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The Human Side of Trade

Russell Roberts

Free trade is on the run. The president-elect of the United States calls the free market the “dumb market.” He wants to renegotiate past trade deals. The death spiral of manufacturing jobs makes people wonder if trade with China was really such a good idea. Some economists claim to have found evidence that increased trade with China causes an increase in suicide. It is tempting to argue then, that free trade, while good for the economy, is not so good for human beings.

This standard calculus — cheap toys vs. lost jobs in manufacturing and elsewhere is woefully incomplete.

Trade has undeniable human costs — dislocated and unemployed workers, some of whom struggle to find dignified ways to support themselves and who may be left with dreary lives without meaning. What are the benefits? One benefit is obvious — less expensive clothes, toys, and gadgets. But if that’s the end of the story, it’s a pretty bad deal.

But it’s good for the economy! It’s efficient! That’s the free market way! These are inadequate and irrelevant justifications. What we care about is how trade affects our daily lives as workers and consumers. If trade is about getting cheap stuff at the price of wrecking millions of lives, then the American people and its leaders would be right to reject it.

This standard calculus — cheap toys vs. lost jobs in manufacturing and elsewhere is woefully incomplete. It leaves out the most important and positive impact on our lives that trade provides. To understand the full story, we have to understand the fundamental connection between trade, productivity, innovation and economic growth. Without that understanding you cannot understand what’s going on when we buy toys from China this holiday season instead of making them ourselves within our borders.

So let’s start with a seemingly unrelated example that will help us see the unseen. Suppose a scientist invents a pill that once you take it lets you live until 120 with no health issues whatsoever. Once you turn 120, you die a peaceful death on your birthday. Suppose the scientist, in a gesture of good will, charges $10 for the pill.

Should we let the scientist sell the pill? Is it good for the country? It’s good for almost everyone. But it’s going to be very hard on a very large group of people immediately:

Doctors. Nurses. Health Care administrators. People who build hospitals. People in medical school. People who teach in medical schools. People in health insurance companies. Pharmaceutical companies. Researchers. You get the idea. It’s millions of people. This is a very disruptive technology.

What’s going to happen to all those people?

Mass unemployment. All of the skills of all of those people are no longer valued. The past investments made in those skills are now wasted. Incomes of those workers will inevitably plummet overnight.

True, they also get to live until 120. But their incomes are very low and may stay low for a while. They will have to find new things to do. What will they do? They face a very depressing future. Not much else they can do with the skills they have acquired. They will do their best to acquire new ones. The older those workers, the smaller the chance they will have to find a meaningful way to spend their time going forward.

Government policy to soften the blow financially would definitely be on the table. But money is only one part of the challenge facing these unemployed workers. Their sense of being important, of mattering, their sense of pride has been destroyed.

Most people would argue that the millions of health care workers have no right to stop people from living until 120. And on the surface, that’s the whole story — long life and a very tough transition for millions of people from lives of financial well-being and deep satisfaction to a much bleaker future.

An Incomplete Picture

But that’s not the whole story. We’re missing a huge part of the story.

The other important part of the story is that everyone is suddenly a lot wealthier. All the money we once poured into health care will now be able to be spent on other things. What are those other things?

The economy may be smaller in the short run as these adjustments take place. But in the long run we are much wealthier.

We can’t know. No one can. But a whole bunch of areas are going to expand and some of those are going to soak up the time, talents and energy of former doctors, health care administrators and so on. It will take a while for this process to work itself out. To the extent health care workers can’t do the things that are newly in demand, their struggle to adjust will be harder. But entrepreneurs will explicitly look for ways to hire the newly unemployed, knowing that their talent will be much less expensive to employ. And of course those unemployed health care workers will be eagerly looking for things to do.

And young people who planned to go to medical school or become chemists in the pharmaceutical industy or nurses or data analysts in the insurance business will now turn elsewhere. What will they do instead? There is no way of knowing but they will try to find skills to invest in that lead to financially and psychologically rewarding lives. The dreams of those young people have been shattered. They will have to find something else to do. But their opportunities will now be much wider than just something other than health care. The areas outside of health care are now much wider because the increased wealth we all have can now go into new areas and opportunities.

The economy may be smaller in the short run as these adjustments take place. GDP may actually fall. But in the long run we are much wealthier as a nation because we don’t have to devote as many resources as we once did to health care.

Your standard of living and mine is going to go up a lot and that doesn’t even take into account the gains from living longer and with better health.

We are not going to just live longer. We are going to get a bunch of additional things to enjoy in our lives because we don’t have to spend as much on health as we used to. And it won’t just be more steak and less hamburger though that will happen too. We’ll have new products and services to enjoy, Those additional things might include more leisure — we may decide not to work as hard or as long.

These are the things that happen when there is growth and higher productivity. But that doesn’t change the challenge facing workers in health care.

To summarize the effects of the magic pill that lets you live to be 120:

  • All Americans get some benefit from this incredible discovery.
  • For most Americans, the gains are enormous and there is no offsetting loss.
  • For some Americans, the gains are still enormous, but there is a big loss also. They’ve lost their jobs and may struggle to find new ones.
  • Some new products and services are now going to exist because we’re wealthier as a nation.

Creative Destruction

This process is what Schumpeter called creative destruction. It is the essence of economic change driven by innovation which is what Schumpeter was interested in. But trade is just another form of creative destruction.

Trade and innovation are very similar — they’re about finding ways to do more with less.

Look again at our magic health pill.

Would any of our conclusions change if the person who discovered it was from Mexico or China and we imported really fantastic health care through the magic pill? Most of us would still be immensely better off. It would still be very hard on US health care workers.

You still get to live to 120.

You still have a huge amount of money to spend on something else. Your standard of living goes way up. Lots of other industries expand with your new found money that’s now available given that you don’t have to pay for health care.

If you’re a doctor, you still have a tough time. There are still a whole bunch of new opportunities as Americans spend more on other things. Whoever makes those things and has the skill to provide those things or services will benefit.

First lesson: Trade and innovation are very similar — they’re about finding ways to do more with less. That is the only way to create prosperity for everyone. But finding more productive ways of acquiring good health or automobiles may be hard on individuals in transition. The shorter the transition, the harder it is to adjust. The magic pill dramatizes the magnitude of the gains the abruptness of economic transition.

Innovation in Agriculture

Let’s take a real example now — the transformation of agriculture in the United States in the 20th century, driven by innovation. Because of that innovation, farm productivity is way up. Output per acre is way up. Output per worker is way up.Is there a farmer from 1900 who would be sad today to see their posterity leading longer more interesting lives?

That has meant cheap food rather than just a lot of rich farmers. Competition among farmers forced them to share the gains widely with the entire country and the world. (I know it’s not all rosy — there are complications from the fact that we’ve subsidized food production artificially through government policy with lots of unintended consequences. Let’s stick with just the productivity side here.)

The productivity revolution was very tough for some farmers and certainly on most farmers who wanted their kids to inherit their farm and work the land as they did. The low prices made it hard for thousands of small farmers to survive. Some couldn’t make their mortgage payments any longer and lost their farms. Some just absorbed a lower standard of living and their kids, seeing that, decided it would be better to do something else. They headed to the cities to find a different path toward a meaningful life than the one their parents chose.

And the choices available to the next generation and the ones that came after weren’t the same. They were a lot better because people no longer had to spend as much on food.

In 1900 about 40% of the American work force was in agriculture. Now it’s about 2%. If you went back in time and told the 1900 farmer that employment change was coming, that farmer would weep in sorrow at the thought of the riots in the streets and mass starvation and lack of work opportunities for their children and grandchildren. But if you could bring that farmer to the present and see the full story, everything would be different.

Is there a farmer from 1900 who would be sad today to see their kids leading longer more interesting lives doing things that didn’t exist in 1900 and that are able to exist because we don’t have to have 40% of the workforce on the farm? Having only 2% on the farm is a feature, not a bug. It’s a good thing. It’s a glorious thing. Because it allowed the creation of all the glorious things that would amaze the farmer brought into the present — the smart phones and the artificial knees and youtube videos, and cross-country travel and cars and the longer life expectancy and everything else we didn’t have in 1900 that makes life more pleasant and even more meaningful for the children and grandchildren of farmers in 1900.

Bring those farmers into the present and they’d weep again, but this time for joy at the ease and wealth and safety of their descendants' lives that they couldn’t dream of when they were living through the tough times.

In 1920 or 1940, I’m sure many farmers mourned the loss of their farms and the hardships along the way. But they couldn’t see the whole story. It turned out pretty well.

Would that story be any different if it had been cheap imports of food instead of technology that made food cheaper?

Trade and innovation are both ways to increase our standard of living overall, though not every single person will benefit.

Not really. Both make most of us a lot better off. Both challenge farmers to get by. Both mean fewer Americans can make a living as farmers. Both mean the children and grandchildren of farmers are much better off because there’s a wider array of alternatives to work on doing. Those new jobs and innovations are only possible because we don’t have to have 40% of the population producing food. Trade would let us achieve the same thing. Importing cheap food would do the same thing. Just like importing cheap televisions did or all the other products that now use fewer American workers to make them.

(The only important difference between trade and innovation is that if we imported cheaper and cheaper food there would be some risk that the price could rise through some form of manipulation by a foreign government say. Fracking — lower prices coming from innovation — is potentially more reliable than cheap imported energy that could go away. But that difference doesn’t change the point that the full benefits when prices fall from either change has a wider set of effects than just less expensive energy.)

Trade and innovation are really the same thing. They are ways to get more from less. Ways to be more productive. Ways to increase our standard of living overall though not every single person will benefit. But when we find ways to get more from less, that means more resources available to expand opportunities elsewhere in the economy. That expansion is unseen. You have to think through the logic to see that part of the impact on our lives. But it’s hugely important. This transformation due to trade and its impact across generations, is what I explored in my book, The Choice: A Fable of Free Trade and Protectionism.

The magic pill was overnight. The agriculture revolution took decades. The transition of that real example, while still painful, was made easier because it took a while for it to happen.

The Loss of Manufacturing Jobs

And that brings us to the latest revolution in the American economy, the transition out of manufacturing employment . In America we make a lot more stuff than we did 50 years ago or 40 or 30 or 20 years ago. But because the machinery and computers we use in manufacturing are so much better, we don’t need as many people in manufacturing, just like farming.

At the same time, factories have moved overseas. Both trade and innovation have led to fewer manufacturing jobs in America. And the pace is something between overnight and the slow transition out of agricultural employment. In the last 15 years, America has lost 5 million manufacturing jobs.

But overall, net, the US has added 12 million jobs since 2000. The worry is that not enough of those manufacturing workers have found good alternatives. The worry is that they are more like doctors than the children of farmers in my previous examples. They are struggling to find uses for their skills. It’s not as simple as the children of farmers who headed into the cities when they realized that farming was going to be a lot tougher than before.

I don’t think we know just how easy or how hard it has been for out-of-work manufacturing workers to find new jobs. What I do know is that the question of whether trade with China or the increased use of technology in manufacturing has been good for America isn’t just about those lost jobs vs. cheap toys. What we have to remember is that spending less on toys (and clothes and cars and smartphones) creates a lot of opportunity elsewhere. That’s why trade and innovation and growth matter. That’s let the American workforce expand by 12 million jobs since 2000 even in the face of a horrific recession in 2008.

But I understand that it’s not easy being an out-of-work manufacturing worker. They are competing not just with Chinese workers but with robots. And the long run may be more harder rather than easier. What are you going to do if you can’t work in a factory? Drive a truck? We just had the first driverless truck make a run recently. Cab drivers might be replaced by driverless cars. Is this a short term problem — a mediocre recovery from the recession of 2008? Or is this a longer-term problem that might not get better for a long time?

The only way to get him his job back is to force up the prices of those cars and have him share in that.

The worry is that people with very general skills — the ability to show up on time and do physical labor — are going to struggle to find appealing and lucrative kinds of work.

I once debated NAFTA on the south side of St Louis surrounded by autoworkers who were threatened by open trade with Mexico. A machinist, who happened to be the brother of the guy I was debating told me had already been out of work for years.

“What are you going to do for me?” he asked.

I didn’t tell him to find comfort from the fact that his children were going to lead better lives. I wasn’t sure what to tell him. So I asked him what he wanted. Did he want a check?

He said “I want my job back.”

He said he wanted his job back, but what I think he really wanted back was his pride and dignity. What makes us happy, what makes our lives feel meaningful isn’t money.

Here’s the problem — the only way to get him his job back was to keep people from buying cars they preferred to buy elsewhere and force up the prices of those cars and have him share in that. It’s a form of charity, you just don’t see it. That’s the problem with protectionism as a way of helping those out of work workers. It’s a form of charity. And it destroys the expansion of opportunities that trade and innovation create.

That last point has been lost in the euphoria in some quarters over the saved Carrier jobs. Yes, it appears that some jobs are not going to Mexico (though I don’t know for how long.) And yes, this creates incentives for businesses to cozy up to the president instead of trying to improve their products and please their customers. But what has been unnoticed are the unseen jobs that will not get created if we deliberately give an artificial advantage to more expensive products on the grounds that they are made in America. Protectionism (or special subsidies to American firms like Carrier) save certain kinds of jobs while keeping other jobs from coming into being.

The easy alternative is to be more honest and put workers whose skills are obsolete on some kind of welfare. This is presumably what people mean when they say we have “to spread the gains from trade more evenly.” But if people really are more likely to kill themselves when they find themselves in competition with foreign workers, I don’t think a welfare check is much of a solution.

If we care about human dignity and human flourishing, we need to give people something other than just money. We need to give them the opportunity to be part of the economy that is coming in this century, an economy where robots and computers may end up doing a lot of things people used to do.

That opportunity requires education.

Trade makes most of us better off, but it’s a bumpy road and I think we need to be aware of that.

Easy to say. What does that mean? I don’t know the answer to that question with any precision. What appears to be the case is that people without a college degree seem to have fewer choices than they once did. And those choices don’t seem very fulfilling not just financially but emotionally.

I think we have to be open to a radical reimagining of education that goes way beyond fighting over the common core, say. An education that prepares people to participate in an economy with limited opportunities for people who only know how to do repetitive tasks. Those tasks are going to go to the robots.

So let me summarize.

We’ve been hearing lately that globalization is some kind of scam to enrich corporations and international banks.

I think that’s false. Trade makes most of us better off and that in turn allows for growth and innovation that benefits almost all of us especially our children and grandchildren. But it’s a bumpy road and I think we need to be aware that for some people, especially the least educated, trade and technology are creating a world that is a lot less satisfying for them to live in.

Letting those people flourish is not going to be solved by sending them a check. And I doubt it’s going to be solved by trade barriers. Because technology is going to make their lives challenging anyway. Don’t think that’s going to be banned or stopped.

That leaves education. Which we ought to fix anyway. It’s time to stop treating our high schools as places to prepare people to take the SAT or ACT exams. We need more technical schools. More schools that teach people how to code. More choices for people to figure out what they like or love to do with their time and with their lives that other people value so that they can prosper both financially and psychologically. Ultimately, human flourishing is all that matters.

Republished from Medium.

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