Asymmetrical Information

Or, the administration could avoid the EU's retaliation by lifting the tariffs without further prompting.

Which would, IMHO, be the RIGHT thing to do.

Question: While I'm certainly opposed to protectionism, how do you address the concern about loss of American jobs, especially lower-skill jobs that used to absorb the high-school graduates who didn't want to/couldn't go to college? If the new jobs being created in the US are all high-skill work (much of which is also exportable, see India) how do you deal with the mass of unemployed and unemployable Americans who feel that they're being shafted? Eliminating minimum wage would help, but that's not going to happen.

At what point do you balance the benefits of free trade versus the costs to domestic employment?

Jason's comments fail to take into account those employed in industries that use steel. Protectionism of the relatively few remaining steel employees is a job killer for the much larger steel-using economy.

Dean: but we like to think that the administration was driven to impose the steel tariffs; political cover to remove them would be nice, even if it's not actually required.

Jason: the situation is not as simple as a choice between free trade and employment. In the long term, through currency shifts and other changes, free trade should result in no change in the unemployment rate. In the short term, any change will likely lead to increased unemployment, as changes have to be absorbed by the economy. Raising steel tariffs, for example, allow steel companies to raise steel prices; more profits for them (and/or more pay for their workers) but less for steel consumers like the car makers and major appliance manufacturers (as Joseph K points out).

In a sense, the trade situation is very simple. When I spend $300 on a Sony TV, that $300 goes to Sony HQ in Japan (I'm simplifying enormously, of course). In Japan, that $300 is just 300 pieces of green paper; sooner or later, it will come back to the US to buy something else. It may first go to Iran and Australia and Mexico, but its only value is that it can buy $300 worth of stuff from the US.

As a practical matter, workers in the US without significant skills are being absorbed in the retail sector (eg Walmart and McDonald's). Unlike steelworking, these jobs don't pay very well, so there's an incentive for unskilled workers to become more skilled. And no matter how cheap Mexican or Thai workers are, they can't serve you a burger and fries in Times Square... at least, not yet.

Jason -- as opposed to the jobs being lost in the automotive sector from the high cost of goods? How many of the major american automakers are financially viable -- One? Zero? You can bet that every dollar increase in the price of steel translates traight into job losses there.

The unemployment will get you coming or going. The question is whether you are willing to damage the economy and international relations to move it from a favored to a disfavored group. The Republican answer seems to be a resounding "yes."
--G

“At what point do you balance the benefits of free trade versus the costs to domestic employment?”

The harsh fact is that some unemployment is fantastic from a macroeconomic standpoint. Productivity gains inevitably translate into job losses. This nonnegotiable price must be paid if you truly wish to enrich the overall population. Each and every time you protect jobs---the poor who do not earn their livelihood in that particular industry---must pay more for their goods and services.

What can we do to help those who lose their jobs because of creative destruction? We must encourage these folks to seek other employment requiring different skills. Many higher credentialled members of our society will indeed also experience some unemployment. Heck, just ask Jane Galt. She only recently obtained a real job with health benefits!

Please note that I’m essentially ignoring trade issues and focus only upon the aspects of creative destruction. I do this because free trade discussions are ultimate ridiculous. What’s the big deal concerning international trade? How about the economic trading between states, cities, villages, or between you and your next door neighbor?

hi jg,
"If they slap tariffs on products that use steel, tariffs that will go straight to the bottom line of the steelworkers union (for all the talk of how the Bush administration is hostage to Big Business, it's the unions, not the companies, for whom the tariffs were enacted)."

as heckscher-olin and samuelson's analyses many years ago showed, tariff protection will decrease national income and increase returns to a scarce factor of production--in this case labour, at the expense of aggregate capital. however, this is not to say that all capital will be disadvantaged. one small sector of capital owners will benefit--namely the steel industry (part of the import-competing sector)--at the expense of export oriented capital (all that higher priced steel makes american goods more expensive to overseas buyers) and the rest of the import competitng capital owners (more expensive goods for home consumption).

which is a polite way of saying that it wasn't just workers looking for protection in the steel industry.

There's been several comments to the effect that "improved skills" are the way people can remain employed in an era of increasing global trade. Job outsourcing, however, is not limited to low-skill jobs. X-ray films are being read in the Philippines; software is being developed in India; even architectural work is being done in low-cost countries. We are still early in this trend, and the economic and political implications are going to be massive.

“We are still early in this trend, and the economic and political implications are going to be massive.”

Yup, and it’s a price tag that must be paid! There is absolutely no other choice if we wish to become a wealthier country. Do I have any good news for those who have lost their jobs because of creative destruction? Indeed I do. Our cost of living is constantly dropping. The poor of today often live better than the very wealthy of just half a century ago. The software developer who loses their job will almost certainly not starve to death. They will simply be unable to at temporarily purchase an expensive automobile or travel to Acapulco.

...it wasn't just workers looking for protection in the steel industry.

Sure, cas, but it's the workers (and pensioners) who vote, and affect certain swing states.

There's been several comments to the effect that "improved skills" are the way people can remain employed in an era of increasing global trade. Job outsourcing, however, is not limited to low-skill jobs.

David Foster, of course the sensible course is to develop skills that are in demand; spending years becoming an expert buggy-whip maker would be a poor choice.

The relevant point here is not unskilled versus skilled (I expect working with steel took a fair amount of skill) but the recognition that today's jobs will not be tomorrow's, and many (most? all?) workers need to continually add new skills to stay in demand. Working in the steel industry didn't require much education, because you mostly learned on the job; and once you learned, the union ensured regular raises and minimal change. Right up until the entire industry went under.

Much easier to say "we all need to continually update our skills" than to do that, of course.

It doesn't help that our public education system follows a labor model quite similar to the steel industry's. Rather ironic. ;-)

PJ: "In a sense, the trade situation is very simple. When I spend $300 on a Sony TV, that $300 goes to Sony HQ in Japan (I'm simplifying enormously, of course). In Japan, that $300 is just 300 pieces of green paper; sooner or later, it will come back to the US to buy something else. It may first go to Iran and Australia and Mexico, but its only value is that it can buy $300 worth of stuff from the US."

One concern is that rather than buying goods and services with their American dollars, sometimes the foreigners buy American companies - and then the profits go overseas forever after. (Of course, this wouldn't happen so easily if so many Americans weren't overspending and undersaving...)

PJ...certainly the sensible course is to develop skills that are in demand; however, my point is that there are arguably *no* skills that can't be supplied in low-cost countries...and advances in telecom technology make it possible to source these skills with little concern for geography. Many people consider graduates of the Indian Institute of Technology, for example, to be the equal (or superior) of those from MIT. Why hire an (engineer, tax accountant, architect, whatever) when you can get equivalent talent at 1/5 the cost on the other end of a telecom link?

Economic theory suggest that, in the long term, this situation will adjust itself by rises in pay scales in countries such as India...however, this could take decades. In the meantime, there could be a tremendous dislocation within the U.S. (There will also be benefits, such as a fall in the prices of certain goods & services). I'm not suggesting any solutions or even that the negatives necessarily outweigh the positives; just that this is all going to be a huge issue.

...my point is that there are arguably *no* skills that can't be supplied in low-cost countries...and advances in telecom technology make it possible to source these skills with little concern for geography.

David, this is a concern of mine, too. However, my experience sub-sub-sub-contracting on projects suggests that it is often harder to come up with project chunks which can be split off and sent overseas than it is to do the actual work. In computer programming terms, I can get (say) Indian programmers to write any subroutines I want, as long as I can describe them completely. At some point, tho, it's easier and faster to write the damn thing myself than to write the complete description.

So, given that management still needs to fly over to keep checking up on subcontracted work, and other costs involved, I expect we'll see a number of limiting factors over the next decade. As long as the labor savings are major (as they are now), the incidental costs and inconveniences can be taken in stride. Once pay scales start up, tho, the projects become more marginal. If the final calculation is that you could save 10% by out-sourcing (say) customer support to India, I expect no one would because the downside isn't worth the savings.

There is also some cultural involvement. It would be much easier to outsource to Mexico: much closer geographically, same time zones, etc. But most don't speak English well enough to serve as customer support. Or why not out-source to Canada, where they do speak English? Well, in effect we've been doing that for decades, and their pay scales are close to US ones. So countries who can culturally handle out-sourcing will tend to have higher pay scales than those that can't. India is an anomaly, in that it has enough Anglo culture to accept outsourcing, and a big enough population that it will take quite a while to be absorbed. (Though I wonder what percentage of Indians have enough education to work in something like customer service.)

And finally, if most of us lose our jobs to people in India, the trade deficit will skyrocket, and then the dollar will tank; effectively, this will raise Indian wages and lower US wages, so we'd all get our jobs back.

Let's not forget that a wealthy India would provide a huge market for everything that is still made in the USA.

I'm all for reciprocal tariffs. We'll allow everyone else unrestricted access to American markets, but we insist on equal access to foreign markets.

hi pj,
"Sure, cas, but it's the workers (and pensioners) who vote, and affect certain swing states."

true, but its these corporations (and those executives that work in them) that give big donations, lobby, etc...

"Question: While I'm certainly opposed to protectionism, how do you address the concern about loss of American jobs, especially lower-skill jobs that used to absorb the high-school graduates who didn't want to/couldn't go to college?"

As Joseph K implies, for every job that is lost in the steel-producing industry, there is at least one job created in steel consuming industries (e.g., automobiles, appliances, cans, etc.)

Also, also don't forget the reduced costs for retail consumers of the finished products.

Economic calculations of the total societal cost per steel-producing job saved result in incredibly high numbers:

"According to Mr. Francois and Miss Baughman, a low tariff would impose about $2 billion in additional costs on U.S. consumers. This might save 4,375 jobs that would otherwise be lost to imports. However, the higher costs on steel consumers would likely result in a loss of 36,164 other jobs, for a net loss of 31,789 jobs. They calculate that each job saved in the steel industry will cost the economy $439,485."

http://www.nationalreview.com/nrof_bartlett/bartlett030402.asp

"I'm all for reciprocal tariffs. We'll allow everyone else unrestricted access to American markets, but we insist on equal access to foreign markets."

In my college economics class, I think it was Milton Friedman who was quoted about erecting trade barriers, unless other countries removed their barriers:

"They send us automobiles and microwave ovens, we send them printed pieces of paper. Sounds like a pretty good deal."

Trade barriers are wrong. To erect trade barriers while waiting for trade barriers of other countries to be lifted, is like saying that two wrongs make a right.

On the contrary. Reciprocal restraint of trade restores balance to trade. If your neighbor insists on having his dog crap in your yard, doesn't it make sense to have your dog reciprocate, if he's refused to stop? At some point, you have to stop just being a trade victim.

Admittedly, I don't know squat about this sort of thing, so feel free to correct me with some sort of argument that says this can't work.

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