When President Obama and Rick Santorum agree about something, it gets my attention. They have both announced tax initiatives favoring manufacturing over other economic sectors. This together with their occasional expressions of skepticism about free trade policies have met with dismissive scorn from the guardians of economic orthodoxy. It is easy to chalk this up to candidates trying to take positions popular in heartland swing states like Ohio, Pennsylvania and Wisconsin. I think they are addressing something that resonates with public intuition. It definitely resonates with my thirty years of micro-economic practice.
I have heard for 20 years that we don’t need to worry about the decline in domestic manufacturing , because we are going to replace those jobs with a knowledge-based economy. Perhaps I just can’t escape my agrarian roots, but we really can’t all earn a living providing health care, banking, social services and website design to each other. The notion that the US could earn a living as financial intermediary to the world seems even less credible now than in 2005. From here it looks like too much intermediation capacity chasing too little real production causes asset bubbles. Somebody somewhere has to use labor, capital, technology and natural resources to grow or make something. The “knowledge economy” advocates have yet to respond to Warren Buffet’s observation that “we can’t all just serve each other pizzas”.
Radical free trade proponents have owned economic policy since the 1980s. In the 1990s we basically threw open our borders to manufacturing competition from anywhere in the world based on the theory of comparative advantage. Comparative advantage is a compelling concept. My neighbor Kurt grows beautiful red and yellow onions, but he has trouble growing potatoes. I don’t understand what is so hard about potatoes, but my onions are always small and of marginal quality. Clearly there will be more and better soup for both families next winter if I double down on potatoes and he doubles down on onions. Both of us keep neat, mostly organic gardens. Either family taxing or impeding the exchange of potatoes and onions is bad for both families.
Extending this principal to open border trade with all nations at all times blatantly ignores the differences between our nation and much of the rest of the world. In concept, our nation provides for and protects the basic freedoms and rights of individuals and associations to work together for the common good. We also maintain an extensive and expensive social safety net. We impose environmental and many other forms of regulations on producers. Some of these are necessary and effective. Others are clumsy, irrational and ineffective. All of this adds a great deal of cost for producers, but presumably protects individuals and communities from the negative consequences of unregulated production. Fanatical free trade thinking so dominated policy that the Senate approved most favored nation (MFN) status for China in 1996 by a vote of 99 to 1. MFN effectively committed to China long term open access to US markets. This triggered a massive state-driven mobilization of capital and labor in China. The impact on US manufacturing was immediate and devastating. Living standards improved in China, but massive environmental degradation has occurred and the people remain in concept and practice the property of the Chinese government. Forcing our producers to bear the cost of our social compact while competing against foreign producers with no such costs, is a misapplication of the principal of comparative advantage. We force our team to compete on a playing field dramatically tilted in favor of the competition. Capital can compete by flowing overseas. Mobility is not so easy for people.
There is no question that consumers benefit from cheaper imports. It is a good thing the goods get cheaper, because real wage levels fall. This is a part of the increasing sense of class division now so evident in the US. It is one thing for Kurt and me to swap potatoes and onions. We live under the social compact common to all residents of Rockland Township and vegetables are just part of our mutual interests. I want fair trade with him if for no other reason than I hope to keep borrowing his tractor. If Kurt worked confiscated land with forced labor and dumped his sewage into the river, I wouldn’t want his onions.
Manufacturing remains very important in Northeast Wisconsin. There is a lot of discussion about how to renew our diversified base of entrepreneurial manufacturing. It is interesting to see two such diverse candidates express a preference for manufacturing over other businesses. Manufacturing matters and we are overdue for reconsidering how the principal of comparative advantage is applied to trade policy in a complex and dangerous world. Fair trade is about more than coffee beans. I am all for free trade with nations of free people with a similarly robust safety net and regulatory environment. Naturally we should be wary of politicians bearing gifts. We should also be wary of economists descending from the clouds to assure us of their received wisdom.