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Trade Policy & Jobs

 

 by James Kroeger

 

 

 

A 'pure' Free Trade Policy (no trade barriers of any kind) would actually provide the vast majority of America's Working Class with wonderful benefits if Congress were to create and maintain a domestic Labor Shortage.  In a Labor Shortage Economy, workers would enjoy the best of all possible economic worlds.  Jobs would still be lost, but it wouldn’t matter.  New jobs would be easy to find.  Market forces would put constant upward pressure on wages & benefits.

 

Employers would discover that they'd have an incentive to treat their employees with respect.  They might even want to try to create a pleasant work environment for their employees.  Some may find themselves more eager to go the extra mile to try to solve the problems of their marginal employees (or even enlist the state's help in that effort).  Labor reps would discover that they'd have negotiating leverage they could never have imagined in their wildest dreams.  With such leverage, they would be able to produce the kind of negotiating results that would make them very popular with The Rank & File.  Even unskilled workers would be able to experience negotiations success.

 

Still, Free Trade poses a special threat to those workers who face the prospect of losing good-paying jobs that they might not be able to replace, even in a Labor Shortage Economy.  This can be quite tragic for those directly affected, but the news is not all bad.  Ultimately, the problem with Free Trade is not that it eliminates jobs; after all, firm investments in machinery do the same thing.  How do investments in machinery benefit us?  Well, when fewer people were needed on the farm to produce the food we needed, more people became available to produce cars and refrigerators and airplanes.  More desirable things are produced and become available for our consumption.  As they become more plentiful, they become less expensive, more affordable.  Market prices will drop to levels that more people can afford to pay.

 

So even though some skilled workers may lose their jobs to either engineering innovations or overseas workers, society-as-a-whole benefits from more things being produced.  Looking back over our economic history, it's just not possible for us to rationally dispute this fact.  However, that benefit cannot be enjoyed unless all those who lose their jobs to foreign competition are re-employed in other efforts to produce Real Wealth.  Unfortunately, we cannot count on The Marketplace to make that happen, not when there is an ongoing conspiracy between [mostly Republican] politicians and financial leaders to create and maintain a labor surplusThe good news is that we can always elect a Congress that would stop this madness.

 

If Congress were to act to maintain a labor shortage in the face of continuing job losses to foreign producers, it would be able to increase the total amount of Real Wealth that Americans are consuming and enjoying.  The goods & services that Americans used to produce would still be available for consumption, only they would not be produced by Americans.  Displaced American workers would be producing something else that would enhance our lives, like a modernized infrastructure and improved public services.  More generally, displaced factory workers would quickly obtain jobs working for either the government or the private sector at a time when both sectors are offering higher wages to fill their staffing needs.

 

There’s just one problem.  The financial sector of the economy is infected with an irrational fear of inflation.  I won’t go into an exhaustive discussion of inflation right now, but let me just make a couple of important points.  First, no matter how grave the warnings you may hear about the “evils of inflation”, the ultimate truth is that inflation is always and everywhere harmless when it comes to the purchasing power of consumers (there are a few exceptions, but they are remarkably easy to fix).  The extra costs that controlled, moderately-high inflation [in the 5%-19% range] would impose on society—above and beyond the costs that are already imposed on us by the low-inflation rates we normally experience—are a mere “headache” compared to the extra costs that are imposed on society by unemployment.

 

There are many irrational fears and distorted perceptions-of-self-interest that are aroused by increasing inflation rates, but most of these concerns are attributable to Money Illusion.  This is a psychological problem that can be effectively addressed.  It would be very helpful, for example, if the Fed's Chairman and Board Governors were to actively seek to reassure the public that higher inflation rates are not really harmful to the economy in any real sense.  If they are not inclined to give this reassurance because they are in the banking industry, then Congress can give control of the nation's money supply to the Treasury Department, instead.  This just might be a better idea anyway.  Politically, an administration either manages the economy well, or it doesn't.  At least the executive branch would have all of the tools it needs to produce results.

 

The benefits of sustained, moderately-high inflation—one consistent with a sustained labor-shortage—are at the top of the chart.  If we focus our attention on the real economy, on what people are actually producing & consuming [and forget about abstract calculations of “rate of return”] it soon becomes clear that a chronic labor-shortage would create an outcome that is true economic perfection.  All those who are able-bodied & able-minded would be producing something of value.  In such an economy, the production & consumption of wealth are optimized.  Investment is optimized.  When production & consumption & investment are all at optimal levels, society gets to experience an ideal economic achievement.  That’s quite a benefit to stack up against the list of “headache costs” that are so often mentioned by those who describe inflation as a thoroughly horrifying prospect.

 

Any sober analysis of the costs & benefits of moderately-high inflation would lead us to warmly embrace it, since the perceived costs of inflation are mostly imagined, generated by money illusion and a misunderstanding of how markets function.

 

There is one more point I’ll make at this time re: inflation.  There is a popular misperception promoted by Wall Street & financial institutions that inflation is somehow able to take on a life of its own at a certain point, that it will drive us relentlessly to the horrifying Pit of Hyperinflation.  This fear is absolutely groundless.  We should remember well Milton Friedman’s statement that: “Inflation is always and everywhere a monetary phenomenon.”  He was/is absolutely correct.  There is actually a zero percent chance that a moderately-high inflation rate could ever balloon into hyperinflation in any economically advanced nation that is willing to impose intelligently-designed credit controls.  If banks are allowed to lend only a fixed quantity of money in particular loan categories, then it is categorically impossible for a moderately-high inflation rate to blossom into a “runaway” hyperinflation event.  A true cap on the inflation rate can thus be achieved through intelligently designed institutional restrictions.

 

At the cost of some higher inflation rates (that are essentially harmless), we can enjoy all of the benefits that Free Trade has to offer while also providing America's Working Class with all of the benefits of a chronic Labor Shortage.  It is insane to pursue any other option...

 

 

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Related Economic Analysis:

MEASURING SAVINGS AND INFLATION

UNEMPLOYMENT: OUR GREATEST ENEMY

ARE INCENTIVES NEEDED TO ENCOURAGE INVESTMENT?

DO TAX CUTS STIMULATE THE ECONOMY?

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