Jobs Jobs Jobs – Trade Trade Trade

Warning: In terms of the title, I’m about to bury my lead. Either be patient, or jump ahead.

Yesterday my dentist asked me if there was a short and sweet book I could recommend to him that would help him establish a framework for his thinking on matters economic. He thought he had good instincts about the major topics of the day—which I can confirm—but he needed a theory or theme for structure to organize his thinking. I said I would think about it.

Actually, I’ve given a lot of thought to such questions, but I still don’t have a short and sweet answer. I once took a stab at discussing what high school economics teachers should teach, one version of which I posted here in December 2008. Maybe I can update that some day.

The question made me think first of Henry Hazlett’s classic, Economics in One Lesson. That, in turn, reminded me of Frederic Bastiat, on which some of Hazlett’s book was based. But Bastiat’s nuggets of wisdom are spread out over more than one book. My dentist had current events and issues in mind; so that places his request in the macro rather than micro realm, which takes much of the fun out of it.

Wednesday morning, Arlen Specter handed me an example of economic illiteracy to chew on in this context. President Obama’s meeting with democrats was carried on TV and the first question came from the party-switching Senator Specter. Paraphrasing, he said his question had to do with jobs, jobs, jobs. He said we had lost over two million jobs because of our trade deficit with China. He pleaded for some protectionist relief and noted that he had been opposed to China’s membership in the WTO in the first place.That got my attention because I had written an op ed favoring China’s membership. To his credit, President Obama didn’t give him much relief, although he, himself, has been taking small steps toward that slippery protectionist slope.

Free trade, or freer trade, is one of those battles we have to win over and over. One huge problem is that we see the jobs lost to free trade but not the jobs gained. And, of course, the benefits of free trade have little to do with jobs anyway. The benefit of free or freer trade is a higher standard of living in trading nations. The impact on jobs is virtually neutral: maybe a small gain in jobs, or maybe a small loss of jobs depending on various circumstances. The benefits come from needing fewer jobs for a given level of consumption rather than more. Freer trade in that regard is similar to labor-saving technology. You get more output with fewer workers, and the excess workers are available for the new things.

Satire, and carrying faulty but appealing arguments to their logical conclusions, may be the best ways to discuss trade and other issues that are not intuitively obvious. That was Bastiat’s specialty, and his tongue-in-cheek petition to the French Parliament on behalf of the French candle makers is the most famous example of that approach. The candle makers, you see, were suffering from competition from an unfair competitor—the sun. Bastiat’s petition sought relief for the candle makers through a law that would mandate the closing of all windows, shutters, blinds, etc. through which the sunlight entered. This would not only create more jobs in the candle industry, but it would have spillover or multiplier effects—but this was before Keynes—throughout the economy. General prosperity would result from shutting out the sun.

A shorter, and perhaps sweeter, satiric argument was given by Henry George, who pointed out that protectionists want to do to their own country during peacetime what the countries’ enemies would want to do to it during wartime—close its ports to imports.

Back to Senator Specter and his assertion that over two million jobs have been lost to our trade deficit with China. The thing is this: when we import more, it leads to more exports; when we export more, it leads to more imports. The net result is a zero, or close to zero, change in the domestic (and foreign) job count. The benefits of trade have nothing to do with the job count.

Our imports, taken by themselves, result in more dollars in the bank accounts of foreign exporters. Our exports, taken by themselves, result in fewer dollars in the hands of foreign importers. If we import more than we export, as we are wont to do, dollar balances will build up abroad and be available for more exports from the United States. Other things equal, those excess dollar balances will put downward pressure on the dollar relative to foreign currencies and stimulate those additional foreign imports and U.S. exports.

If the trade imbalance is sterilized and not allowed to affect the exchange rate, then there will be upward pressure on foreign prices and nominal incomes and downward pressure on U.S. prices and nominal incomes. This will, at the margin, trigger trade adjustments similar to the effect of a dollar decline. Again, more imports result in more exports.

The balance of payments always balances when all transactions are taken into account. Since rising imports lead to rising exports and rising exports lead to rising imports, most of the adjustment or balancing takes place within the trade accounts—trade in goods and services. However, precise balance to the penny and to the job is unlikely. Nevertheless, the balancing adjustments will continue. A net import balance will result in an equal inflow of foreign capital; a net export balance will result in an equal outflow of capital. These capital flows that finance and offset residual trade imbalances will tend to affect jobs in the same direction as would be the case if trade were precisely balanced.

When we import more, most of the balancing will take place from more exports over time. The jobs lost from imports will be almost offset or just more than offset by jobs gained from exports. However, the net inflow of capital will put downward pressure on interest rates and will also stimulate job growth. The problem is that the jobs lost to imports are more visible and more easily associated with imports than the jobs created by more exports and larger capital inflows. That’s why good economics is often bad politics. Our leaders not only need to understand how trade works; they need to have the courage to explain it to their disgruntled constituents rather than pandering to them.

Good luck with that.

Comments (7)

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  1. Jon says:

    Our reality with China is they do not follow our labor laws, and China manipulates its currency versus ours. With these two variables, how would this effect the basic economic theory presented in the above article.

  2. John B says:

    Do we extend unemployment benefits to the “available excess workers?” For me the answer is “yes.” The follow-on question is how do we pay for those extended benefits? More government borrowing or do we raise taxes? I would say raise taxes. How about raising taxes on financial assets?

  3. W.C. Varones says:

    John Taylor’s “Getting Off Track” is a very short read, easy for the layman.

  4. David Smith says:

    Doesn’t enter into “the basic economic theory”, Jon. The gains in efficiency, utility, and consumer choice aren’t affected by the “labor laws” of either party.

    By the way, why would you expect any foreign country to follow US laws in its domestic affairs? The US does not follow China’s labor laws either . . . is there a case to answer?

    The IMF has flatly refused to back up the US position on currency and condemn China’s fixed RMB:USD exchange rate as an illegal manipulation.

  5. DOR says:

    Very well written piece, a real gem.

    I have never understood why protectionists demand that consumers pay more, when 100% of any economy is made up of consumers, and — at least in America — less than 3% are manufacturing production workers.

    It just doesn’t make sense.

  6. enoriverbend says:

    But back to your dentist:

    Hazlitt’s book is, in fact, what I’ve recommended when people ask me similar questions. Some don’t read it because it’s old or somewhat hard to find. But I just re-read it again recently over a snowbound winter day and it certainly does seem fairly fresh and not that dated. Some of these issues just come up over & over again for decades, or even centuries.

    Maybe someone could give it just a hairs-breadth of update (what’s Tobias up to?) and put out a New Revised edition.

  7. Thomas Sowell “Economic Facts and Fallacies” – it might be such delicious reading for your dear dentist he will not be able to stop there.

    I don’t think there is a “quick and dirty” lesson in economics – it’s too broad a request.

    Instead why don’t you REALLY teach him a lesson in free enterprise and offer to trade economics lessons with dental services? Everyone wins.

    In all seriousness, I don’t think wide-spread economic ignorance is exactly accidental. That’s a feature, not a bug. Come on, Bob, this ain’t your first rodeo…