For the dollar-crash pundits, one of the key drivers of the doomsday scenario where the US is suddenly cut off from the torrent of foreign capital necessary to fund it's negative savings economy (and a trillion dollar war habit) is a rather nebulously specified "rise in protectionism."
As every student of orthodox economics is taught, and the public debate on trade has accepted as fait accompli since what feels like the Reagan era, the goodness of free trade is as pure a thing as there is to be explained in economics. As the story goes, the principle of comparative advantage enlarges the economic pie for everybody. Furthermore the reduction of frictions and barriers to trade are touchstones of a modern, efficient, and open society.
However, a lot of economics is about the frictions, the sand in the gears, of theoretical purity. Ronald Coase, one of m*'s favorite old time economists, won the Noble prize for examining some of those frictions, transaction costs to be specific, and theorizing that enterprises organize themselves into corporations in order to minimize those transaction costs.
When it comes to the sacred cow of free trade however, the frictions created by globalization - the very real and serious impact on the economic well being of ordinary people, are the inconvenient truths rarely discussed openly by serious members of the profession, with some exceptions. As long as the pie is expanding, it is impolitic to ask whether and for whom the pie is shifting as well. Inequality is not a subject economics handles well, and this ideal, utterly inimicable to the economic well being of the US middle class, has somehow become the law of the land in economic thought.
Yet a strong case can be made that for adherence to an economic ideal, the manufacturing base in the US and a sense of purpose and security for a large mid-section of the population has been sacrificed. No doubt a young Chinese factory worker's life in an industrial complex resembling a city is better in many respects than the deep rural poverty that would have preceded it. And m* can well appreciate the benefits of "everyday low prices" in poor rural sections of the US as well. But those kinds of benefits do absolutely nothing to create investment or better long run prospects for our people, and our democracy.
What is surprising to m* is how little complaint there has been from the manufacturing regions of the country, as one industry after another has been packed up and shipped off overseas. Distracted by fighting the war on terror, and fooled about their prospects by the (now departed) housing bubble, the US's losers in globalization have been mostly silent. Now they are waking up.
The extraordinary article on the WSJ's front page today, Republicans Grow Skeptical on Free Trade , signals a dramatic shift in opinion that brings the Red State voter in close alignment with many Blue State voters, and portends significant pressure on the unfettered free trade the owners of capital have enjoyed (with extraordinary sized profits as a share of GDP to show for it) while real wages for the average US worker have steadily declined. While pockets of dissatisfaction have surfaced before, a two to one margin of Republican voters now believe free trade is bad for the economy.
To be clear, m* is all for fair and open trade, and abhors tariffs, subsidies, and import quotas on principle. However, the system now in place, beginning with China's accession to the WTO in 2001, has been anything but fair and open. Heavily lobbied for by corporations seeking access to a vast and dirt-cheap labor pool as well as a billion person market, the accession allowing China to maintain a closed capital account and an inconvertible currency was a grave error of short-term profit seeking behavior. The 2001 agreement focused almost exclusively on microeconomic issues, market structures, and reducing trade controls, many of which, six years later, appear to have failed. Yet the macroeconomic "global imbalances" that have resulted from an unlevel monetary playing field, including massive trade deficits, distorted risk premiums, over-investment and consumption globally, and an explosion of debt in developed nations, will have serious consequences on US standards of living as the inevitable (and thoroughly underway) inflation and debasement of the dollar gather pace.
For the moralists' case, the Red's are coming around.
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