Conservative Logic

An economic guide to politics, designed for post-Baby Boomers

Why Protectionism is Bad for Generations XYZ

Posted by A Hamilton on March 30, 2008

The rhetoric is compelling. America is losing tens of thousands, hundreds of thousands of manufacturing jobs to competition overseas. The bleeding must be stopped. We must raise barriers to trade and protect these American jobs before we export them all.

Suffice to say, it is a fundamental principle of basic economics that freer trade always results in a superior economic outcome for both trading parties. In the long run, free trade always generates a larger pie – even if it causes some economic disruption along the way. This is the general concept of Pareto efficiency.

Without getting into too much detail on the economics behind this subject now (we’ll circle back to it later), the general impact of free trade will be to move our economy towards a scenario where:

  1. The jobs we lose will be the lowest value to the economy, in areas where we have the least amount of competitive advantage.
  2. The jobs our economy we gain will be in areas where we have the greatest comparative advantage. The value of these jobs will outweight the value of the jobs lost.

So what types of jobs will we gain and which will we lose? And how does that impact Generations XYZ? (Just a side note here – in the interest of efficiency, I will henceforth refer to America’s future generations – in my opinion our politically disenfranchised generations – as Generations XYZ, encompassing Generations X and Y, plus the newest post-Y generation, the children of the 21st century.)

As it turns out, the jobs we lose are the old economy manufacturing jobs. These are the jobs which are characterized by a rigid, hierarchical structure (typically union jobs) where tenure is more important than talent and hard work. The exact types of jobs that Generations XYZ are competitively disadvantaged.

Now which jobs do we gain? New economy jobs. Jobs that require flexible labor, creative talent, and new economy skills – service orientation, technology skills, etc.

Here’s an interesting article looking at how economic evolution has transformed the economy of my adopted state of Pennsylvania, starting with a bit of a history lesson:

“To keep out foreign competition [in the early 1970s], the United Steelworkers union and the big steel companies joined forces in a no-strike pact known as the Experimental Negotiating Agreement, which tried to protect the industry’s high wages and benefits by blocking foreign competition.

This campaign for protectionism failed and employment in the American steel industry fell from 521,000 in 1974 to 151,000 in 2000. The global shakeout was even more severe, with bigger percentage drops in steel employment, in Germany, France and Britain. It was a savage process in which more than 30 U.S. steel companies went bankrupt and a great industrial union was decimated. Working in Pittsburgh in the late-1970s, I heard people talk as if any hope of future prosperity would disappear once the mills and blast furnaces closed.

But if ever there were a case that documents what the economist Joseph Schumpeter described as “creative destruction,” it’s what happened in Pennsylvania. Steel and other manufacturing industries were indeed shattered by competition from the globalized economy that was just emerging. But new industries that nobody could then have imagined took their place, and they provided new jobs, year after year.

Employment in Pennsylvania reached an all-time high in January 2008, and then fell slightly in February. People here fear that a steep recession may be coming. But as of February, the last month for which statistics are available, unemployment in Pennsylvania was just 4.9 percent. Since January 2003, the state has added a total of 178,000 new jobs, according to the state government.

Where are all these new jobs coming from? The answer is that as the old rust-belt manufacturing industries sank, Pennsylvania became a platform for innovators in technology, finance and the health industry. What saved the state, above all, was its concentration of great universities, which provided the human capital for growth….

The new jobs will come in areas such as professional and technical services (up 17 percent by 2014), computer systems design (up 30 percent), wireless telephone (up 30 percent) and data processing (up 32 percent). This transformation is evident in Pennsylvania data recording gains in wages and salaries from 2003 to 2005. Pay rose 20 percent for information technology managers, 35 percent for biotech engineers, 24 percent for computer researchers.”

Once again, we find the Democratic Party on the wrong side of this issue, supporting protectionist policies that favor older generations at the expense of Generations XYZ. Ultimately, protectionism is a dangerous rearguard action that fights economic inevitability. Better to engage in free trade, grow the economic pie larger for everyone, and accelerate economic transition to jobs where America has maximum competitive advantage – new economy, high tech, powered by Generations XYZ.


2 Responses to “Why Protectionism is Bad for Generations XYZ”

  1. Joel_Cairo said

    re your last paragraph: the problem is the potential backlash or, if you wanna zoom out, the problem is democracy. Say you go pure 100% free trade, and just say Screw You too all of Detroit. That may be optimal, and if America were populated by homo economicus, everyone would see that this is what’s best for the long run. But Americans are homo sapiens who look at their own narrow interests rather than the aggregate. If they are losing all their jobs with no hope for a future, they’ll get pissed off and vote accordingly (by accordingly I mean vote against free trade). They may not have their jobs, but they still have their ballots, and if there is one thing unions have worked hard to perfect it’s get-out-the-vote operations. Because of the machinations of Democracy, unfettered free trade that pays no mind to distributional consequences will shoot itself in the foot.

    That’s why you gotta throw unskilled labor a bone, and use some of the surpluses we earn from trade to retrain them, do R&D, etc. If the loss of their factory jobs isn’t so terribly wrenching, they’ll be more likely to get on board with free trade. You need to replace their lost jobs with something else, or they’ll just stew and be pissed and throw a wrench in the whole operation.

    That’s the difference between you & I, I think. I see you as saying “Free Trade, full speed a head at 100mph.” But it seems clear to me that this is short-sighted. I say let’s go like 80mph ahead. True, aggregate growth will be a little less robust, there will be need for a more redistributive tax system and it’ll be less theoretically ideal in the world of homo economicus, but we don’t live in that ideal world. My fear is that your 100mph policy will result in the losers of globalization grabbing the wheel and doing a U-Turn, sending this country straight toward full-on protectionism and undoing all our gains. But if we can keep the losers comfortable enough in the backseat so that people like John Edwards don’t emerge, we’ll still get where we’re going. It’s like the tortise and the hare (or some other allegory about the value of caution over haste).

    And I’d be remiss if I didn’t point out that GOPers also pander against trade when their audience is composed overwhelmingly of globalization’s losers (*cough* Romey’s “I’ll bring auto jobs back” in Michigan *cough*).

  2. Joel_Cairo said

    Shorter version of the comment above: The problem is that generation UVW still votes.

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