Free Trade and the Social Safety Net

On Monday, the church-owned Deseret News published an editorial condemning—in no uncertain terms—the racism of “the KKK and other so-called white nationalist groups.” The editorial leaves no wiggle room, and brooks no disagreement.

And then it turns in what—to me—was an unexpected direction: protectionism.

So I’m a modern liberal, meaning I buy into the economic consensus that free and open trade is a good thing. It increases the net wealth in the world, and provides both Americans collectively, and our foreign brothers and sisters, better access to the goods we need.

But.

But the fact that free trade is a net benefit for society doesn’t mean it’s a benefit for each and every member of society. Free trade’s “costs and benefits are distributed unequally within each country, making some people better off and others worse off.”[fn1] In fact, economists have found that workers with the lowest incomes—the most vulnerable workers—bear the heaviest costs of international trade.

So what do we do about the unequal distribution of the costs and benefits of free trade? Like the Deseret News, I believe that protectionism is bad. It decreases the wealth available across the board; moreover, in our increasingly-globalized economy, returning to some sort of closed-off economy strikes me as implausible, even if I thought it were a good idea.

Toward the end of its editorial, the Deseret News touches on what strikes me as the best answer:

There is of course room for safety nets to aid those who cannot fully participate in the marketplace and appropriate wealth distribution to help mitigate adverse market excesses or to provide adequate access to opportunity and education.

I’d personally strengthen the recommendation, though, and explain it in slightly more detail. Essentially, what I’d say is this: free trade increases the net wealth, but it imposes significant costs on a subset of American workers, a subset that happens to be among the poorest and most vulnerable.

In order to pay for our increased wealth, then, we should be both willing and happy to expand the social safety net, not just to provide benefits to some imaginary group of “worth poor” (and excluding the poor we find unworthy), but provide true help and sustenance to anybody who falls below a certain line.

Assuming that free trade increases our collective wealth, it’s not costly to improve our social safety net. After all, the free trade that hurt our poorest neighbors has increased the wealth available to all of us. We can fund a social safety net and still be better off than we would have been with protectionist trade policies.

Which is to say, it strikes me that there’s a compelling economic argument to be made for expanding our welfare, job retraining, and other benefits available to prevent individuals and families from slipping into poverty (and, at the same time, to lift those in poverty out).

But it also strikes me that doing so helps us fulfill our religious obligation to build Zion, a place of one heart and one mind that notably has no poor among them.


[fn1] James Kwak, Economism 165 (2017).

Comments

  1. This has been an obvious argument for decades but has run into the buzzsaw of economic libertarian types who believe that every single penny of their gain derives from their own hard work and righteousness.

    Nobody wants to admit that the supposed “natural order of things,” the free market, is an unstable equilibrium requiring nearly constant intervention to ensure that nobody is stealing from someone else–whether at the point of a sword or merely that of a lawyer’s pen.

  2. APN, the reason you are right is because it is efficient markets that are beneficial, not merely unregulated markets.

    “Free market” is an imprecise term. Usually when people use it they mean an unregulated market, but government intervention is only one type of market inefficiency that can prevent the market from yielding up the maximum benefits. Regulations that correct inefficiencies are good (assuming they actually correct inefficiencies and not just create new ones).

  3. Sam, since our politics and economic sense seem to be aligned, I’m in full agreement. This is a well done write-up.

  4. Gaylene Pheysey says:

    I’ve always liked the concept of free trade and have no qualms with social programs and subsidies but feel this may only be a bandage. Also selling the idea would be hard and feel more like a realist than pessimist saying we’d need working baby steps to get to this point. Love that you are working on solutions and thank you for sharing your idea!

  5. “Free Market” is actually a pretty precise term, if I remember six semesters of college economics correctly. A free market is one where a person has the ability to leave an inheritance for (generally) their children. If the Crown takes your estate upon your death, you aren’t in a free market.

    So, that editorial phrase “There is of course room for safety nets to aid those who cannot fully participate in the marketplace and appropriate wealth distribution to help mitigate adverse market excesses or to provide adequate access to opportunity and education” directly addresses “appropriate wealth distribution”, so I’d have to say that this editorial is actually against a free market system.

    I’m not advocating for or against safety nets here, just trying to explain terminology.

  6. I’m not an economist, but to go from “free market means you can leave wealth to your children” to “any kind of ‘appropriate’ wealth distribution is automatically incompatible with a free market” seems like a jump in logic.

  7. Mike, I’ll admit that I’m not so worried about the term-of-art definition of “free market” (though I’m skeptical that its primary meaning is that you can leave wealth to your children—rather, a “free market” is one where supply, demand, and price are determined without either governmental or monopoly interference).

    That said, what I’m talking about here isn’t free markets; it’s free trade (that is, trade without quotas or limitations and generally without excise taxes or tariffs). And, like I said, free trade increases net wealth, but distributes that wealth unevenly and, I would argue, inequitably. But as long as we believe that free trade makes us better on a net basis, we who win can afford to give up some of that win to support those who lose, and we can still end up in a better place than we would have without free trade.

  8. In order to pay for our increased wealth, then, we should be both willing and happy to expand the social safety net, not just to provide benefits to some imaginary group of “worthy poor” (and excluding the poor we find unworthy), but provide true help and sustenance to anybody who falls below a certain line.

    Amen.

  9. And, like I said, free trade increases net wealth, but distributes that wealth unevenly and, I would argue, inequitably. But as long as we believe that free trade makes us better on a net basis, we who win can afford to give up some of that win to support those who lose, and we can still end up in a better place than we would have without free trade.

    Double amen. Thanks for these cogent comments, Sam.

  10. “but it imposes significant costs on a subset of American workers, a subset that happens to be among the poorest and most vulnerable”

    No, they don’t just “happen to be” poor and vulnerable. They are often poor and vulnerable because of the way corporations are structured and how they do business, and not just internationally. To most businesses, labor is a market, and workers are commodities. They are a cost to be minimized. Some companies do this by searching the world for cheaper labor. Others do it by replacing workers with technology. Either way, though, labor gets a smaller and smaller piece of the pie while executives and stockholders get an ever-increasing piece. This is, of course, an unsustainable arrangement. Eventually, the pitchforks will come appear. They almost did with the Occupy Wall Street movement, but don’t believe that was the end of it. Trump was elected by appealing to this demographic and their misery. Of course, Trump is a liar and was just saying things to get elected. Since being in office, his actions have made it clear that he doesn’t really care about those who have been left out.

    Progressive taxation, which we used in the ’50s, ’60s, and ’70s to pay down our war debt, also built up the middle class, but since Reagan and his voodoo economics, we’ve been working hard at destroying both the middle and lower class. But while progressive taxation is necessary, it is insufficient. The only way to permanently rectify the growing inequality is to implement some form of employee ownership. Not state ownership, as with communism. Employee ownership. This is also a form of economic democracy, which is more consistent with our American political ideals (not to mention our Mormon communitarian impulses). Our current system of corporate ownership is an authoritarian business arrangement, completely at odds with our political ideals and our religious teachings.

  11. Really great comment, Wally. Thanks!

  12. Wally’s comment is exactly right. “Free trade” is the cause of the problem by leapfrogging the lowest economic contributors in our own local markets to seek lower cost workers. This can occur domestically (because labor costs vary from state to state) or in international markets. I have long felt that exploiting low cost labor in other countries is a short-term gain anyway; those nations develop quickly and costs eventually level out. These strategies may mean the world is flat, but our poor are flattened.

  13. Angela C,

    John F. Kennedy wrote a piece in The Atlantic back in the ’50s informing the Southern states that had (with sweetheart tax deals and brutally anti-union labor policies) poached the textile and furniture manufacturing sectors away from New England, that the time would come for them when international trade would obliterate their industrial bases just as thoroughly. Lo and behold, that’s pretty much exactly what happened in the ’80s; upland North and South Carolina were absolutely hammered by deindustrialization as a result of competition from Taiwan and Korea, which have themselves in turn lost most of the textile business to China (which is losing it to India and Bangladesh) and the furniture business to China and Vietnam.

    The Atlantic is lousy about archival pieces but if you do some digging it’s a worthwhile read.

  14. Michael Davis says:

    Great post and comments! I especially appreciated Wally’s comment regarding employee ownership. As counsel for a 100% ESOP company I agree that empowerment of the employees as owners is beneficial for myriad reasons, from inspiring a cooperative culture to securing a safety net for all those employees at retirement.

  15. I guess I feel uncomfortable where my life work is basically getting my allowance from my working overlords. There is more importance to a job than money.

  16. Sam, your post makes a good point: there’s a compelling economic argument to be made for expanding our welfare, job retraining, and other benefits available to prevent individuals and families from slipping into poverty (and, at the same time, to lift those in poverty out). In addition, doing this alleviates the social pressures that poverty and inequality bring. Angela also hits the nail on the head; eventually the localized advantages in labor pricing even out, as the globe shrinks.

    However, the problem with the expansion of public benefits is not in the idea so much as in the execution. Their track record is, at best, mixed, both in terms of efficiency and efficacy.

    A free market is usually defined as one in which the production of goods and services is based on supply and demand in the general market, and prices are determined by sellers and buyers in (as the old phrase has it) arms-length transactions. (It has little or nothing to do with who inherits.) What we have in this country is not a free market, but a market in which the oligarchs wish to get the government out of the market manipulation business, so that they themselves can manipulate it. Reg’lar ol’ folks like us is just stuck.

  17. Thanks for the comments, everybody.

    Steve, I tend to agree that there is more to a job than just income, but I can agree because I have a dream job that both pays me enough to support my family and is fulfilling. Not everybody has access to that kind of work, though; as much as fulfillment is nice and important, the principal purpose of work is to fill our stomachs and put a roof over our heads. Social safety net programs may not be able to give us meaning, but at least they can let us keep our full stomachs and roofs until we can find something to replace them and, ideally, give us a sense of meaning too.

  18. Geoff - Aus says:

    Another possibility is to legislate that no one in a company can be paid (total package) more than 100 times the lowest paid employee. So incentive to increase lower wages so they can also increase. Can anyone really be worth more than 100 times another full time employee.

  19. Or we could let the government hire the people it needs to do the jobs that need to be done, and raise taxes to pay for those jobs. Government jobs tend to be very middle-class jobs and they tend to be doing things that help the rest of us.

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