Freeman Essay #70: “Compensate Workers Harmed by Trade?”

by Don Boudreaux on January 30, 2018

in Freeman, Trade

In the November 2001 Freeman I asked if government should compensate workers harmed by trade.  I answered then as I answer now: no.  My reasoning is below the fold.

Should government financially assist workers harmed by free trade?

Many people answer yes. Such adjustment assistance sounds reasonable. But a deeper investigation of the issue counsels against it.

Losing a job indeed is harmful, both financially and emotionally. Free trade with foreigners, however, does not uniquely cause job losses. To focus on free trade’s role in eliminating some jobs is to focus on a phenomenon that is inessential.

Suppose Congress eliminates all government-created obstacles to automobile imports. Some U.S. auto workers would lose their jobs as a result. But as a result of what, exactly?

The correct answer is: as a result of consumers’ voluntarily buying more foreign cars than they bought when trade was restricted. These job losses result from consumers’ voluntary choices.

A popular alternative way of explaining these losses is to blame foreigners: “Foreign producers stole these American jobs.” If you don’t think about the matter deeply, you might conclude that foreign producers are indeed the real culprits.

But with free trade, no producer sells anything that consumers don’t wish to purchase. All that any producer does, in a free market, is to make offers to consumers. Ultimate buying decisions rest with the consumers. So blaming producers misses the mark. If you’re looking for the real cause of a worker’s job loss, look to consumers.

Much of the emotional hostility to free trade dissolves when we recognize who causes the job losses when trade is freer. When the ultimate cause of an industry’s sagging fortunes is understood to be voluntary consumer choices, it’s beside the point to fume and thunder against perfidious foreigners. And arguing for relief from the effects of the peaceful choices of fellow citizens is more difficult—although more honest—than arguing for relief from “foreign competition” or from an abstraction labeled “free trade.”

But recognizing that consumers are the ultimate cause of particular job losses does not, by itself, argue against government assistance to those who lose their jobs when foreign trade expands. Proponents of assistance might argue that job losses resulting from consumer choice are no less real and painful. Precisely because free trade makes us wealthier (the argument goes), we as a nation must help those who pay the price for that policy.

One indication of the soundness of an argument is the willingness of its proponents to apply it consistently. If I argue that I can punch your innocent child for my amusement, I should be willing to extend to others the right to amuse themselves by punching my own four-year-old son. It will not do for me to assert, “No, no. The argument justifying my punching your child doesn’t give you the right to punch my son. The reason is that my child is mine. I reserve the right to amuse myself by punching other people’s children, but deny others the right to punch my child.”

Those who argue for government assistance to workers who suffer losses when trade is made freer are guilty of the same sort of inconsistency revealed in the above hypothetical example. Here’s why.

As noted, every job loss “caused” by free trade is caused, ultimately, by consumers voluntarily shifting some of their spending to foreign firms. But any time consumers shift their spending—whether to purchase more foreign products or to purchase a different mix of domestic products—some workers are made worse off in the short run while others are made better off. Foreign competition plays no unique role in this dynamic, competitive process.

If consumers buy less beer brewed in Wisconsin and buy more wine made in California, do taxpayers owe relief to brewery workers? If Americans choose to spend less on Hollywood movies in order to invest more in IBM stock and U.S. Treasury bonds, should government assist out-of-work actors?

Those who endorse government assistance to workers harmed by freer trade with foreigners should, to be consistent, answer yes to the above questions. After all, the point of such assistance is to relieve the distress of job losses caused by changes in the patterns of economic activity. But few of those who advocate government relief for workers and firms suffering losses from free trade advocate this logical next step—a fact that accurately suggests that the first step is itself unwise.

A principal reason why most people instinctively avoid this next step is the correct understanding that such an attempt would freeze economic activity—and freezing economic activity kills it. If government set about to protect everyone from every economic difficulty caused by changes in the ways that consumers spend money, government would inevitably clamp down on entrepreneurial innovation and consumer freedom. How could it be otherwise? Because every innovation and every change in consumer wants would cost the state money, state officials would never allow entrepreneurs and consumers the freedom to cause government to spend money on economic relief. He who pays the piper does indeed call the tune. Only the state would decide which, if any, economic changes are permitted. Entrepreneurial creativity would be snuffed out and consumers would be stripped of the freedom to spend their money as they choose.

The resulting tyranny and destitution would rival the worst catastrophes perpetrated by Stalin or Mao.

State assistance for workers who lose jobs because of freer trade with foreigners has the virtue only of not immediately opening the door to wholesale government direction of all economic activity. Arguably, only foreign commerce would be frozen by such assistance (a bad-enough outcome, but one far less horrible than a freezing of all commerce). But if we wisely resist policies that entail freezing domestic economic activity, what good reason is there for pursuing a policy that will freeze economic activity in which consumers purchase foreign-made goods and services? None that I can see.

The twentieth century taught us that wholesale government direction of economic affairs inevitably fails. The only distinction between wholesale direction and boutique-sized direction is that the ill effects of the latter are less widespread and, hence, less noticeable than the ill effects of the former—hardly a good reason to tolerate such avoidable consequences.

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