It's The Economy Stupid

If our loyal visitors take a look at the latest Zogby polls they will see that jobs are the most important issue for 1/3 of voters. Iraq is the biggest issue for 1/5 of voters. It would appear that once again, "it's the economy, stupid!"

Is the problem trade? Dean, Nader, Kucinich, Buchanon and others say the problem is global trade. They argue that by allowing open trade with developing countries, the US is giving away jobs. The mechanism, according to them, is that cheaper labor in the developing world combined with permissive regulations in the US allow jobs to be "outsourced" and otherwise shipped abroad. This leaves American workers with few options besides working for peanuts at Walmart or McDonald's (so called "McJobs").

So will forbidding companies from outsourcing solve the problem? Will clamping down on trade openness make things better? I suggest not. In fact, I agree with most economists that reducing trade openness would make people worse off by making prices increase and reducing investment at home. After all, if companies are moving production overseas its because its cheaper. If we forbid that some portion of those companies will respond by simply stopping production altogether. Society will be left with higher prices, and will lose jobs anyway.

What is to be done?
Trade has been a problem for countries in Europe for decades. They responded by structuring all of their government services to accommodate the problem. They work from the principle of flexibility. Tax structures are arranged so that investment and re-investment is easier and cheaper than consumption. Capital gains taxes are low or non-existent but income taxes and sales taxes - especially on luxury items - are very high. Unemployment insurance benefits are generous and long lasting. Education is nearly or totally free at all levels. The result is that as world economic conditions make it unprofitable to produce some good or service in the country, both the capital and the labor switch to more profitable industries with relative ease.

In the USA, we have half of that. Capital is very flexible but workers are not. It is very difficult for unskilled workers in the United States to increase or change their skills. The result is that when a textile mill shuts down somewhere, most of the workers won't have special skills and will have to find a job that does not require much skill. If the textile industry as a whole is unprofitable in the United States, that leaves the aforementioned McJobs. Meanwhile jobs that do require specialized skills continue to be plentiful and unfilled.

Recently, it has become cheaper for American companies to pay the legal fees needed to bring in skilled workers from overseas than it is to train or educate an unemployed American.

I argue that our problem is not our open trade policy. The problem is - largely but not entirely - the shoddy adult education system in this country. We could do more for the economy by offering FAR more generous support for education and retraining than we could by raising tariffs or forbidding companies from outsourcing.

If you are interested in a detailed discussion of how trade exposed countries can adapt to world trade see Katzenstein's Small States in World Markets. Its a classic!