Adam Smith Opposes Free Trade!

Rep. Adam Smith (D-Wash.), that is. He's one of 42 members of the moderate (and traditionally pro-trade) New Democrat Coalition, which has turned against the Central American Free Trade Agreement, E. J. Dionne writes in his Washington Post column today. (Massive, byzantine treaties like CAFTA, of course, aren't really "free" trade, but I'll take a step in the right direction when I can get it.) They're not against more trade per se, but have come under pressure to cushion the blow to workers displaced by foreign competition.

A few observations: First, as Cato's Brink Lindsey observed in our July cover story last year, the declining share of the economy represented by manufacturing jobs is largely attributable to domestic increases in productivity, not foreign competition. It's just easier to point the finger at a Dark Other when jobs are lost—so at least it's someone's fault—rather than blame largely impersonal structural changes in the economy.

Second, it's not clear why there's any more reason to provide "adjustment assistance" for jobs lost as a result of import competition or offshoring than, say, jobs lost as a result of new labor-saving technology.

Third, if you look at GAO surveys of existing "trade adjustment assistance" programs, it's not clear how effective they are. Some of the program managers GAO interviewed suggested that people being retrained kept on in programs they had no expectation would increase their future job prospects just to continue receiving benefits. There are probably ways to make adjustment programs more effective if we're going to have them—they're probably necessary as a political sop to safeguard the greater benefits of expanded trade—but the need to improve those programs is a bad reason to hold trade liberalization hostage.

Comments

[joe]

"the need to improve those programs is a bad reason to hold trade liberalization hostage."

No, it's a perfect reason to hold trad liberalization hostage. If the localized pain of dislocation is big and bad enough, it will undermine support for trade liberalization. You will never, ever, win the argument that a factory full of hardworking Americans needs to be sacrificed for the greater good. Espcially when that greater good is as diffuse and invisible as the broad economic boost achieved by free trade.

[Anon]

Julian,

Just so I'm clear -- do you oppose "adjustment assistance" on general principle or because the types of economic events that trigger such assistance (offshoring but not technnological upgrades) seem arbitrary to you?

As an example, do you feel adjustment assistance should be offerred to the various cilivians and military personnel who've been BRAC'ed today?

Anon

[Girth]

By the way - love the headline.

[Julian Sanchez]

I think military layoffs are a separate case; the question of whether government employers should offer some sort of severance benefit (I have no principled problem with this) is distinct from the question of whether we want to cushion the effects of economic dislocation generally. The only reason I can see to single out trade-related dislocations, though, is the political one I averted to above, should it prove necessary to deflect opposition to liberalization. On its own merits, such cushioning seems like it ought to be justifiable in general, or a bad idea in general. My inclination is toward the latter, but it's not an issue I'm steeped in.

[Eric the .5b]

No, it's a perfect reason to hold trad liberalization hostage. If the localized pain of dislocation is big and bad enough, it will undermine support for trade liberalization.

So stop trade liberalization because it could lead to a loss of support for trade liberalization, which could cause it to be...stopped?

That strikes me as a bit circular, unless you're trying for "the only test of a good idea is public support".

[Ironchef]

"Fix" the TAA TAA-NAFTA progams?

As if "fixing yet another government program" (wanna bet if they ask for more money?) has ever worked in the past "Please, please, just one more try. we'll do good. honest."

None of the doomsday fears of NAFTA ever came true. Same with CAFTA. Just to appease the entitlement crowd, I'd even let them throw some money at it. Though putting it in a pile and burning will do just as good.

[Anon]

Julian,

Sure, I should have focused on the civilian personnel only.

The Heritage paper you linked to is interesting, but it is noncommital on the same question. I like the line that:

"If we decide that one of government's duties is to give money to workers who have lost their jobs, for whatever reason, then we should do it effectively and efficiently." (Italics mine)

That's a smooth sidestepping of the issue. Following the logic of the paper we should offer wage insurance to everybody. But since such insurance is dependent on finding a new job, and plenty of people won't find a job because they are reluctant to move due "family commitments or ties to the community"...Well, what happens to those people?

I mean, in the end it seems that under the current program people stay in dying towns too long, at government expense. Under wage insurance somewhat fewer people would stay in dying towns. But I really wonder how much a difference it would make. If the main employer in town packs up and leaves and you're still on the fence about whether you should move someplace else, exactly how much incentive will wage insurance provide?

joe's phrasing of this problem seems right, as a diffusive (but real) greater good is opposed to very particular and powerful shocks to my local community. I guess I'm just curious whether the government role should be to try to make the dying towns die quicker (wage insurance) or die slower (the current system). And, of course, what exactly happens to those people.

Anon

[joe]

"So stop trade liberalization because it could lead to a loss of support for trade liberalization, which could cause it to be...stopped?"

No, don't stop the liberalizing elements of CAFTA. Just improve the dislocation assistance and improve the safety net.

[joe]

"I guess I'm just curious whether the government role should be to try to make the dying towns die quicker (wage insurance) or die slower (the current system)."

How about, "reprogram those towns so that they don't die?"

[Eric the .5b]

No, don't stop the liberalizing elements of CAFTA. Just improve the dislocation assistance and improve the safety net.

OK, that's more clear, thanks.

[MikeP]

While I understand joe's point that dislocation assistance will help make trade liberalization more palatable, I question the viability of a Democratic political strategy that opposes liberalization.

As free trade (just as with productivity improvement) displaces and disperses entrenched industrial constituencies, that factory-worker voting block gets smaller. At some point lying to them and to the rest of the country while promoting discrimination against people born on the wrong side of a line on a map becomes less useful than simply taking the pro-trade side and arguing for the improvements to all.

This is yet another example of Democrats (moderate Democrats, no less) not taking the middle ground that the Republicans have abandoned in favor of the religious right. The Democrats are reacting to the Republicans' move to the right by moving themselves to the left, which is downright stupid.

Not that I like Democrats: I simply dislike and fear much more Republicans who think their power comes from their moralizing factions.

[Anon]

joe,

That's a separate debate. Unless you believe that industries are completely fungible and the federal government can just move them around at will, sometimes it will simply be the case that a factory can be profitably moved someplace else -- in another city, in another state, in another country. I am generally sympathetic to the suggestion that some insurance should be provided against this circumstance. My curiosity is what the goal of that insurance should be -- the wage insurance approach tries to get people to move out as fast as possible, while the current approach makes them stay longer.

Now what would be the benefit of staying longer? Well, perhaps a good labor force can attract a different industry to the town -- due to the actions of state and local officials. Perhaps this is what you meant by "reprogram."

Assuming jobs are moving out of state, this suggests that states (and smaller governments) have an incentive to get people to stay. But it's the federal role I'm unsure of -- at the federal level, where is the tradeoff point between the greater good (to the whole country) and the powerful shocks (to all sorts of communities).

Economists probably have a name for this equilibrium. But I bet they argue like children over where it lies.

Anon

[Eric the .5b]

How about, "reprogram those towns so that they don't die?"

I understand why someone wouldn't want to see their town die off. I don't understand a number of other things:

How do you keep a town viable when the majority employer pulls out and there simply aren't enough jobs in the town for everyone? What's involved in "reprogramming" a town? (I gotta love your word choice...)

Why should everyone else have to pay to keep a town economically viable?

If we should, how much in the way of heroic measures must we be willing to take in order to keep those towns viable?

Why do you believe these measures will save the towns instead of just artificially delaying the deaths and making them more sudden and traumatic for the residents?

Which towns are we going to keep viable? If, say, India becomes dominant in global computing and Silicon Valley companies collapse, should we really going to throw money at those companies because they couldn't keep up?

[joe]

"I question the viability of a Democratic political strategy that opposes liberalization."

As do I. Both half of the argument needs to be made - free trade brings significant benefits BUT it also causes problems that need to be managed. I though Clinton did a much better job of doing this than Kerry, who framed his moderate free trade position in a way that made it sound like isolationism.

Anon, maybe it's the urbanist in me, but I think there would be better results achieved by addressing dislocation through regional economic developments efforts, like funding schools, fiber optic cable and brownfield remediation in Gary, Indiana, than through payments to individuals.

[joe]

Eric,

"How do you keep a town viable when the majority employer pulls out and there simply aren't enough jobs in the town for everyone? What's involved in "reprogramming" a town?" Very careful, deliberate, targetted efforts that take local idiosynchracies into account. But basically, investing in promoting strengths and addressing weaknesses so that the community becomes an attractive place for other industries to move into.

"Why should everyone else have to pay to keep a town economically viable?" You know what the answer to that is, we're not going to agree on the principles, so let's just skip it.

"If we should, how much in the way of heroic measures must we be willing to take in order to keep those towns viable?" I suppose I could come up with my own set of standards, but realistically, as much as the political reality deems appropriate.

"Why do you believe these measures will save the towns instead of just artificially delaying the deaths and making them more sudden and traumatic for the residents?" Because I've seen it work in my own town, which has spent the last three decades recasting itself, with outside help, from the corpse of a manufacturing center into a successful, modern urban center for its region.

"Which towns are we going to keep viable?"

All of them, if possible, but priority needs to be put on larger cities, because they have so much more potential, and potential to do harm. A dying city is like gangrene - the rot stinks, and it spreads.

As for Silicon Valley, they'll be fine. They're on the forward face of the wave, and the jobs they'd lose are the back end anyway. Those jobs will be more than made up for by new jobs created by future progress. The trick is to reposition the less-dynamic cities so they can take part in the same process.

[Eric the .5b]

Joe,

"Why should everyone else have to pay to keep a town economically viable?" You know what the answer to that is, we're not going to agree on the principles, so let's just skip it.

Alright, let's recast this on a less ideological, pragmatic level. How and why is saving a town better than just letting the residents leave for greener pastures - what are the benefits of town-saving over town-dying that outweigh the costs?

"If we should, how much in the way of heroic measures must we be willing to take in order to keep those towns viable?" I suppose I could come up with my own set of standards, but realistically, as much as the political reality deems appropriate.

Hey, go for it, at least in short form. After all, I'm not addressing this post to "the political reality" with the assumption it should be done, but instead to the guy who says it should be done. I want to know how far you think we should go, when we should give up, etc.

"Why do you believe these measures will save the towns instead of just artificially delaying the deaths and making them more sudden and traumatic for the residents?" Because I've seen it work in my own town, which has spent the last three decades recasting itself, with outside help, from the corpse of a manufacturing center into a successful, modern urban center for its region.

I don't know your context, so forgive my pointing out that it doesn't sound like your town was saved if you'd say it was a "corpse" at that point. In other words, I thought you were talking about preventing towns from ever hitting that level, not spending decades bringing them back. I'll also note that, as you might expect, I'm skeptical of the sort of claim that the city government managed the town back into viability over the course of 30 years, as opposed to perhaps, at best, avoiding being a sufficient obstruction to the town becoming attractive on its own in the time period.

[Jason Ligon]

I lean more to opposite side of the issue from joe. I would prefer low transaction costs for relocation and a highly mobile workforce in general as ways to promote regional competition that benefits everyone. The most desirable places will get the people, others won't. People can choose less density if that is what they want.

[LisaMarie]

Joe,
If I understand your position, factory workers cannot be sacrificed for the greater good, but everyone else can be sacrificed so that people don't have to leave a town that's dying economically. Since we've established that onely some people have to be forced to sacrifive for others, and saving towns "for the greater good" is the only thing that matters, why not just put entire towns on welfare so they can continue to exist? After all, if we reject the idea that people should ever have to move on from a place because there are no jobs, wouldn't a giant outright welfare program, instead of one disguised as "job training" or "economic development" be simpler? After all, they are just people demanding welfare from everyone else so they don't have to move, find new places or new jobs. Why not just call it what it is and give them cash, food stamps, and Medicaid?

[joe]

RC, Jason, if towns, cities, and regions just sort of folded and their assets transfered, like when a corporation or a certain type of investment vehicle goes bust, I could agree with your position that they should just be let go. But they don't - a down and out city that never comes back just keeps stewing in its own crapitude, ruining many thousands of people's lives - those who are stuck in it, and those nearby, who get flooded as the crapitude keeps gushing out at them. The appropriate metaphor is not one three letter ID winking out at the stock exchange, but an internal organ shutting down in a living being. Look at Gary. Look at Detroit.

Not to mention the environmental catastrophe. Cities aren't piles of inert and organic materials anymore, like Akkad or Babylon. What do you think happens when there aren't enough funds to keep the sewage plant in working order? To keep up with the maintenance of the gas stations? The metaphor here isn't a stone wall left to tumble down, but of a car battery left to fall apart and leak in the middle of a field.

[joe]

First, Lisamarie, being left without economic opportunities is not an equivalent sacrifice to having a small piece of your paycheck collected in taxes.

Second, the purpose of recovery assistance is to restore a city to a place where it can be economically self-sustaining, by changing it. Welfare doesn't do that - it just allows people to stay in their crapitude.

[Anon]

joe,

Aren't the types of infrastructure investments you mention really looking one generation ahead? FIber optics in schools doesn't really help the factory worker, but it might help his kids. This might be a viable strategy, but it really requires taking a very long view. Moreover, there's no guarantee that the kids won't just leave town with their newly gained skills. It stills seems to me that the city somehow has to get some employer to come back, and I still don't see a good way to calculate the odds of that occuring.
This is why I wonder if the long term trend is more favorable to cities with multiple industries. Factory towns may just be too unstable a concept (in the U.S.).

Eric the .5b,

I feel that anyone who is working in city government in a dying town must either be trying to pick over the spoils or trying to save it -- why else bother putting in all that effort? Since the spoils are generally meager (that's the whole point), I'm even inclined to believe that most of the efforts are sincere (though not necessarily effective).
So what's wrong with trying to hang on? Again, if you believe their are big industries to be attracted, then isn't an established work force a draw? And if there aren't big industries but rather small-to-middle size ones, then maybe we shouldn't expect towns to recover so quickly, as they will have to retool to make themselves attractive to a variety of industries in order to regain footting. Isn't 30 years (give or take) a reasonable retooling time?

Jason Ligon,

Aren't the decreases in transaction costs cutting both ways? In particular, aren't the same technological forces that allow companies to set up shop quickly in a new location the same ones that should allow me to telecommute from any location I want? So why should I move? This argument doesn't apply to manufacturing jobs, of course, but according to Lindsey's article those aren't really coming back.
I do like the vision of "everyone gets a trailer and a hitch" subsidies, though.

LisaMarie,

I think you are unfairly characterizing joe's position. He is arguing that towns that suffer a sudden catastrophic loss of industry need not become dead cities. They should have an opportunity to recoup and retool. And why should they have that opportunity? Because, for cities that are large enough, it means that there is a huge labor force being unused, and it is arguably more efficient for them to try to attract an industry to their town rather than have them slowly, inefficiently disperse, leaving a husk of a city with only the least capable (who cannot afford to move and have nowhere to go) left behind.

Again, it seems to me that either way you are making a bet. I'm just trying to understand how at the federal level you weigh the benefits of allowing people to stay put against the benefits of making people move. At least that's how it looks from the government position. From my position it looks like I get to choose suboptimal national growth (or even decline) at the cost of a stable lifetime job versus more optimal (maybe very much more optimal) national growth at the cost of high variability in my employment. Speaking for myself, I could be pursuaded to allow a little suboptimality in order to provide myself (and my family, and my friends, and my community) a little more stability.

Anon

[Jonathan Dingel]

I don't think it's clear that CAFTA is "a step in the right direction." I make a free trader's case against CAFTA at my blog. Unfortunately, most free traders have already lined up in favor of the agreement, and now they're in for a costly Congressional battle.

[joe]

Anon, some of them are looking a generation ahead. You say that like it's a bad thing.

Jericho was founded around 10,000 years ago. Sumer, around 5000 years ago. Alexandria, 2500. New York, 400. It's important to take the long view when you consider urban policy - this is one of the biggest reasons why a pure market system won't cut it.

[Eric the .5b]

Anon,

I feel that anyone who is working in city government in a dying town must either be trying to pick over the spoils or trying to save it -- why else bother putting in all that effort? Since the spoils are generally meager (that's the whole point), I'm even inclined to believe that most of the efforts are sincere (though not necessarily effective).

So what's wrong with trying to hang on?

On a level of principle, I think it's unfair to force everyone else to pay for a town to hang on. On a level of pragmatism, I don't know that it's worth the effort, even if considered fair.

I'm a tolerant guy. If people want to pursue "Sincere...though not necessarily effective" solutions to their problems, that's their business - up until they force other people to pitch in.

And if there aren't big industries but rather small-to-middle size ones, then maybe we shouldn't expect towns to recover so quickly, as they will have to retool to make themselves attractive to a variety of industries in order to regain footting. Isn't 30 years (give or take) a reasonable retooling time?

Sure. But is that "retooling" done by the government or by the market and the people themselves? Joe never addressed the issue of whether the 30 years was really unlike the old joke, "A bad cold normally lasts a whole week, but this medicine will cure it in just seven days..."

[ivan]

Yes Jonathan, at the moment we have the worst of all possible worlds. We have Bush taking anti-trade measures against Chines textiles in order to save an agreement which is not about free trade.

And we have Democrats turning more and more against trade liberalization. They do stress the benefits; that consumers profit from cheap goods and increased choice.

So the economy as a whole and consumers in particular win by free trade. There also are losers - workers in import competing industries for instance. Not all of them, because many of them find other jobs sometimes with higher wages. And they are consumers too, profiting from the lower prices. On the other hand, by keeping the goods out or by taxing them with tariffs you hurt consumers while not necessarily helping the workers in import competing industries.

So by holding liberalizing trade hostage you punish the vast majority of consumers in the hope of supporting the few losers. Surely it would be better to make the economy wealthier by free trade and use some of the benefits to compensate the losers. Why should you forgo that wealth when you even aren?t sure that the victims would get helped by protectionism?

[LEE]

So if it is caused by "increased domestic productivity" why is it that whenever I buy anything I have to search through many "made in China," "made in you name it" to find(and increasingly not be able to find)the "made in USA" product? If it is increased domestic productivity WHERE IS THE DOMESTIC PRODUCT!?

[Ironchef]

LEE why don't you go visit, China, say, and hop on their Internet. Most likely you will be using a computer with an American chip in it (Intel or AMD), maybe with an American or Japanese hard drive, Taiwanese motherboard and possibly an American operating system. There's no outcry over "lost" GDP.

It's a good thing the Chinese aren't protective of their IT industry like we're getting about making cheap t-shirts. I wouldn't want to trade a programmer's job here for a dimwitted textile factory job over there in a heartbeat.

[joe]

(Eric/2)b,

"But is that "retooling" done by the government or by the market and the people themselves?"

An important question, because it goes right to the distinction between welfare and economic development. The only way to successfully replace a dying industry is to have the private market come in with new businesses. But there are very few reasons to set up your new business in Gary, Indiana. The policies I'm advocating are not for the government to put everyone in Gary on welfare, or to give them public jobs, or even to bribe companies to do business there when it doesn't make sense. I'm talking about the government making changes to Gary that will help make it a place that private industry will want to locate in.

ivan, "So the economy as a whole and consumers in particular win by free trade." I think you need to distinguish between two types of "losers." There are those who are in the position of buggy whip manufacturers - people whose business practices just cannot keep up. But there is another group, those harmed by the disruption itself.

It is easy to say that people who aren't addicted to heroin are better off than actively-using addicts. Nonetheless, kicking cold turkey has been know to kill people.

[Eric the .5b]

Joe:
The policies I'm advocating are not for the government to put everyone in Gary on welfare, or to give them public jobs, or even to bribe companies to do business there when it doesn't make sense. I'm talking about the government making changes to Gary that will help make it a place that private industry will want to locate in.

That sounds great, but what sorts of policies are these, and what burdens do they put on residents and on people outside of the town?

[joe]

"what sorts of policies are these"

I listed a few above. Community colleges, infrastructure improvements, cleanup of brownfields, as well as bolstering whatever local resources there are that could form the basis of a new economy.

I think I've finally got an answer to "how much?" Ready?

As much as we can afford. If I have 2 hours a week to landscape my yard, I'll keep it looking good. If I have 20, it will look better. If I could do it full time, my yard would make "Better Homes and Gardens." But I'm not in a position to do fulltime landscaping, just as our country isn't in a position to put unlimited resources into helping hard-hit communities. So we do what we can, and prioritize.

That's the best I can do. I'm not Plato, I'm just a guy who can, sometimes, recognize and fix problems.