Minimum Wage and Protectionism

[guyton]

Could someone explain to me exactly why "protectionism" is so bad?

Do you believe in a national minimum wage? If yes, then how do you reconcile that belief with "free trade" and a policy of allowing massive numbers of jobs to flow to whatever country happens to have the lowest labor costs?

Do you believe in protecting the environment? If yes, then how do you reconcile that with allowing imports of products made in countries where environmental protections any less than ours?

Do you believe in labor unions? If yes, then how do you reconcile that with purchasing non-union produced goods?

Do you believe in having safe products on store shelves? If yes, then how do you reconcile that with purchasing products that are oh so so so cheap ... in sometimes dangerous ways.

I am not an economist, nor a politician, but I totally fail to see how:

- massively increasing the national debt is going to fix our economy
- increasing consumer confidence (aka increasing consumer debt) is a good thing
- allowing our ridiculous trade imbalance is anything but a recipe for disaster
- we can possibly reverse global warming with our current trade policies

Buy me a drink or three and I'll feel great for a while. Maybe even long enough to go buy that new car I think I need. But I won't feel better when I sober up and figure out that I can't make the payments. And when I realize I also have to pay the bar tab I'll feel even worse.

My suggestion? The word that must not be said: protectionism.

- we need to protect the concept of a minimum living wage
- we need to protect our unions
- we need to protect the environment
- we need to protect our health
- we need to protect our economy

I'm not really against "free trade" ... as long as our trade partners share our minimum wage levels, our environment protections, our product safety requirements, and our child-labor laws. We can complete just fine when the playing field is actually even.

But without some protectionism, aren't we all just short-sighted hypocrites looking for another round of "free" drinks?

[HereSince1628]

1. Protection is bad for free-market ideologues. The Founders put protectionism in the Constitution

Why would they do that if it were 100% bad 100% of the time?

An interesting note is that English boat builders feared that the American colonies were unfairly competing in the boat-making industry. They complained our boats although cheap were poorly built and didn't last. They were sometimes very right.

So, once upon a time America had the sort of access to cheap abundant resources and operated with a cheaper labor force that we now complain about. Nonetheless, the Founding Fathers considered the development and PROTECTION of the national economy so important that they explicitly mention tariffs into the Constitution.

[PowerToThePeople]

2. cooperation in using limited resources, not competition for them.

This, imo, is the only way..

[taught_me_patience]

3. Protectionism tends to stifle competition

Lack of competition tends to stifle innovation. Without innovation, the consumer gets inferior products at inferior prices. Look at countries with severe "protectionism" and you'll generally find a lower standard of living and slower growth.

[guyton]

5. re: competition ...

But ... when the jobs are flowing offshore due primarily to lower labor costs, how to compete other than by lowering labor costs? What's the point of having an economy when we don't have jobs to buy the spiffy new products?

I'm not advocating 'severe' protectionism, but just enough to really balance the equation given that we believe in a living wage, protecting the environment, etc.

[taught_me_patience]

6. Some jobs flow offshore and some are created here

The jobs that are created here outweigh the jobs that are offshored.

[JANdad]

12. What Flavor is that Koolaid you are drinking?

You are joking right?????

I am not even going to ask you to prove your point, because I know you can not...

[taught_me_patience]

14. Many economist belive this

Here is an excert from Mankiw:

"Yet, whenever the economy goes through a difficult time, as it has in recent years, free trade comes under fire. Some people now fear that trade is responsible for recent weakness in U.S. labor markets. The concern is understandable, but it is simply not true. Over the past three years, job losses are more closely related to declines in domestic investment and weak exports than to import-competition. To the extent that the rest of the world threatens U.S. prosperity, the main problem is not rapid growth in China and India, but slow growth in Japan and Europe.

Of course, global competition has caused employment declines in some industries. The world trading system is changing along with technology. Goods that could once be produced only domestically can now be produced abroad and imported over fiber optic cable. The Internet and advances in telecommunications have meant that more Americans are competing with workers in other nations. Even if more competition is good for consumers, it can produce very understandable anxiety among some workers and their families.

These technological changes, however, have not rendered Smith’s insights obsolete. The same principles apply to offshore outsourcing of services as to traditional trade in goods. This has been confirmed in a recent study by the McKinsey Global Institute. McKinsey researchers tallied up the costs and benefits associated with outsourcing and found that for every dollar the United States sends abroad, we get back about $1.12, resulting in a net gain of $0.12. Smith would not have been surprised."

rest can be found at...

http://gregmankiw.blogspot.com/2006/05/outsourcing-redux.html



Mankiw is a Harvard economist.

[guyton]

15. "job losses" due to "declines in domestic investment"

So ... if labor here is expensive, and labor elsewhere is cheaper, then the limited capital is going to flow out to build factories elsewhere.

Isn't he stating that declining domestic investment is part of the problem? That same declining domestic investment that is declining because the limited capital is going offshore?

[taught_me_patience]

17. Capital is flowing into the U.S.

Current Account Deficit = Capital inflows.

[guyton]

18. really?

I don't get it. Our trade deficit is really a capital investment in our economy, not a drain. Really?

[taught_me_patience]

19. As it related to trade, yes

as the trade deficit rises, foreign capital investment also rises.

[Romulox]

28. If you only look at one side of the ledger. OBLIGATIONS to foreign entities rising concurrently. nt

[treestar]

30. You're just assuming, and could be wrong

Massive layoffs are reported in the media. Newly created jobs happen a few at a time, and aren't news. So we don't really know if the loss of any jobs is balanced out or even exceeded - the media never reports it, and a lot of DUers just assume every job loss is a negative one job in the U.S.

To me the biggest evidence is that we can still afford the imports. There would be a point where moving labor offshore would not be effective if no one was left in the US who could buy the products.

[RaleighNCDUer]

7. Not with a proper balance.

If you use tariffs to undercut foreign competition, that is self-defeating because, as you said, it reduces the need for innovation as there is no competition. But if the tariffs simply level the playing field, where the cost of imports are raised to be equivalent to the cost of local products, then the local products must do something to still fight for the market - innovate. What it comes down to then is which is the better product, rather than the cheaper product.

Fair trade - not free trade.

[rucky]

11. "Competition" in the current market = a race to the bottom.

producing third-world products at third-world prices in order to "compete".

Sure there'd be less "choice" for consumers, but the innovation part is debatable.

[Romulox]

24. Competition with third world workers has lead to a rapidly declining standard of living in the US

"Innovation" in this case means "the ability to concentrate wealth amongst the elites."

In other words, innovation is not, per se, a benefit to the American people.

[Deja Q]

32. re: inferior products at inferior prices...

Vista was the most expensive edition of Windows to date and, especially before SP1, would only be honored by being called "inferior".

Never mind product recalls, lead, melamine, improperly manufactured goods...

http://www.youtube.com/watch?v=Zj-vIOMtVY0

[taught_me_patience]

33. I'm sure you can find examples of inferior products

in an economy the size of the United States.

[Veritas_et_Aequitas]

4. In theory or in reality? (Warning, my answer is comprehensive)

In theory (meaning ideal free trade/economic situations) protectionism is inefficient because it ties a country's resources up doing something it's just not that good at doing but another country might be really good at doing. Let's pretend that the USA and South Korea both produce microwaves comparable in quality. For whatever reason (usually laws, company policies, unions, price of resources, etc) it costs a US company $90 to produce a microwave, but it only costs a South Korean company $70 after cost of import. From a macroeconomic standpoint, in that situation it would make more sense for the US to start buying microwaves from South Korea. This would free up resources (money, physical capital and workers) to do something that the US is particularly skilled at doing, say making airplanes. The US would make more airplanes and increase revenue. It's just an extension of the division of labor that you and I engage in everyday.

In reality it's not quite that clean-cut. Maybe South Korean companies are producing microwaves for $120 each but are receiving $50 government subsidies for each microwave made. Maybe (probably) their workers' wages are significantly lower or the factories are horribly unsafe (ie a sweatshop). Or maybe the microwave is really an inferior good (the official economic term for a good that's crappy) and is just at such a low price that domestic microwaves can't compete, even if they are top-of-the line. Whatever the cause, the South Korean manufacturers are engaging in what politicians and business owners call "unfair competition". Unfair competition occurs when one company or nation has a significant market advantage over another for what could be considered ethically/morally dubious reasons (sweatshops) or because certain laws or policies give that country's companies a major advantage (tariffs or subsidies). The United States engages in a mixed approach to global trade - Free Trade (like NAFTA), protectionism (what you're talking about), and exploitation (the US' dominance of Latin American and Caribbean grain and fruit markets).

This is where things get fun. Ideally, free trade should be the most efficient economic model. However, the countries seem to get locked into a Prisoner's Dilemma like scenario - if they both cooperate with each other and engage in fair free trade both countries will benefit and taken together their economies will be healthier. However, if one country decides to leave itself open to free trade and the other country imposes tariffs, the protectionist country will benefit more than it would via cooperation (not only is it selling more abroad, it's selling more at home through suppression of foreign competition). While one country will benefit significantly more than the other, their combined economies will not be as strong as they would be if they cooperated. If both countries distrust each other and invoke protectionist policies, they slide into a Nash Equilibrium in which neither can improve their economies without getting the other to cooperate (which is unlikely to happen). Their combined economies are weaker than both the previously mentioned scenario. Of course, again, this is all assuming perfect free trade.

[guyton]

8. re theory vs. reality

But when the constraining resource that is most efficiently utilized is labor, doesn't that ignore some details like, um, living wages? Let alone unions?

As manufacturing has been flowing offshore for the last couple of decades, there's been nothing coming in to replace it. Possibly white-collar jobs, but our education system has been short-changed so that not everyone has the needed education.

What would be the effect of ...
- zero tariffs for products from countries that match (or exceed) our minimum wages
- tariffs on products to adjust for lower-than-minimum wages being paid in their production
- total ban on products where the environment is being sacrificed to make a quick buck

and (just to stir the pot a bit)
- gov't paid education up through college level so we can get away from a 'manufacturing equals jobs' economy?

[Veritas_et_Aequitas]

16. You're on the money.

Your observation that the US' loss of blue collar jobs has been replaced by white collar jobs is correct. As you've probably heard tossed around by various talking heads, the US is classified as a "service economy", meaning we make precious little in the way of physical things and deal extensively in intangibles. The US' major service "exports" are education and financial services (ha!). Likewise we've seen a boost in tech sectors like biotech, pharmaceuticals, and energy. At best the trade-off has led to a shuffling around of unemployed population. Sure Fred the UAW lifer lost his job, but his neighbor Bob the accountant just got a sweet gig. Economists don't tend to make those differentiations since they only look at overall numbers. The real problem is even those jobs in which things are made have become so specialized that it's hard for Fred to go from working on the assembly line to working on a DNA sequencer (or at least, that's the argument).

And, yes, you're right. Countries that "get the most" out of their workers tend to have horrible workers rights records (and human rights records often) for the reasons you imply above. China has an explosive manufacturing sector, but it isn't exactly kosher when it comes to taking care of its most valuable asset - the worker.

I like your ideas. Let's look at them one by one. (I would like to point out that I have no formal training in economics. I'm just a wonk who gets obsessive about seeing how systems are supposed to work).

"zero tariffs for products from countries that match (or exceed) our minimum wages" - Personally, I like it because it put some economic and political pressure on countries to at least match our minimum wage laws and could be a real vehicle for change. It would be interesting to see how it would work on a country such as China; yes, China is very economically powerful, but the United States is its number one consumer, and I doubt any one nation could pick up our slack. That could be a very good thing. And it's not like such a clause would be new. The US often puts little clauses in our free trade agreements that make countries bend to our will one war or another. On the other hand, we could find ourselves at the end of a similar policy when dealing with France or Sweden. Overall, though, I think that would be a good way to balance a desire to protect workers rights and promote free trade.

"total ban on products where the environment is being sacrificed to make a quick buck" - That would never fly. While promoting environmental stewardship and sustainable economic growth are both essential if the human race is going to continue on as a society, I don't think our government (or any other) is ready to accept that. Instead, we should probably ease into something that broad. For example, we could establish a responsible domestic industrial sector by granting subsidies to companies that are environmentally responsible and profitable and fine those that abuse the environment; however, such command and control policies usually don't work. Economists would prefer something along the line of the carbon "tax" - tradeable quotas that become progressively more expensive the more they are purchased from a government agency. In the case of carbon, it should encourage companies to reduce carbon simply because its too expensive to keep being so wasteful. As the company becomes more waste-efficient, they can sell off their license to another (probably younger and less efficient) company to increase revenue. Ideally this would bring carbon emissions to an all time low over time. A similar program could be used to enforce environment regulation. After we set a standard for ourselves we can then request our trading partners to keep pace if they wish to maintain a favorable trade agreement.

"gov't paid education up through college level so we can get away from a 'manufacturing equals jobs' economy?" You Marxist, you! I have mixed feelings about this based on my stint as a high school teacher and from my upbringing. Coming from a working class background I agree with your statement. Every American citizen who wants a college education should be able to do so for free at a public university of their choosing in their state. My grandfather had to drop out of school in the 8th grade to support his family. It was through his intelligence and his "protestant work ethic" that he was able to eventually become the foreman at a local, very profitable machine shop. However, I always wondered what my grandfather would have been capable of if he finished his formal education. Free post-secondary education would help promote a more tech-savvy workforce and a better educated workforce in general, two factors which should increase worker efficiency. However, after a year of teaching let me tell you that there are some kids who really don't belong in college. This isn't because they are lazy or lack the intelligence or work ethic; they'd just be miserable there. So to what you're suggesting I'd also add providing green or clean industrial vocational training. We'll always need electricians, mechanics, plumbers, carpenters, and the like. There's no reason we can't let them get in on that benefit to perfect their chosen craft.

It's interesting. I was talking to a conservative friend of mine and he proposed that the US move away from large scale manufacturing based on environmental concerns and proposed a similar education program to yours. It gives me hope that a staunch but very intelligent conservative (although not Republican) such as he can come to the same conclusions we can and suggest a similar solution. Maybe there is some hope we can fix our system.

[SergeyDovlatov]

22. Inferior goods ... small correction

Inferior goods are not just crappy products.
They are products that people stop buying as they become richer.

For example, poor family may be buying canned tomatoes, as this family income grows they may start consume more organic tomatoes and less canned tomatoes. Even though canned tomatoes are much cheaper then organic ones.

So if microwaves from south korea are inferior goods, it means that americans won't buy them as they would prefer more expensive plushier american models.

http://en.wikipedia.org/wiki/Inferior_good

[anonymous171]

9. The neoliberal people on this board don't like it.

They seem to have forgotten that the Democratic Party is not just for Civil Rights, but also for Workers' rights.

[guyton]

10. not even in the debate

What really bothers me is the national dialog about the economy doesn't even mention protectionism as an option to consider.

It's just assumed that it's bad, it's awful, run away.

Not just here on DU, but the MSM and everywhere. It's like 'free trade' is untouchable.

In the meantime, what's quietly being ignored is the uncertainty of economists that 'stimulating' the economy will work at all. It's unproven. They're just making it up as we go down the fast-path to imploding.

[leftstreet]

13. You're right, they're just pulling ideas out of their asses

Although you said it more politely

:D

There's a whole lot of stuff the national dialog on the economy is leaving out.

[Tierra_y_Libertad]

20. The problems with protectionism far outweigh the supposed benefits.

If we were to apply tariffs, etc, to foreign products to bring them up to American prices, who would buy them? Presumably, not Americans. But, America isn't the only market. The cheap products from China, Indonesia, Guatemala, Mexico, etc, that we smugly scorn (but still buy) will still have a market around the world.

Like it or not, we are part of a world market. And, the rest of the world, particularly the "emerging" world has the advantage. Chinese, Guatemalan, Mexican, Indonesian, made products may not be of the same quality, but they will remain cheaper and thus affordable to the majority of the world's populace (including Americans).

If we impose protectionism, we will be selling our "expensive" products only to Americans.

The average worker around the world isn't going to be in the market for a "well made" American toaster for $20 but he will buy a cheap copy from China for $10.

Also, if we impose tariffs, etc, do you really think that the rest of the world will sit idly by and say, "Oh, well"? Even our "allies" in Europe will retaliate in kind. And, we are deeply, disastrously, in debt to them. They don't even have to call in their loans to us, they can simply refuse to keep financing us.

A "level playing field" would demand equality in wages. Do you really think that China, India, etc, are going to kill their economies to save ours? They can compete with the western economies only because they have cheap (by our standards) labor. They can raise their workers wages a few pennies and improve their quality of life. Not enough to buy a Buick, but enough to buy a cheap fan made in China, Indonesia, or wherever.

Wages here will drop, not because China pays less, but because jobs will be scarce here and the demand for jobs, any job, paying almost anything, will become valuable.

Is it "fair"? Of course not.

[Romulox]

23. If protectionism is such a disaster, why does it work for Japan, Germany, and yes, even China?

:shrug:

[Tierra_y_Libertad]

26. Because they can afford it. We can't.

[Romulox]

27. Er, uh. Excuse me? "Free trade" has made us so "wealthy" that we can't afford

the same worker protections as authoritarian third world dictatorships? Care to clarify this point?

[Tierra_y_Libertad]

35. You're confusing "protection" with "protectionism".

We can't afford to apply things like tariffs to their products because we can't compete with them in pricing.

They can afford to sell their products more cheaply than ours because they aren't compelled to have the same protections as our workers do. And, obviously, they don't have to pay their workers nearly as much.

We cling to the notion that our workers are fairly paid based on our standard of living. And, that their workers are unfairly paid based on our standard of living.

To the average Chinese, Indian, Honduran, worker who spent most of his life subsistence farming $5 an hour in a sweat shop is damned near luxury. If the government raises his wages to $6 an hour, which they can afford to do, the worker is overjoyed because he can buy that cheap, poorly made, dress that his kid has been nagging him for.

The American manufacturers can't do that without raising their prices which put's their products out of reach of even "wealthy" American workers.

[bvar22]

21. Some things are worth protecting.

The NeoLiberals are arguing theory and ignoring the Reality in front of their faces.

It is billshit to insist that Protectionism stifles competition.
As long as internal competition is protected by AntiTrust laws, competition does just fine.
When a large monopoly is allowed to exterminate Mom&Pop, competition suffers, but that is the result of the lack of regulation....NOT careful Protectionism.

As a matter of National Security, the USA NEEDS to protect:

*A healthy automotive/machinery industry

*a healthy Tool & Die Industry (the machines that make other machines

*a healthy steel and other metals industry

*a healthy textile industry

*a healthy electronics industry

*a healthy and diverse agricultural capacity

If we don't, there will come a time that we WILL regret it.

[Romulox]

25. I've often asked a similar question of Al Gore supporters:

How do you reconcile his support of NAFTA and "free trade" with his supposed environmentalism.

"Free trade" means that countries with lesser environmental regulation will necessarily have a competitive advantage.

I've never had a Gore supported even attempt to answer that one.

[Donald Ian Rankin]

29. If you apply tarrifs to imports, other countries apply tariffs to your exports and everybody loses

That, in a nutshell is why protectionism is generally (not in all cases, but in the overwhelming majority) a bad idea.

[guyton]

31. persuasion

the idea is to tariff products make by folks with lower minimum wages than ourselves, or ones that pollute. Make it clear that if they pay their workers well and clean up their pollution, the tariffs would go to zero!

else we're "rewarding" slave labor, mistreatment of workers and polluters.

[Donald Ian Rankin]

34. That doesn't mean it won't be met by tit for tat, though.

Even if you tell a country "we are doing this for ethical reasons, not to promote our industry at the expense of yours", they're usually more likely to respond with counter-tariffs than by meeting your demands.

There certainly are situations where that is worth doing, though.