… is from pages 224-225 of the 2015 Fourth Edition of Dartmouth economist Douglas Irwin’s superb volume, Free Trade Under Fire:
Still, the best and most direct way to raise wages and labor standards is to enhance the productivity of the workers through economic development. Trade and investment are important components of that development, and therefore efforts to limit trade or to shut down factories are counterproductive.
DBx: Doug here is writing specifically about developing countries, but the point applies equally well to developed countries. (If economic growth continues, the level of development of the American economy today is less than will be the level of development of that economy tomorrow. America’s is still a ‘developing economy.’)
Wage and income growth for ordinary workers as a whole in a country are not created by labor unions, by seizing income or wealth from ‘the rich,’ by government mandating higher paid and more fringe benefits, by the use of protectionist measures to create artificial scarcities, by paying foreigners to buy more of our outputs, by the government sending out more checks, by the monetary authority printing more money, or by any of the other schemes commonly peddled by people who can’t see past their noses or who mistake the fallacy of composition as being a recipe for rational action.
Growth in income per capita, and enjoyed by all, requires an increase in real output per capita. And such an increase, in turn, depends overwhelmingly upon market-tested innovation and more tools – more “capital” – per worker.
Because increases in a country’s trade deficit – more accurately here, increases in a country’s current-account deficit – mean that that country is a net recipient, during that period, of global capital, it’s incorrect to assert that rising trade deficits for a country dampen that country’s prospects for economic growth. While tales can be told in which a rising trade deficit is a symptom of economic decline, rising trade deficits are themselves never a cause of such decline. (Is the bank that lends money to a homebuyer who buys too much house the cause of that homebuyer’s coming financial woes?)
But the far more realistic account of a country’s trade deficits is that they are a symptom of economic promise – at least relative to the promise of other countries. And the realism of this account rises the longer is the string of trade deficits. (The person who took out an imprudently large mortgage is unlikely to be able to continue to do so.)
When the likes of Donald Trump, Peter Navarro, Peter Morici, Oren Cass, Sherrod Brown, Chuck Schumer, or you name the protectionist, complain about the U.S. trade deficit, they should be heard as complaining, in part, about non-Americans helping to equip American workers with more and better tools. They should be heard as complaining, in part, about non-Americans helping Americans become more productive. They should be heard as complaining, in part, about non-Americans helping to raise the real wages and incomes of American workers.
They should be heard, in short, as being economically illiterate on a topic that they mistakenly presume to understand.