Sunday, December 17, 2017

The Disadvantages of Trade Are Due to Federal Intervention

The federal government, not trade, is the source of social losses from the exit of manufacturing firms. Trade always results in making the parties to the trade better off. It may result in one party's being made better off to a greater degree than the other, but without both parties' being made better off they wouldn't trade.
The declining automobile industry and Chinese manufacturing illustrate separate issues. With respect to the US auto industry in the 1960s and into the 1970s, when I was in high school and after, consumer advocates talked in terms of "planned obsolescence"--that American car makers deliberately produced badly made cars so that consumers would be forced to buy new ones within a few years. That was probably an exaggeration of the Big Three's competence: They produced bad cars because their management systems were crummy, not because they consciously made bad cars. The 1979 book by John Z. DeLorean and Patrick Wright "On a Clear Day You Can See General Motors" covers GM's often laughable incompetence.
Thus, global competition has been a boon to Americans. It increased the quality of cars because of the Toyota production system invented by Taiichi Ohno and the Toyoda family. The result is that cars that once had to be junked at 100,000 miles or less now frequently last 300,000 miles.
That means every American who buys a car enjoys three times the value. Although American auto workers lost their jobs (a plight amply illustrated in Michael Moore's best work, "Roger and Me"), Americans have on balance been made better off by trade.
With respect to China, there is a combination of issues. First, labor costs are lower in China, and there is a reason to move labor-intensive plants there and to other low-wage countries. Low labor costs mean lower prices to Americans. One of the reasons we have sustained a relatively high standard of living is the inexpensive merchandise at big box stores due to low labor costs in China.
At the same time, plant relocation requires capital investment, and when capital is at its market rate, there is an impediment to making risky and costly moves. The costs of relocation have been suppressed by the federal government and the Federal Reserve Bank. By keeping interest rates artificially low, firms have been able to invest in plant relocation and make other labor-cutting capital investment at subsidized cost. There likely has been overinvestment in labor-saving technology as well as plant relocation because of suppressed capital costs.
Hence, the relocations and the loss of blue collar jobs are not entirely due to free trade. They are in part due to the federal government's subsidization of capital investment.
That's not the only way, though, that big government interventionists have hurt blue collar workers. During the same period that it subsidized plant relocations, the federal government increased all kinds of regulation, from human resources and employee benefits to OSHA, to environmental regulation, to Sarbanes-Oxley, to product liability. In addition, it raised corporate tax rates. The Democratic Party's policy mix seems designed to force manufacturing to move overseas.
Moreover, and most importantly, the federal government through its protected monopoly, the Federal Reserve Bank, has inflated the money supply while the dollar is used as the world's reserve currency. Foreign holdings of dollars limit the inflationary effect of historically low interest rates. The dollar remains relatively strong despite massive increases in the number of dollars.
In a free market trade regime, if many manufacturers exit a home country and sell their goods back to the home country, the value of the home currency will decline. That has not occurred. Rather, the dollar has retained its relative value despite the exodus of manufacturing to China. The reserve currency status of the dollar allows the Fed to subsidize privileged industries in services, government, education, and health care while it drives productive industry to China.
It is not surprising that President Trump's often-blue collar supporters have been skeptical of trade, for the managed version of it has harmed their interests. In contrast, the well-to-do beneficiaries of Fed policies, stock market investors, Wall Street, government employees, beneficiaries of government welfare plans, real estate developers, professionals like psychologists who benefit from state programs, are key constituencies of the big government economy. Notice that none of these produce much of value. America's has increasingly become a vampire economy.

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