Too Few Jobs: Trade Is Not the Problem, Slow Growth Is

[Note:  This post originally appeared in American Thinker magazine on May, 27, 2016.]

The irrefutable evidence of economic history over several centuries is that the wealth of societies (later nation states) significantly increases as trade expands.  Scarce resources are conserved by being able to obtain goods from others who can produce those goods more cheaply.   The conserved resources then become available to be redeployed to other productive activities, thus adding to the total stock and diversity of a society’s wealth.

Notwithstanding this overwhelming evidence, however, expansion of trade is often singled out as detrimental to a society’s well-being.  Presumptive Republican presidential nominee, Donald Trump, for example, has made the alleged “costs” of trade a centerpiece of his campaign.  Mr. Trump cites current account deficits with China and Mexico as evidence that those nations are taking advantage of the U.S. and stealing U.S. jobs.  He says that, if elected, he will use his business skills to renegotiate existing international trade agreements so as to eliminate the deficits and bring jobs back home.

Regrettably, Mr. Trump sees the conservation of resources, especially labor, as a cost instead of a benefit to be exploited to the nation’s advantage.  This view is short-sighted, and it ignores the principal reason for the lack of new employment opportunities for resources that have been freed up because of trade, a near stagnant economy.

Economic systems are highly complex. In a market-based economy, all economic variables, including policy variables, are interconnected.  If you push on one variable, every other variable shifts — some imperceptibly, others measurably.  A consequence is that focusing on a specific perceived problem in isolation nearly always leads to a failure to grasp the actual causes of the problem.  Regrettably, politicians rarely learn this lesson.  As a result, they try to “fix” a specific problem that they can see with cocooned policy that does not account for other variables either unseen or incorrectly perceived to be unrelated.  In the end, the “corrective” policy more often than not does more harm than good.

Mr. Trump’s view about the “costs” of trade suffers from this short-sightedness. It focuses solely on what is visible, the displacement of resources (e.g., jobs) in those industries most affected by trade.  Such a restricted view has great emotional appeal because structural changes owing to trade can cause severe hardship to those whose lives are disrupted, and a compassionate nation should rightly address this result (I will come back to this).  Limiting one’s focus only to what is visible, however, excludes accounting for the benefit, on a macro level, of the nation’s enhanced capacity to grow by reallocating those conserved resources to other productive activities.

In this regard, a nation is no different from an individual. Most individuals find that it is cheaper to buy groceries at a supermarket than to produce their own food.  Because it is cheaper, money is conserved that then can be spent on other items that enrich one’s life.  Similarly, a nation that buys goods from abroad at a cost less than it would incur producing those goods at home can use those savings to expand output in other areas.  Moreover, when low-priced imports are intermediate goods, the gains extend to domestic industries using those goods, thus permitting, at the macro level, positive job creation.  Implementing restrictive policies (e.g., tariffs, quotas, duties, etc.) designed to “protect” jobs from being lost to trade (the visible problem) thus suppresses a nation’s wealth potential.

What’s more, this focus on the visible misdirects attention away from doing what is necessary to ensure that the wealth-enhancing gains from trade are fully realized and that trade-related structural change does not produce lasting localized hardships.  In other words, instead of forgoing resource savings and the gains to consumers (including industrial consumers) from low-priced imports in order to “protect” jobs, would it not be better to have a rapidly expanding domestic economy characterized by continuous new job creation?  It is no coincidence, I believe, that Mr. Trump’s pronouncements about the “costs” of trade come at a time when the U.S. has experienced an historically tepid recovery following a severe recession.  Had economic growth been anywhere close to historical norms since the 2008 crisis, it is doubtful that complaints about other nations “stealing” U.S. jobs would have nearly as much currency.

So, the real question to be asked is how do we restore economic growth. This is the problem to which Mr. Trump and others should direct their attention.  Undesired resource idleness does not occur in a vibrant economy with expanding job opportunities.  The goal should be to accrue all of the gains from low-cost imports while maintaining full employment at home.

Putting the economy back on a job-creating growth path will, in turn, require addressing the several significant self-imposed interconnected impediments to that path.  These include, among others, the massive and growing overlay of federal regulations on business; leviathan government spending that saps the economy of productive resources; and a tax system that hinders capital accumulation and is laden with special interest provisions that distort allocative efficiency.

Space here does not permit a full discussion of these yokes on growth and job creation, but a few facts illustrate the magnitude of the yokes.

Regulatory Costs:

According to estimates made by the Competitive Enterprise Institute (CEI), federal regulations imposed a $1.88 trillion cost on the U.S. economy in 2014.  Those costs include direct and indirect costs on businesses and higher prices on goods and services to consumers.  CEI estimates that, all told, the costs amount to nearly $15,000 per U.S. household.  This number would of course be even higher if state and municipal regulations are added in.

Of course, not all regulations are bad. Nonetheless, a $1.88 trillion burden on the economy certainly contains substantial overreach.   In turn, each dollar of unnecessary cost on businesses reduces the output rate at which a business maximizes its profit and thus reduces its demand for labor.  Moreover, the enormous compliance burden diverts resources away from more productive uses that would otherwise expand the size of the economy, and the higher prices on final goods mean that consumers’ real income is reduced.  The end result is stunted growth and fewer jobs.

Spending and Taxes:

Federal government spending for fiscal year 2015 was $3.7 trillion.  Total government spending (including state and local government) was $6.4 trillion. At the same time, the federal government took in $3.25 trillion in tax revenue.  State and local governments took in another estimated $3.1 trillion.  Such a huge diversion of resources away from private, productive uses robs the nation of both wealth and jobs.

In addition, the inefficiencies that spending and taxing policies impose on the economy hinder growth and job creation still more.  For example, special interest tax provisions and spending programs vitiate market-determined resource allocation.   The result is distortions throughout the economy.  Further, taxes on business income, capital gains, and income from savings reduce the returns on capital and make capital less desirable to accumulate.  Less capital accumulation means slower economic expansion and less demand for labor.

Summing Up:

Low-priced imports that American buyers find cost-effective and that provide the opportunity for expanding the total national wealth are a net benefit to the U.S., not a cost.  Restrictive trade policies that focus only on the visible hardships suffered by those most affected by trade misperceive the real problem, a near stagnant economy characterized by slow growth.  In the end, such polices will not only fail to stop inexorable structural change, but make the country poorer.  Far better would be to restore a vibrant, robustly growing economy in which there is continuous job creation that ensures an abundance of new opportunities for those otherwise displaced by expanded trade.  Of course, where short-term transition assistance is needed, that assistance should be provided, but long term unemployment need not be the norm. The next president will have a fresh opportunity to refocus on growth.  A good start toward this end is serious reduction in regulatory overreach, overhauling the tax system to remove anti-growth biases, and major cuts in the amount of national income that big government consumes. — The Chinese and the Mexicans are not the problem.  The problem is us.