Sunday, October 14, 2007

The Road To Poverty (Free Trade)

I was reading the WSJ today, as I do most every day, and I found a couple of very interesting articles that really compliment one another. This happens a lot, and when it does it makes for good blog fodder. The articles I am referring to are “Why The US Job Market Is Sagging In The Middle” which can be found here:, and “The Burma Connection” which can be found here:

I must say that I found both articles to be very interesting and well done. The first article was in the Career Journal section, and it addresses the loss of good paying middle class jobs. These jobs are being replaced by personal service jobs, the demand for which is growing as those at the top demand more things like nannies, security guards, and so on. These are things that cannot be done anywhere else, so you can’t ship the jobs to another location to take advantage of lower wages or replace them with technology (not yet anyway). A bastion of safety from globalization and technology (unless, of course, you simply import the workers – some food for thought).

David Wessel, the author of this article, points to one possible solution to the widening wage discrepancy – unionize the service jobs to provide better wages thereby replacing the traditional middle-class factory workers with a new middle-class of service providers. I thought that was very interesting, and something the labor unions should grab on to (I’m sure this has not escaped them). They certainly are not winning many battles in their traditional strongholds such as the auto industry. Other possible avenues include further obfuscation of the tax code and trade restrictions, although Mr. Wessel correctly points out that many economists warn taking trade action would be costly to consumers (I assume here that he is referring to the increase in prices that would accompany a more restrictive trade policy). What I want to work through in this post is the globalization/trade restriction issue. This comes up a lot these days, including in the article about Myanmar, f/k/a Burma.

In the Burma article, author Andrew Higgins describes the tragic consequences for many residents of a planned economy, dictatorial regime, and economic sanctions. In particular, he explains the ordeal that many women go through each day crossing the Moei River into Thailand to work in factories for $4.30 per day (these are apparently the fortunate ones). This is the other side of the changing nature of the US work force and an important part, in my view, of the trade issue. These women living in abject poverty are working in textile mills making things such as braziers. The products ultimately end up on the shelves in our stores. Now, regardless of your political leaning, this is one of those facts that just cannot be reconciled with a national conscience grounded in freedom and fairness. OK, these are not people of our country, but so what? Something that results in these working conditions for these people and a product that we use is wrong and there should be a way to make it better, period. I am not claiming to know how.

We had circumstances in this country during the industrialization of our economy that left many workers in poverty. Now, I’m no expert on this point in history, but I have consulted someone who has read quite a bit about it. (I would like for him to do a piece on it, actually, and if I can convince him to there will be many more details to come). The very short upshot is that dreadful labor conditions led to revolt in the form of both violent and non-violent acts against industry and the political structure. Socialists, anarchists, and communists all gained popularity as workers were forced to endure these working conditions or go hungry. Ultimately, we altered the accepted rules of our society that had held labor could not bargain collectively. Originally (and today in many cases) collective bargaining was seen as collusion and inconsistent with a market based economy. Of course, with the deterioration of working conditions to the point of revolt, change was necessary. In this case laws were passed to allow workers the right to organize, thereby reducing the power of the business organization (yes, I use that term intentionally here) over that of the individual worker. If we had not done that, we may not have survived and thrived as we did. In fact, advancing workers’ wages turned out to be a good thing as we developed a strong middle class consumer population with a big appetite for goods and services. How did this happen?

I think it goes right back to basic economics. If the price of an input is dirt cheap, you will use that input over others. If the price of that input goes up, you will substitute another input for it. Now, there may be no absolute substitute for the labor of an individual, but if that labor gets more expensive, business figures out ways to compensate by innovating. This is the same argument for a minimum wage. It lifts people out of abject poverty (into just poverty) and it forces business to innovate. The innovation creates new job opportunities for those who are innovated out of a job, and the cycle continues. But if the cost of labor remains dirt cheap, there is no incentive to innovate around labor. It simply remains the low cost way to operate and workers suffer. This is also the argument for an increase in taxes on fuel.

Now connect the dots. What is happening in the US is certainly connected to what is happening in Myanmar. Business seeks out the lowest cost anywhere on the globe today. Don’t blame business, it is supposed to do that and it is good for us that it does. The issue here is the set of rules that business must play by once they leave the US. There are lots of rules, and we keep hearing these days that those rules are why US businesses are losing competitiveness around the world (too much regulation, too many law suits, etc.).

OK, time for a thought experiment. What if, instead of exporting jobs to places like Thailand, we exported our rules? What if we said to other countries that we will not trade with them unless they protect their workers and pay them at least a living wage (defining “living” as something greater than survival)? Lets throw in a little environmental protection while we’re at it. Well sure, the cost of labor would stay higher, but does that mean that in the long run the prices of everything will go up? I for one am not convinced that this is the only logical long-run result. Didn’t the price of a car in this country steadily decline while labor gained much higher wages during the 20th century? And labor is a large part of automobile manufacturing. Oh, that’s right, it’s less so today. Why? Maybe it has something to do with manufacturers substituting technology for labor due to labor’s high cost.

As long as we export the jobs without exporting the rules, we are in fact importing the rules through the back door in the form of lower wages to the middle class. We begin living by the standards of other nations rather than our own. We may also be losing our advantage in innovation if we simply lower costs by moving from one area of cheap labor to another. Any change will likely cause short term pain making it politically difficult, but in the long run no change could be a lot worse. In the mean time, can we please figure out a way to help people like those women in Myanmar? If we don’t, we may be looking at our future.

Sphere: Related Content


Michael Nugent said...

I like the idea, but I don't think it would work, trying to export regulations is hard, we have been trying to do that with China for a while, but we never press hard enough because there are 40 other country that will step in if we step out. plus the black markets will find a way around it. Invisible hand is what works best.

Palermo's Blog said...

This is a difficult one. I too favor free markets, but that doesn't really apply here because our trading partners no not adhere to the same ideals. In addition, because we do things like cut of Burma economically, we have already altered the markets. Factories in Thailand pay even lower wages because of the flood of labor coming accross the boarder. I don't see that as free market. I don't have answers on this one, but I do think we need to be more responsive to these issues. The political response is pennies for those who lose their job because of foreign competition so they can re-train to do something else. So far the political response has been words and an increase in funds (they are trying to pass this now)for worker retraining in the US. I guess the free hand of the education market isn't working well either:-)

Palermo's Blog said...

Sorry about the typos - I hit submit by accident before editing.

Palermo's Blog said...

A few interesting developments today regarding China. WSJ article available here:, and commentary at China Confidential here: and Tibetan Affairs here:

Anonymous said...

All I can say is I can't believe you wrote this on Sunday!

Lawrence D. Loeb said...

I appreciate your thoughts and your concern for the poor.

As Michael Nugent said, it's very hard to force others to adapt our rules. There has been some success with companies in the US fighting child labor (although their families may not appreciate the loss of income).

In the specific case of Burma/Myanmar, the US doesn't import anything from there (at least in 2007). Look at Exhibit 6 in the latest report from the census (

China is, finally, starting to focus on becoming environmentally friendly. It isn't because of us (we kind of lack credibility since we won't sign the Kyoto treaty), but because of the observable effects of pollution in China.

The people of Burma are starting to stand up against the army. Hopefully they will improve conditions. I don't see what we can do (other than military intervention - and I don't think anyone wants to go there).

Palermo's Blog said...

Here is another example regarding GAP: