Improving Bush’s Vision

Yet all does not seem to be well. Americans are unhappy about the president’s management of the economy and pessimistic about the future. Maybe popular sentiment is simply shortsighted, or uninformed. But there is another, more rational reason for voter discontent: Times have changed, and Republicans have either not noticed or not adapted to the new realities.

Consider, for example, the thinking behind the president’s recent trip to South America. He risked all of the bad images that his staff had to know would result from the protests skillfully organized by a Castro-loving Venezuelan president and a cocaine-loving Argentine footballer to visit a region with which we already run a staggering trade deficit, to urge it to accept trade deals that offer it even better access to our markets. The president undoubtedly believed he needed to push his free trade agenda. After all, free trade is one of the policies in which he believes deeply, and for good reason. No need here to rehearse the best-known passages from Adam Smith, or to tout the contribution that the liberalizing of trade since World War II has made to our prosperity, and to the prosperity of those countries that have participated in the trade-opening policies that Bush wants to push forward.

What may have gone unnoticed by the president, though, is that the world has changed since he decided to take on the trade unions and protectionists. For one thing, we have learned that our enthusiasm for freer trade is not exactly matched by our trading partners. The European Union will not, no matter how many meaningless concessions its rather unreliable negotiators make, do anything to expose its farmers to the rigors of international competition. Or to stop the flow of subsidies to Airbus, subsidies that make life difficult for Boeing. And it is clear the Chinese have no intention of ending the pilferage of our intellectual property.

Add those up and you have a world where the industries in which we have a real advantage–the three A’s of agriculture, aircraft, and audiovisual products–are facing an uphill battle. Throw in a bit of currency manipulation by the Chinese, the Treasury’s recent denial notwithstanding, and you have good reason to wonder whether the president should be spending political capital on new trade deals. True, any good economist will tell you that U.S. consumers benefit from free trade even if our partners choose to be foolish enough to enrich us by subsidizing their exports. But any really good economist would respond with two important caveats.

First, leaders must concern themselves with political economy, not economics. In addition to efficiency, relatively easily measured and understood, there is the more elusive issue of equity. It is Americans’ sense that equity matters, that ours should be a society in which opportunity should be equally available to all. Hence the appeal of calls for “fair” as well as free trade. Never mind that these calls come from self-interested, protectionist trade unions and environmentalists, the former eager to protect their members from foreign competition, the latter eager to stop the economic growth that they mistakenly believe causes environmental degradation. A recitation of the efficiency and growth-inducing consequences of free trade is not an adequate rebuttal. Voters understand that there is more to life than efficiency, and want their leaders to make deals that are fair as well as economically productive.

Second, any really good political economist will have read more than excerpts from The Wealth of Nations. Adam Smith intended his words for policymakers–he was not an idle academic scribbler. He aimed his analysis at, among others, “that insidious and crafty animal, vulgarly called a statesman or politician.” But it was not only because of that audience that Smith was careful to frame his analysis of free trade in nuanced terms. It was also because in supporting free trade, as in other matters, Smith was moderate and practical.

So Smith called for care in applying his principles. Yes, he wanted import duties repealed. But he also added:

Not as considerable as special pleaders claim, but “very considerable” nevertheless. Workers might find new jobs, and funds expended on supplies could be deployed elsewhere. But the fixed capital devoted to a business “could scarce be disposed of without considerable loss. The equitable regard, therefore, to [the manufacturer’s] interest requires that changes of this kind should never be introduced suddenly, but slowly, gradually, and after a very long warning.”

It is, of course, not news that those industries seeking protection often take “gradual” to mean “never”–witness the failure of the apparel industry to be satisfied with a 10-year warning that its special protections were to be removed. But it remains the case that free trade creates losers as well as winners. And we should not assume that the losers are always less worthy of our consideration than the winners, especially if we can develop policies based on distinguishing the deserving losers from the undeserving losers.

In the latter category are members of trade unions that exploited their monopsony power by extracting extortionate compensation from monopoly providers–think auto workers in the days when General Motors could easily pass on its increased costs, or airline pilots in the days when regulation allowed the airlines to pass all wage costs on to consumers. A creative gale of destructive competition from imports, in the case of autos, or new entrants when regulation was ended, in the case of airlines, is just what the efficiency doctor ordered, and has resulted in a massive wealth transfer from monopolistic producers and monopsonistic unions to consumers. There is an unmistakable equity ring to such an efficient transfer.

But we also must consider the deserving people adversely affected by free trade–the mill worker who labored for 30 years, paid her taxes, educated her children. Through no fault of her own she finds herself unable to compete successfully with lower paid laborers in China and other countries.

The mill worker’s plight stems from a fundamental change to which the administration has yet to respond. In recent years we have seen a dramatic change in the worldwide supply of labor–the supply of more-or-less undifferentiated laborers competing for work has trebled, from around 400 million to 1.2 billion. Any such massive increase in supply can have only one consequence (other things being equal, of course): a severe fall in price. And until the new entrants to the world labor force become affluent consumers, if ever they do, that fall in price will not be reversed.

MEANWHILE, partly as a consequence of falling labor costs, and of the pressure increased competition puts on American businesses to pursue, and laborers to accept, efficiency-enhancing measures, profits are rising. And as the members of the undifferentiated labor force struggle to compete, or to gain the education and skills that will differentiate them from the millions of unskilled members of the world labor force, the gap between their incomes and those of the skilled and educated widens. Worse still, if people tend to marry their economic and social equals, and if studies that show an increasingly high correlation between the income of children and that of their parents are to be credited, we may be witnessing a lessening of a distinctive characteristic of the American dream–social and economic mobility.

How has the administration responded? In two rather perverse ways. First, it has asked Congress to extend tax cuts for corporations and upper income families, and tax relief for dividend income and capital gains. Combined with a lack of spending restraint, some of these cuts are contributing to a rising deficit at a time when the economy is growing at an annual rate of 4 percent, and hardly in need of a fiscal stimulus.

More important, are we certain that policies that were appropriate to the world in which Ronald Reagan lived over two decades ago, and may even have been appropriate to the world as it existed when George W. Bush moved from the Texas to the national and international stages, are still the ones we should pursue now? It was not so long ago that reductions in marginal tax rates were necessary to increase incentives to work and risk-taking. But with taxes now lower than in modern memory, corporate profits so high that the boardrooms of America are populated by executives who can’t figure out what to do with all that money, and with untold billions in the hands of hedge fund managers for whom no risk seems too great, is it unreasonable to wonder whether we need a further tilt in favor of high earners and entrepreneurs? One can only hope that someone in the administration is charged with the responsibility of figuring out a proper conservative response to this change. That response might, for example, include a reduction in the regressive and job-killing payroll tax, with the revenue shortfall recouped by taxing the oil imports that pose an increasing threat to our national security.

The second way in which the administration has responded is to persist in spending political capital on pushing freer trade agreements through Congress. This might be a tenable policy if it were accompanied by effective programs to meet the needs of what I have called the deserving displaced. But it hasn’t been. After all, the policy question is not, “Are we for or against freer trade?” Or at least it ought not to be. The harder and more relevant question–the one that Adam Smith would put to us–is, “How do we obtain the benefits of freer trade in an equitable manner?”

The answer is to continue to support trade-opening measures, but accompany them with mechanisms that transfer some of the benefits of free trade from the winners–in large part passive recipients of those benefits–to the deserving losers. The development of mechanisms that actually achieve this sharing objective is no easy task. For any such program must be administered by government, and as we have recently been reminded by reconstruction efforts from New Orleans to Baghdad, government is not good at implementing even the best crafted policies.

A paper by my Hudson Institute colleague Diana Furchtgott-Roth considers 13 government programs designed to assist displaced workers. These attempt to incorporate both the notion of compassion and the idea of transferring some of the gains of trade and change from the winners to the losers. But, to cite just one example of the gap between aspiration and achievement, Congress passed and the president signed a Trade Adjustment Assistance program in 2002, providing among other things that older workers displaced by foreign competition receive from the government checks covering half the difference between the wages at their old jobs, and what they are able to earn at such jobs as they find after being laid off. Great idea, poor implementation. Because the forms are complicated, and the number of hoops through which an applicant must jump seemingly infinite, only 1,403 of the tens (by some reckoning, hundreds) of thousands of displaced workers received checks between August 2003 and December 2004. For example, only 41 of the 4,800 workers laid off by Pillowtex in North Carolina applied and qualified.

Until we can do better than that, would it not be well for the president to direct his attentions to helping displaced American laborers before seeking to gain what has often proved to be only nominal access to overseas markets for our manufacturers, in return for still greater access for foreign businesses to our much larger market?

What is true for trade is true, also, for immigration. Immigration, legal and illegal, creates winners and losers. The most obvious winners are the immigrants themselves, and the families to whom they repatriate a large portion of their earnings. Other winners are employers and people with pools to clean and lawns to mow. Losers are the unskilled workers who must compete for jobs with immigrants–estimates are that immigration reduces the wages of the unskilled by about 5 percent–and the local communities where large numbers of immigrants congregate, who bear a significant burden in social services for new immigrants.

Now, we surely don’t want to deprive ourselves of an infusion of people who come here to work and live the American dream. We surely don’t think we can deport some 10 million people who have slipped across our borders illegally. Equally surely, we shouldn’t want to have an increasing number of people who live here but remain outside the American mainstream, cut off by an inability to speak our language or understand our history. A president intent on solving the immigration problem would insist on a solution that consists of a full-out fight to restore assimilation as a goal, while at the same time forging a generous policy of attracting and welcoming newcomers–and compensating “losing” communities and workers.

So, what is to be done? The place to begin is with a realization that in all of these policy areas, the alternatives on offer by the Democrats are nonexistent, or counterproductive. If fresh thinking on trade, taxes, or immigration is going to happen, and if such thinking is going to become politically viable, it is going to happen because conservatives make it happen. If the Bush administration wants to take the lead in this rethinking–as it may be doing in the case of immigration–more power to it. If it is preoccupied elsewhere, then the task falls to others–in Congress, in think tanks, and in the broader conservative policy community. After all, if Bush wants to focus on winning the war in Iraq, many of us wouldn’t complain. Conservatives have in the past won when they put daring but sensible policies at the service of an attractive candidate and a vote-generating machine. The last of these is in place; the search for the candidate will begin in due course; it is fresh thinking on policy that is most urgently needed.

Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).