Things Fall Apart: The Coming End of the Free Trade Coalition

The American Conservative ^ | September 27, 2004 | Ian Fletcher, VP, American Engineering Association

[rmlew]

Up to now, offshoring of American jobs has been a political flashpoint but, judging by the responses of both parties, has been adjudged by the powers that be to be just another annoying political issue, which changes nothing fundamental and should be handled the way political issues usually are: by jockeying for position within the established policy consensus.

The Democrats, quintessentially John Kerry, have sought to make the smallest policy proposals sufficient to position themselves as the good guys on this issue for those voters that care about it. The Republicans, because they are in office, must defend a status quo they are no more or less responsible for than the Democrats, and are defending it using the same arguments that have always been used on the free-trade issue, as if nothing has changed.

Both responses are perfectly rational within the confines of ordinary day-to-day Washington politics, which is precisely why they have occurred. Unfortunately, both are completely deluded, because offshoring is already setting off a political earthquake that will reshape American politics for a generation. For in reality, free trade is dead and the only question is which party will figure this out fast enough to collect the burial fee.

The key to understanding why free trade is dead is to be honest about the fundamental way free trade is experienced by Americans as citizens of a high-wage nation:
Free trade is cheap labor embodied in goods.

Naturally, everyone wants the labor they consume, whether directly or embodied in goods, to be cheap. But as a wage earner, they also want the labor that they are paid for to be expensive.

Whether this is “efficient,” as academic economists understand this term, or not is irrelevant to the politics. This is shown by the fact that in American history there have been long-lived and stable electoral coalitions producing both free-trade and protectionist outcomes. Economists' theories about the efficiency of free trade touch the way voters actually experience trade peripherally at best and flatly contradict it at worst.

What is relevant to the politics is that this analysis implies the possibility, in a democracy, of a stable political coalition in which one part of society treats itself to cheap labor at the expense of another part. So long as the enjoyers of cheap labor exceed the victims in number, this coalition is viable.

For example, one could have a coalition of everyone who is not a manufacturing worker (roughly 85% of the population) against everyone who is. Manufacturing workers suffer the competition from cheap foreign labor, everyone else enjoys the cheap foreign goods, and a majority is happy. At least in the short run, before everyone begins to suffer the consequences of a depleted industrial base.

You may already see what the problem is and where this is going. What if the percentage balance in the coalition isn't stable? What if we go from 15% of the population harmed and 85% benefited to 30/70? Or 50/50? Or 70/30 the other way? The coalition starts to fall apart.

Free-traders have an argument here: they will tell us that even if we go to 90% or even 100% of the population being impoverished by competition with cheap labor, we will still be better off because goods will be cheaper.

The problem is, as is intuitively obvious to any laid-off factory worker who has contemplated the cheap knick-knacks on sale at Wal-Mart, that the drop in cost of living never matches the drop in wages. Like many free-trade arguments, it is qualitatively true but quantitatively false. The mitigating factors mitigate; they just don’t mitigate enough.

Don't believe this? Let's count up how many people have voted against incumbents because they were unemployed, and compare this to how many have done so because they couldn't buy a pair of scissors for $.99. Has there ever been a demonstration in the streets about the latter?

Free traders might have half an argument here if inflation were a live political issue today, but it isn't. Allan Greenspan has been worrying about deflation, not inflation. And given that the biggest inflationary factor looming on the horizon is the coming collapse of the dollar under the weight of accumulated trade deficits, they're better off not raising the topic.

But back to our electoral math: what offshoring has done is to radically shift the percentages of the electorate who fall into the two categories. So this beggar-my-neighbor coalition is starting to fall apart.

Of course, this takes time, as offshoring all the tens of millions of jobs that can now be offshored cannot be done overnight.

But what doesn't take nearly that much time is for the fear that this is going to happen to ripple through the electorate. Right now, people are taking a wait-and-see attitude, wondering if this is going to be just another one of those crises that were supposed to end life as we know it that never actually happened.

The problem is, unlike running out of oil in 1973, this is actually going to happen. Don’t believe it? It’ll probably only take another two years of empirical data for the trend to become dispositive.

As a result, the cozy acquiescence of a majority of Americans in letting free trade destroy American wages sector-by-sector is going to end. The dividing line between the winners and the losers, which the winners thought, as recently as the dot-com boom of a few years ago, would remain stable, has grown fluid.

Worse, no-one really knows where it will one day solidify. So no-one knows – on a personal, let alone political level – how to protect themselves.

Basically, there is not much left of the American economy that is invulnerable to offshoring. There are, basically, these jobs:

1. Those services that must be performed in person: cooking, policing, bagging groceries, teaching school, prostitution etc.

2. Those activities, like construction, that are performed on physical objects too large or heavy to be economically shipped from abroad.

3. Those activities, like agriculture, mining, and transportation, that are performed on, or relative to, objects fixed in place.

4. Those activities, like the practice of law or advertising, that depend upon peculiarly American knowledge that foreigners don’t have. But even this is rapidly breaking down as law firms, for example, start to offshore work.

5. Activities of government impinging upon sovereign power, like the military, or democratic legitimacy, like Congress. But given our use of mercenaries (sorry, “civilian security contractors”) in Iraq, clearly this can be nibbled away at in surprising ways.

6. Industries where America enjoys significant technological superiority tied to local labor pools or educational institutions, a rapidly-shrinking category.

7. Owning capital. Although not really a job, it's at least an occupation, and so long as America maintains a political consensus that rules out significant expropriation of capital, owners of capital gain from consuming cheaper labor and lose nothing.

The problem is, this isn't enough. In particular, it isn't a high enough number of high-wage jobs, as most, though obviously not all, of the jobs in these seven categories are relatively low-paid. This is largely inevitable, since jobs that must be done by hand, like stocking a Wal-Mart, are difficult to automate to increase their productivity.

So our little coalition starts to fall apart. What happens next?

For a start, the bad news for Republicans is that the psychological bourgeoisie starts to shrink. I use this term to describe everyone in the economy who identifies emotionally with the owners of capital, whether or not a majority of their income is investment income. All those yuppie financial analysts who may now get offshored are an obvious example, but there are far more people in this category, people all over American suburbia.

The key psychological bargain such people have until now had with the system is that economic forces are something that happen to other people. Someone with this attitude can indulge an amazingly dispassionate concern with economic efficiency.

More obnoxiously, he can explain that the jobs being lost are only "bad" jobs, while the jobs being kept, like his, are worth keeping. This is a wonderful way to covertly congratulate himself that his existence is a worthwhile one while that of a blue-collar worker is not. Thus the galloping narcissism of the baby-boomers becomes an emotional motor of globalist economics.

But that party's over, soon. It probably has only one presidential election cycle to go.

The bad news for Democrats is that they sold out so completely to free trade under Clinton that they've thrown away their natural position, earned over 60 years, as the party that protects Americans from the rougher edges of capitalism. With the classic stupidity of the imitator, they embraced free trade just before the fad went sour.

Either party could be the first to turn on free trade and thus capture public support on this issue. The Democrats could follow Ralph Nader's idea’s; the Republicans, Pat Buchanan’s. The fact that these wildly different figures oppose free trade is a strength, not the weakness the Wall St. Journal supposes, as it means that ending free trade can be credibly sold to people on either end of the political spectrum. Or packaged into a nice balanced pitch for the middle.

You want a right-wing America First appeal? You got it. You want a hippie sob-story about exploited workers? You can have that instead. You want a moderate and reasonable “commitment to a middle-class society?” Done.

Once the issue heats up some more after a few more rounds of depressing job-creation numbers from the Bureau of Labor Statistics, the only thing that will be keeping the status quo in place is the corrupt bargain of the American political duopoly, in which each party agrees with the other to not make trade an issue. This bargain is intrinsically unstable because of the temptation to score politically by defecting from it, so one must assume one party must eventually defect from it.

The other will have no choice but to follow or face electoral extinction, and America’s experiment with free trade, which has outlived its Cold War purpose of bribing foreign nations to not go communist, will finally be over.

[justshutupandtakeit]

This was also the case during the Republic's early years.

As long as economic luddenites and crackpots are not leading this nation the rest of the world will continue to invest here. Where would it be safer?

Should a Buchanan achieve office the outflow would be staggering.

[radicalamericannationalist]

So much better to do nothing then and spend tens of billions taking care of cheap labor.

[Sam Cree]

I remember as a kid staying a night in the John Marshall Hotel in Richmond, VA. Not at all sure it is still there.
That was a long time ago.

[Chad Fairbanks]

Personal attacks have no place on the forum. Desist please.

Oh, THIS is rich, coming from you. Ahhhhahahahahahahaha

Pot, meet Kettle.

[The Old Hoosier]

We haven't lost all of our industries, nor will we. Although some of them continue, just with fewer jobs due to automation.

[oceanview]

you mean, like consumer electronics? anything left of that? when we lost it, people said "oh, its just VCRs and TVs", buggywhips. so who controls the entire world market for flat panel displays, a mega-billion $$$ industry - Japan, South Korea & Taiwan.

[The Old Hoosier]

so who controls the entire world market for flat panel displays, a mega-billion $$$ industry - Japan, South Korea & Taiwan.

Indeed. And somehow, unemployment remains low and Americans enjoy an unprecedented material standard of living.

[justshutupandtakeit]

If you believe your statement was significant there is nothing I can say. Maybe two sentences collided and their merger didn't quite rise to the level of meaningfulness.

[justshutupandtakeit]

Can you believe the whining coming from him over an "insult" which wouldn't have gotten a whimper out of a six yr old girl?

Disputing his snide remark insulting the memory of one of our greatest Founders, second only to Washington, is a "personal attack."

My "suspension" which he brought about by his whining on another thread lasted all of an hour. Rather than discuss it with the Moderator I just went to lunch leaving him in command of the "field." Probably made his day.

[justshutupandtakeit]

What a great memory. The biography by Jean Smith is just astounding in unfolding his genius. What men we had back then creating a nation now in grave danger of falling into the hands of traitors like Kerry. A modern day Aaron Burr.

[William Terrell]

United States exports are over 1 trillion dollars a yr and you sneer at this? How many million jobs does this create?

What exactly does the US export at 1 trillion a year? And who produces it?

What percentage of US imports is petroleum?

You tell me.

If there is a "glut" of workers as you claim how is it possible to maintain higher wages here than what the market would produce?

Wages are obvious either down from what they were 2 decades ago in some sectors or the same, with prices higher. Whole sectors are missing and the technical work is going offshore.

You know this very well.

It doesn't matter why medical costs have escalated. The point is that they stay the same or increase when wages trend downward.

Why is so hard to understand that it's ok for prices to be high when they are still a reasonable percentage of wages in each, or most, commodity category? Then we would have a wide range manufacturing base in America.

We care because millions of jobs and trillions of dollars of exports are bought by the rest of the world and because we CANNOT provide all the oil we need which makes up the bulk of our imports. I have no idea what fantasy you indulge in to escape that reality.

We didn't used to, and we had a very healthy economy. When we had a healthy economy, we traded with each other. We don't need to prop up third world and slave labor regimes. The only reason we would, would be for the purpose of a world trade backdoor to a global government.

You a globalist, hoss?

My guess is that you are, otherwise would you have to sprinkle your theories with demeaning insults if your data could stand on their own.

I don't care to live in the world you envision, friend. It has been done the way I described and it worked. It has not been done the way you describe before, and the dissatisfaction spreading through the country directly and indirectly linked to it indicates that it will not work.

What you want to happen doesn't necessarily happen. Economists are wrong about each predicted trend in proportion to the number of them that make a prediction about the trend.

I'll stick with what works and keeps my family safe and prosperous. I am a conservative.

[justshutupandtakeit]

While I didn't check the composition of exports in general it is agricultural products, machinery, machine tools, computers etc. An odd combination of raw materials and ultra high tech stuff reflective of the incredible versatility of our economy.

An earlier poster calculated about 6.5% I had believed it was a little less than 10.

People's lives are better materialistically than they were decades ago. I reject the counter argument catagorically.

Medicine is expected to provide near immortality. How many billions and billions are spent keeping old folks alive an extra few yrs. Years filled with pain and misery for the most part. I am approaching the age where this come become an issue in my life and hope to God it is not prolonged without good reason.

We have the widest industrial base in the entire world. You are not viewing the world that is but the world the RATmedia paints.

Your comments wrt price and wages indicates you do not have a grasp of the fundamentals. Are you trying to make a distinction between real and nominal wages? Nor do you have a grasp of world economic history if you believe this nation EVER was not intimately involved with exports. Our entire early history was tied up with exports of agricultural goods, and imports were extremely important as well.

"Globalism" is a concept of the radical Left and its modern name for "Capitalism" thus I reject the concept in its entirity. I am a believer in capitalism and recognize that there is a World Economy. Though you claim to be a conservative what you advocate is vastly increased governmental control over the economy which would end in socialism.

[Protagoras]

54, white,

Careful, your new buddy is Mr. PC. He will call you a racist now for having that in your profile.

[justshutupandtakeit]

Anyone can call me whatever they wish I'm a big guy and can take it as well as dish it out. And I don't need the moderator to run interference for me.

[Protagoras]

Anyone can call me whatever they wish I'm a big guy and can take it as well as dish it out.

Your a big White guy. You go out of your way to make sure people know it.

And I don't need the moderator to run interference for me.

I don't think they will anyway, they have a habit of tossing you off the site.

[OXM_1962]

Who and what are Luddites?

What are the nature of these foreign investments? Do they invest in stocks, bonds or government debt? Isn't this going to effect the value of the dollar eventually?

[OXM_1962]

I started having second thoughts about "free trade" after watching a panel debate the issue on C-SPAN. The most informative speakers were Paul Craig Roberts, some union economist and Stephen Moore of Cato.

The most damning criticism was that American multinationals are not just moving production offshore but are creating R & D ceters in China as well. The long term ramifications of this are rather ominous. Stephen Moore, or any of the other two panelist supporting free trade, did not adequately address or rebutt this criticm.

[justshutupandtakeit]

Luddenites were 19th century folks who were so concerned about machinery putting people out of work because of its vastly increased productivity that they destroyed the machinery.

Foreign investment can take the forms you mentioned as well as buying companies outright. Investments increase the value of the dollar because they must buy dollars to make them. Japanese auto companies use this method called "direct foreign investment" as well as buy a lot of government bonds.

[1rudeboy]

Tell those americans working in foreign auto plants that make light trucks. the tariff on light truck imports is the reason why Toyota, Nissan, etc al, are building pickups in Texas and Alabama.

Gosh, I wonder if those Americans are out-numbered by the ones who are forced to spend more money on light trucks, and I wonder how many fewer are sold for the same reason.

[justshutupandtakeit]

That is a LIE. I certainly have NOT gone out of my way to inform anyone of my race although for some odd reason you seem to be obsessed with it. It is no more important to me than my age which is now 58 if you want to send a present.

That is another LIE. I had an hour "time out" ONCE because of your sniveling and whining when your balderdash got thrown back into your face. Then you had to go crying to Mommy because the big boys were playing too rough.

The Moderator probably thought you were one of the biggest @$$es he had ever seen.