. Just as ignoring the distinction between beneficial macro effects and individual micro effects can hinder thoughtful, empathetic analysis, so do attempts to personalize and villainize what are clearly impersonal, economic forces. To say “XYZ low-cost manufacturer in China caused my town’s factory to shut down” is a fair statement. But “globalizing economies are ruining our town’s economy” is not. “The Chinese are stealing our jobs” is particularly not helpful—and possibly xenophobic. As any first-year economics student knows, rational capital flocks to its best use.
Moreover, the issue of trade in the global economy is a complex, nuanced topic brought about by a reality that is itself amoral. How economic actors respond to changes may, or may not, have moral implications, but the problem we’re trying to solve is not the fact that increased global trade and lower production costs cause disruption in certain sectors. Rather, our agenda is to examine the impact of global free trade with an eye toward a policy prescription. Instead of assigning blame, we need to understand the full spectrum of economic complexity created by these modern developments: free trade, automation, artificial intelligence, and a digitalized economy relying more on information than products and labor.
Doing More with Less
Those who believe easy access to a global labor force caused U.S. companies to import products for less than domestic manufacturing costs must face an inconvenient truth. American manufacturing jobs began declining in both relative and absolute terms decades before NAFTA ever became law. The significant, yet politically uninteresting, fact of the matter is that a dramatic increase in U.S. manufacturing productivity has enabled the sector to do more with less. The United States remains the second largest manufacturer in the world, responsible for 17.2 percent of total global output. It is the third largest exporter in the world.24 America’s manufacturing contribution has simply not been the issue, either to her own or the global economy. The issue has been the labor force required to maintain that same level of manufacturing output.
Figure 5.1
The numbers displayed in figure 5.1 show a thirty-five-year period in which manufacturing output in the U.S. didn’t just climb—it grew exponentially, even as employment in the manufacturing sector declined in inverse proportion. NAFTA and other high-profile trade agreements didn’t enter the story told by this data until halfway through this timeframe.
Technology, economies of scale, innovation, improved divisions of labor (i.e., specialization)—the American economy has seen a productivity boom, and productivity is the engine of economic growth. The reality is this: if we applied productivity levels in the year 2000 to actual production output in 2010, we would have required nearly twenty-one million workers. But our 2010 production required barely twelve million workers. Our manufacturing output did not decline, but we produced more with dramatically less.25
If we choose to view that situation as a problem, we open an incredibly un-American can of worms. We are not, and never have been, a society that celebrates inefficiency. It’s perfectly human to bemoan the loss of jobs and the economic anxiety created by improvements in manufacturing productivity, but to bemoan increased productivity and efficiency itself is simply not in the American DNA. Even if the facts don’t align with a political narrative, they remain stubborn things. American manufacturing did not decline; the number of bodies required did. We can and should celebrate the benefits of greater efficiency, primarily incredible cost savings for consumers. At the same time we recognize the net result on the economy as positive, we should also evaluate the best path forward for the disaffected.
However, let’s set aside for now the standard, and perfectly valid, arguments for how consumers have benefitted in this more globalized and technologized economy. It’s an argument I clearly accept and, in fact, believe to be often understated. The food and clothing sectors, for example, have benefitted consumers by leveraging increased efficiencies and decreased production costs. A seminal 2015 study by the National Bureau of Economic Research (NBER) found poor and middle-class groups enjoyed 90 percent of the benefits of free trade.26 The low-cost competition made famous by the likes of Walmart has created incredible convenience and access to low-cost goods for the very economic classes we’re talking about better protecting. All of this should be celebrated.
But those on either side of this issue need not deny that certain economic actors derive certain benefits and yet certain economic actors also disproportionately suffer. Not only is it an undeniable fact, but candidly acknowledging it to be true does not threaten either side’s position!
The market is made with such tensions. The ebb and flow of economics calls for tensions between consumers and producers, importers and exporters, wholesalers and retailers, etc. Lower production costs and greater production efficiencies have given consumers huge gains—yet some of those same consumers have lost their jobs. Falling prices at Walmart is a poor consolation prize for the one displaced by the technological and global developments that made cheaper goods possible. The question, of course, is what to do about it.
Protectionism Pabulum
It is immoral, and dangerously bad economics, to claim that the net economic gain to the whole of society should be less important than the particular economic impact on one specific group of people. Readers familiar with the “broken window fallacy” (made famous by Frédéric Bastiat and popularized by Henry Hazlitt) can imagine where this leads—economic policy based on the perceived needs of the few, while ignoring the actual needs of the many.
Protectionism usually seeks to protect a small group on the receiving end of an economic disruption. But sustainable economic growth depends on assessing not only short-term impacts, but long-term impacts, as well. Our economic health as a whole cannot be sacrificed for a perceived benefit to a smaller group. Such an approach is morally self-refuting and counterintuitive to our free enterprise system. To make things worse, disdain for global supply chain realities, more efficient production practices, and the leveraging of technological advantages is hurting the very peopl
e many well-meaning folks intend to help.
For example, the economic impact of tariffs meant to punish offshore activity is mostly felt by U.S. workers hoping to keep their jobs. Higher production costs, either from the tariff itself or a less efficient production process, results in fewer employees and lower wages. By stifling innovation and productivity and promoting the poor use of the global supply chain, we keep others from working who might otherwise be domestically employed in marketing, sales, design, fulfillment, creative services, packaging, etc. Indeed, when multinational companies hire more foreign employees, they also increase domestic hiring. (Foreign affiliates at U.S. companies rose from 9 million in 2004 to 13.8 million in 2014; meanwhile, the domestic hiring at those exact same companies increased by nearly the same numbers.27)
The truth is we lack any effective policy lever to force free economic actors to pursue their company’s aims in an inefficient way. Protectionist tariffs invite retaliation while creating costs that get passed on to consumers or low-wage laborers. Plus, they don’t address the fundamental truth exposed by this paradigm shift: we need a more adaptable labor force.
Adapt or Die
Along with the nationalists and protectionists, I empathize with those who feel displaced in the economy. But I do not endorse a policy prescription that claims to help the displaced by enabling them to become even more displaced. The need of the hour is not to ignore the economic advantages and disadvantages created by the free market, but to train, prepare, and equip the disadvantaged with the tools and resources they need to defeat displacement.
The idea of punishing companies for building products more efficiently overseas has even less merit when we consider the more systemic problem of our laborers not developing new job skills, learning new technologies, or adapting to changing market conditions. The responsible thing to do is not to deny changes in the labor market have taken place, or use manipulative tools of the state to alter conditions in the global economy. Rather, the responsible thing to do is to improve labor dynamism—the ability of our labor force to adapt and grow in response to free market changes. Improving labor dynamism is a sustainable solution that respects the dignity of the individual while not risking significant interventions in the marketplace, interventions that usually do more harm than good.
Plenty of good apologetics exist for the merits of free trade.28 In the previous pages, I’ve attempted only a cursory look at the cause and effect dynamics of free trade in our economy. However, in a book proposing personal responsibility as a significant antidote to the challenges of globalization, the defense of free trade is anecdotal economic education. At a deeper level, we must face the facts that our society faces real challenges, and playing the victimization card puts us at a serious disadvantage. Our crisis of responsibility tempts us to address the microcosms of free trade challenges with protectionist policies. Our crisis of responsibility enables politicians of both parties to promote a fantasy—the idea that political forces can somehow slow or alter technological paradigm shifts moving at the speed of light.
Many people who have seen their life’s career skills become obsolete via the disruption of market forces need a significant investment in retraining. These individuals are not victims of a malignant foe intent on harming random strangers; they are bystanders to the inevitable process of change, progress, and dynamism. That doesn’t make the impact on them and their families any less real, or any less daunting, but what kind of loving response enables a lie? There are jobs that have been lost in our society that are not coming back—and a substantial part of the disgruntled class knows it, yet continues in the avoidance behavior of victimization. This simply must stop.
Many business leaders and policymakers have introduced mature policy solutions to address these realities, only to see continued grandstanding prevent any real progress. Many disgruntled workers have bemoaned the jobs lost to outsourcing, offshoring, or some other easily demonized force of economic nature, and yet non-farm job openings are at their highest point in recorded history.29 There simply aren’t enough qualified applicants (fig. 5.2). The fields most afflicted? Construction, transportation, and—yes—manufacturing. Have the educational requirements and specific vocational criteria changed? Of course. But the minimal level of labor dynamism required to meet that challenge ought not be beneath us as Americans.
In chapter 11, we’ll examine practical ways to make labor dynamism more achievable. Public policy can, in certain areas, assist training efforts to prepare workers who are ill-equipped to thrive in the digital or more globalized economy in which we now live. The Cato Institute’s Scott Lincicome has done yeoman’s work demonstrating several key areas where public policy can improve our efforts in this arena:30
*Allow business training to be tax deductible, even when it is not in one’s current field.
*Significantly reduce regulation in employment, especially termination practices that remove the incentive for healthy labor market flows.
*Revise the tax code’s preference for employer-sponsored health insurance and discriminatory treatment of the individual insurance market.
*Change a bureaucratic approach to job retraining that has failed miserably.
*Address the disability programs described in chapter 3, which are facilitating the avoidance of retraining and dynamic preparation for labor productivity.
Figure 5.2
Our commitment to sympathy should be real and authentic for those disaffected by the challenges of automation, globalization, and changing labor and trade dynamics. It should also motivate us to feed productive ideas—not symbolic or counterproductive ones. Few things in the history of civilization have created more mutually beneficial economic opportunity than free trade. Responding to the challenges that have become painfully transparent in the present political environment need not require the abandonment of economic truisms we know to be right (free exchange, the merits of improved efficiency, etc.).
To cure this crisis of responsibility, we must resist the urge to apply the victim label and choose to embrace and promote labor market dynamism instead. Only then will we reenergize the virtuous, free market cycle befitting a free and virtuous society.
6
PRO-BUSINESS OR PRO-CRONY
Where Corruption Erodes
Our Cultural DNA
This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundation of our culture.
—CHARLES KOCH
In a totalitarian system, social competition manifests itself in the endeavors of people to court the favor of those in power. In the market economy, competition manifests itself in the fact that the sellers must outdo one another by offering better or cheaper goods and services, and that the buyers must outdo one another by offering higher prices.
—LUDWIG VON MISES
I have always considered the biblical passage found in the first book of Samuel, chapter 8, to be the birthplace of statism. We read in this chilling passage of the Israelites being warned that a king would enslave them (v. 11), trample their liberties (12), practice egregious versions of eminent domain (14), and implement a highly confiscatory tax system (15–17). Then in verse 19 we read their reply: “But the people refused to listen to Samuel. They said, ‘No, we want a king over us.’”
The people wanted a king. And so the civilizational foundation of statism came to be.
The message to us is profound. Theologically inclined readers can see that the genesis of statism was, first and foremost, idolatry: “And the Lord said, ‘It is not you they have rejected, but they have rejected me as their king. As they have done so from the day I brought them out of Egypt until this day, forsaking me and serving other gods” (7–8).
Throughout history, the growth of government has been accompanied by the decline of faithful obedience. Government’s ascent to pow
er directly correlated to the people’s surrender of moral responsibility. Sure, civil magistrates have been a lot of bad things—abusive, oppressive, redistributionist, tyrannical, arbitrary, self-serving, and corrupt—and more for different peoples at different times since the beginning of civilization. But the people wanted a king.
All too often, the prospect of being taken care of, the allure of being led rather than leading, the comfort of having a “savior” has trumped all else, overpowering even the human desire for liberty and flourishing. The record of history is clear as early as the days of the prophet Samuel: when faced with a choice between greater freedom—and the responsibility it requires—or deeper state allegiance, time and again, idolatrous civilizations have chosen the latter.
The choice reveals more about the people than the state. And in this complex reality we uncover one of the key issues dividing conservatives to this day. It’s a split I dedicate chapter 10 to exploring, because the divide is all too real. On the one hand, some conservatives believe excessive government results from the greedy state usurping more and more control of the people’s lives; on the other hand, others believe it results from the people’s ineptness and surrender to the state’s overreach.
Both sides are correct, unfortunately. Inadequate self-government begins the vicious cycle by creating the need for a more intrusive magistrate, leading to a more dependent people, leading to still greater government, leading to even less self-government, and resulting in even greater state expansion. Rinse and repeat. The consequences include a government payroll of twenty-two million employees and $20 trillion in national debt. It’s important to get this cause and effect right, but it’s not the subject of this chapter.
Crisis of Responsibility Page 8