If there is one core belief that unites American economists, it is the theology of free trade. Almost all economists -- left or right, liberal or conservative, Berkeley or Chicago or MIT -- learn as undergrads that trade between nations is an unblemished blessing and the freer the trade, the better. Economists -- and the politicians and editorial writers who listen to them -- hold this belief almost as gospel. Anyone who disagrees is immediately labled a "protectionist." End of argument.
That's changing. It's changing from the top, among academic economists. It's changing from the bottom, among workers -- especially Midwestern workers -- who have to live with the results of trade. And it's changing among politicians, who are the people who have to approve trade agreements -- that is, to put this gospel into practice.
In other words, we're seeing a change in the conventional wisdom, and no one knows yet where it will lead.
At the recent Davos conference, Larry Summers, the chief economic adviser to President Obama, reported that one in five American men of working age is now out of work. He said employment rates had been around 95 percent back in the 1960s, when the free trade orthodoxy took root. Summers didn't call for an end to trade. But he did note that Paul Samuelson, his uncle and the intellectual godfather of American economists, had argued that free trade doesn't work when we are trading with countries that practice protectionist or mercantilist policies. We learned this with the Japanese in the 1980s. Summers was referring to the Chinese. The message: that unless China eases its own trade policies, the U.S. will be justified in slapping new barriers on imports from China.
A couple of weeks earlier, Paul Krugman made roughly the same argument in his column in the New York Times. Krugman, a Nobel Prize winner, said that China's trade policies -- especially its insistence on keeping its currency cheap -- could cost 1.4 million jobs. Krugman also quoted Samuelson, to the effect that free trade only works and is only politically acceptable in times of full employment. In times of high unemployment, he said, it's perfectly legitimate to put limits on exports from mercantilist countries like China.
"There's the claim that protectionism is always a bad thing, in any circumstances," Krugman wrote. "If that's what you believe, however, you learned Econ 101 from the wrong people........Chinese mercantilism is a growing problem, and the victims of that mercantilism have little to lose from a trade confrontation."
We'll get to these victims in a moment. But first, it has to be noted that, while Summers is semi-liberal and Krugman is unabashedly so, both are traditional orthodox economists to whom free trade has always been an eternal verity. If neither subscribes to the iron whimsies of the free-market economists at the University of China, neither can he be called a rebel where market economics is concerned.
In other words, something's going on.
What's going on, of course, is no news to workers in Newton, Iowa, where Maytag closed (3,800 jobs gone), or Janesville, Wisc., (GM and 2,500 jobs) or Greenville, Michigan (Electrolux and 2,700 jobs) or Anderson, Indiana (GM and New Venture Gear, 5,500 jobs), or Dayton, Ohio (Delphi and NCR, more than 20,000 jobs), or the many other factory towns and cities across the Midwest which have seen the factories that sustained them for a century close and ship their jobs overseas.
There's anger a-plenty in these towns and cities, and it's all aimed at open markets, free trade and, in general, at globalization. If you feel, as I do, that globalization is both the present and the future and the Midwest has to learn to compete in global markets, not fight them, then this anger is a great big wake-up call. All these angry people may have lost their jobs, but they still have their votes. If the latest elections are any sign, they're willing to use them. In a democracy, any system, including any economic system, exists by the will of the voters. Government of, by and for the losers is not a basis for future prosperity.
Presidernt Obama got an earful of this when he campaigned across the Midwest in 2008. Hence his campaign rumblings against NAFTA, which is the code word hereabouts for globalization. But so far, there's no sign that he plans to do anything about this pain and anger. So it grows.
Midwesterners, of all people, know the benefits of trade. They know they live in a global economy. For decades, the Midwest brought in workers from around the world and exported its products and farm produce to that world. What was good for the free market was very good for the Midwest.
But now no other part of the coungtry has been so thoroughly bruised by the challenges of globalization in general and trade in particular. A region that has always lived by trade is finding that the free-trade sword cuts both ways. Increasingly, it is inclined to say the hell with it.
Midwesterners, like all persons of conscience, applaud the rising living standards that globalization is bringing to China and other formerly Third-World countries. But they're asking why this must be done on their own backs, why they must be the ones to pay the price for progress abroad. So far, they hear no answer.
To free-trade economists, this is heresy. No one denies there is a growing gap in wages and incomes in this country or that many workers, like those in Midwestern factories, are falling behind or losing their jobs. But the economists argue that, in a modern knowledge economy, the rewards properly go to those with the most education and skills. This, they say, is what's happening and is only to be expected. Others make the point that this reflects a decline of labor unions of weakening of labor laws. It's all part of competition, they say, and the solution is for everybody to get more education and better skills.
No argument here. Wages are definitely rising for the skilled and educated and stagnating or falling for the unskilled and uneducated. Industrial unions indeed spend most of their time trying to manage decline. Labor laws, like other government regulations, have become virtually unenforceable.
All this is true. But the question is -- why? If you've got a high-school education that has been good enough for a steady job until now, the sudden celebration of "returns to skills" is baffling. Your skills aren't necessarily dated: after all, workers in other countries with the same skills now have your job.
The answer is context. The framework of our economy has changed. The national industrial economy that created the Maytag factory in Newton has mutated into a global economy that killed the factory. Midwestern workers find themselves in competition with workers thousands of miles away who will work longer and harder for much less pay and who, thanks to modern technology, often do a perfectly good job. Unions find that their biggest weapon, the strike, is meaningless when management can move jobs out of the country.
In other words, the job is the same. The demands are the same. Nothing has changed but the economy. It's global now. Workers whose lives have collapsed know this, and they're angry, and their anger focuses hard on the cause, which is globalization.
Any academic or politician who thinks he can turn away this anger with a few lectures on the benefits of free trade is kidding himself. It's time to recognize that the pain and anger is legitimate, and we have the duty of a democratic society to meet it. Purists who decry a "protectionist backlash" should realize that, by turning free trade into a dogma and ignoring its very real victims, they are bringing on the very backlash they fear.
The U.S. now offers a bit of trade adjustment asistance and a few months of retraining for people whose jobs are lost to the pressures of trade. This pittance won't do it. The assistance amounts to about half what these workers were making, but their expenses are as high as ever. Too often, the training is for jobs that don't exist or for knowledge-economy jobs that these middle-aged workers, with their high school educations, can never hope to fill.
All economists know that trade causes pain -- usually sharp and localized pain to the workers who jobs are challenged by imports. Free traders argue, with considerable evidence, that this pain is more than balanced by the long-term benefits that trade brings to society.
But trading nations have found that sheer compassion, let alone political necessity, argues this pain must be eased. Trade indeed may bring long-term benefits to society as a whole, but not necessarily to those damaged workers. That's why big trading nations, like Germany, pioneered lavish welfare states and a strong safety net for unemployed workers.
Trade has always been a big part of the German economy and accounts for about 75% of Germany's gross domestic products today. For the United States, with its huge home market, trade traditionally accounted for 10% of GDP. Today, with the advent of globalization, that figure has more than doubled, to about 25% -- not much compared to other countries, but a much more significant sum than it used to be. Before, relatively few American workers were hit by trade. Now, many more are, and our social policies haven't caught up with this.
What does this mean? It means bigger benefits for unemployed workers, people who have paid their dues and find themselves out of job because of events 10,000 miles away. To say that the fault is a "return to skills" is simply cruel, blaming the victim: they must be made whole. It means recognizing that many of these workers, those in middle life with no more than a high school education, will never again have a real job. It means laws, common in other countries, that force companies to announce closures or relocations years in advance, to give communities and their people time to adjust. It means laws recognizing the legal obligation of these companies to help find new sources of income for the communities and to pay for the damage their decisions will cause. Companies complain that this eats into their profits, hampers their ability to do business, throws sand in the gears of global commerce. Right. There's a price to be paid for this new economy, and in a democracy, the price must be shared.
The world is changing. Free-trade economists, always more respectful of theory than fact, may not realize it. But Midwestern workers sure do.
For more information on economic competitiveness and globalization in the Midwest, see the In the News section of the Global Midwest Initiative's Web site.
