“Race to the Bottom,” and the Twin Doctrines of International and Domestic Free Trade, Part II

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Nathan’s Famous: Hot Dogs for Kings, Queens…..and Workers

The twin philosophies of Free International Trade and Free Domestic Trade provide the legal foundation for race to the bottom. They also shape the incentive structure for corporate behavior in America.  See the January 15th post on this blog for Part I of this discussion, on  Boeing and the recent round of tax cuts and labor concessions aimed at keeping higher paying jobs in Washington State.

The international pressures are the larger problem.  They provide much of the impetus for corporations to play states off against each other on the domestic side of free trade.  Boeing is the perfect example. Boeing wasn’t trying very hard to move its operations to “right to work” states before Airbus competition.

Arguably, other forces are involved. Workforces, transportation, and energy in those states weren’t always able to support Boeing in the past. But improvements and the growing sophistication of smokestack chasers has changed the landscape.

However, the bleeding of good jobs and shrinking of the middle class is not likely to stop without some reasonable compromises and adjustments to those dual Free Trade principles. More and better education is helpful, but all of the states are doing that. And most of the world has caught up with (and even surpassed) the U.S. in education and training.  Countries which haven’t, send their students to America’s finest universities, which are happy to accept the (higher) foreign, subsidized tuition dollars.

The other conventional remedy for the effects of race to the bottom – various forms of income redistribution —  is more direct, and probably more effective than education and training, but only up to  a point.    There are diminishing returns to this approach.  Liberals and conservatives differ profoundly about the “tipping point”  — the point where too much redistribution destroys entrepreneurial risk taking – but there is a tipping point.  My own take on this is: for the past 30 to 40 years, government policies have redistributed wealth from poorer to richer people (in reaction to the prior policies of the two Roosevelts and the Great Society), so that there is some room for the pendulum to swing back in the other direction. 

Nonetheless, without addressing the effects of foreign and domestic free trade, more education appears (no matter how well intentioned) to be a weak response; and income distribution, a band aid, with serious limitations.

A realistic strategy for attacking race to the bottom also has to be informed by history. The thirty year period from the end of World War II,  through the late 1970s, which American liberals view as an approximate model for compassionate capitalism, is glaringly atypical in American history. 

The precise conditions that made it possible were never sustainable; and they are mostly not replicable.  They include the Great Depression, which ushered in New Deal regulatory, tax, and labor reforms, the economic boost from World War II, the mother of all stimulus packages, and America’s emergence from the Great War as the only intact industrial economy in the world. Those years are long gone. America was never going to be permanently in the world’s economic driver’s seat.

Notice that I have yet to offer a concrete proposal on how to adjust the twin Free Trade policies so that workers don’t continue to be squeezed.  (I was going to say “screwed” or “effed”,  but am not sure whether Google or WordPress is letting those words through).     

The reason I’m not (yet) offering specific remedies, is that I lack the smarts.  I have been telling my economist friends for years, that a Nobel Prize awaits one of them, or political scientists (yes, a political scientist, Herbert Simon, once received a Nobel in economics), who can devise a new (legitimate, not junk science) theory of free trade which benefits workers, alongside consumers.   Classic, Ricardian Free Trade, as my erudite colleague, Brian Pollins, from OSU in Columbus points out, is consumption centric. i.e., it seeks only to optimize benefits to consumers across nations (and by inference, across U.S. states as well).

Keep an eye on the Trans Pacific Trade Agreement (TPTA) and efforts to “fast track” it.  There is so much anger about the negotiations for that treaty on both left and right, that it could be a catalyst for change.   TPTA was supposed to address some of the aspects of NAFTA that contribute to the international version of race to the bottom.  But U.S. negotiators have apparently not kept that promise. We hear about efforts to modify those positions.

One of my goals for this blog is to encourage sensible discussions on big issues like this.  Maybe we will be honored by a group Nobel Prize for the answer to race to the bottom.  Lets hope the prize is in economics and not literary fiction. Why is there a Nobel Prize for literature, anyway?  Or even for economics?  Might as well have a Nobel Prize for art.  That will sure be easy to vote on.

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3 thoughts on ““Race to the Bottom,” and the Twin Doctrines of International and Domestic Free Trade, Part II

  1. Alex MacLachlan

    Irv, the first time I read “Race to the Bottom”, the topic was Government policies around the World devaluing their currencies to benefit their export manufacturers. In my opinion, more importantly, these policies were for enabling irresponsible politicians to deficit spend as far as the eye can see and not see the full negative ramifications of their actions. When bad policies cause inflation in dollar denominated commodities, the standard of living goes down for blue collar families in the US, whose incomes can’t outpace the speed of irresponsible leadership. Corporations get the benefits of their products looking cheaper to their foreign customers, thus more sales, and their workers get the inflation and wealth destruction. The counter argument is the increased sales supports the blue collar jobs from being eliminated through global competition, but when competing Countries are doing the same devaluing, a Race to the Bottom of currency exchange rates occurs. The quadrupling of the value of gold and the strength of commodity based economy’s currencies like Australia and Canada reflect this. We are currently in a lull in this process, but any discussion in trade policies would be moot if currency manipulation and debt and deficit levels weren’t part of the equation. These were very much part of the European Union Charter, and the cheating that went on in Southern Europe is a large part of their troubles today.

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    1. Irv Lefberg Post author

      Currency Manipulation and Free Trade — great point raised by Alex Maclachlan

      Thanks Alex for bringing this up. It was a major oversight in the two overview articles I posted on Boeing, free trade and race to the bottom. Absolutely, when a government intervenes in currency markets so that its currency is undervalued (as China and many other US trade partners have done), it makes their goods (even) cheaper in the US. This adds to the effects of the lower wages paid to workers in those countries, making it even more difficult for US products to compete in terms of price. There is strong bi partisan support in Congress for addressing the currency manipulation problem in the Trans Pacific Trade Agreement negotiations. It will be interesting, to say the least, to see how its handled in the draft agreement.

      The best short article Ive seen recently on this subject is located at:
      http://economix.blogs.nytimes.com/2013/12/05/preventing-currency-manipulation/?_php=true&_type=blogs&_r=0

      Thank you again, Alex, for the comment.

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