Buchananism is not mere 19th-century populism warmed over and updated. Rather, it is grounded in a set of ideas, particularly about trade and the nature of the American corporation, that have a firm basis in recent economic research and thought. That doesn’t make Pat Buchanan right. But it does make him credible. Perhaps even academically respectable. And it leaves his opponents unable to formulate clear responses.
Start with the traditional Republican adherence to the doctrine of free trade. Pat Buchanan has certainly put that idea into play, as a Wall Street merger maven might put it. To respond by calling him a protectionist is to beg the issue, which is whether the facts of 21st-century life will make adherence to the old free-trade religion an intellectually acceptable position or an obsolete, knee-jerk reaction. Free traders teach us that America benefits from keeping its borders open to the goods and services of other countries, regardless of the behavior of those countries. Thus, if Japan wants to dump VCRs into American living rooms at prices set below cost, we should gratefully accept this gift — and others like it. And if the Japanese close their markets to our automobiles, they will be the losers, their consumers restricted to domestic models that will inevitably be expensive because of the lack of foreign competition.
There can be no quarreling with the theoretical underpinnings of the theory of free trade: If each country specializes in what it does best, and exchanges its products with other countries that are doing the same thing, the world’s resources will be used most effciently, output maximized, and costs minimized.
But even if we grant that an open trading system indeed maximizes economic effciency and national wealth, we have not addressed the issue that Pat Buchanan, in his belligerent and therefore insistent manner, is demanding that the Republican party consider. It seems too obvious to need saying, but defenders of free trade persistently ignore the fact that such a policy has major consequences, not only for the size of the national pie, but for how it is distributed.
Free trade creates both winners and losers. The voters know that. That’s why Iowa farmers, who thrive on exports, love free trade, while Michigan auto workers, who are hurt by imports, are less enthusiastically in favor of open markets. Unless the Republican party is prepared to say that an Iowa farmer is a more worthy beneficiary of its policies than is a Detroit auto worker, or even that consumers in aggregate are a more proper source of its attentions than workers, it cannot defend its traditional position in favor of free trade merely by proving that it increases total national income. For Buchanan’s argument is not, in the end, that protectionism will increase total national wealth. He is talking about fairness, not efficiency, and calling for a trade policy that will funnel more of the national income we do generate to industrial workers — particularly those in the declining industries such as textiles and autos — and less to farmers, workers in export-dependent and usually high-tech industries, and consumers, who benefit enormously from the ready availability of foreign goods.
And, whether he knows it or not, an increasing body of economic research supports his position that free trade hurts low-paid workers and benefits shareholders and corporate executives. Which brings us to FPE — the factor- price-equalization theorem. This is the work of such academic luminaries as MIT’s Paul Samuelson. They have long pointed out that free trade reduces the value of a nation’s scarcest resource by subjecting that resource to competition from countries where it is more plentiful. Because the relatively scarce resource in America is labor, the opening of American markets will reduce that scarcity by making available at a reasonable price products that take a lot of labor to produce. Thus, Samuelson told an audience in Italy, ” As the billions of people who live in East Asia and Latin America qualify for good, modern jobs, the half billion Europeans and North Americans who used to tower over the rest of the world will find their upward progress in living standards encountering tough resistance.”
The obverse of this is that free trade makes more valuable the resource that is in ample supply, relative to our trading partners. In America that is capital, which is abundant here, scarce elsewhere. Trade opens up investment opportunities, increasing the possible uses to which American capital can be put — and increasing the return on that capital. So, along with lower wages for the unskilled, who must compete with Latin American peons and Asian peasants, free trade brings higher profits to investors, for whom it opens new doors–not a mixture of results likely to increase the political popularity of its advocates.
It gets worse. The dreaded FPE theorem cannot easily be dismissed with the usual “that’s true in theory, but not in practice.” For it is supported by several empirical studies that suggest that trade does indeed have an adverse effect on the wages of unskilled workers. So say such distinguished academics as the University of California’s George Borjas and Harvard’s Richard Freeman.
Add quite respectable recent studies of the impact of the free movement of people as well as of goods — immigration — and you have Buchananism of the mind as well as the heart. Professors Rachel Friedberg and Jennifer Hunt, of the economics departments of Brown and Yale Universities, respectively, conclude that the effect of immigration on the labor market is “small.” So far, so good for the open-market advocates. But they go on to say that by ” small” they mean that a 10 percent increase in the fraction of immigrants in the population reduces native wages “by at most 1 percent.” They further find that “the upper bound on the wage impact [of immigration] is large enough to explain one-quarter of the rise in inequality in the United States in the 1980s, but the true effect is probably considerably smaller.” This may sound like a minimal effect to an academic economist, but to a worker wondering why (or at least being told that) his or her wages are stagnant, and upset that the highly paid are getting richer while the lowest paid are getting poorer, all of this translates into the idea that immigration is bad for the worker. And that idea cannot be dismissed merely by labeling its proponents ” nativists.” None of this is to say that protectionism is a solution to any of the problems of Buchanan’s so-called army of peasants. As a recent study for the American Enterprise Institute by Jagdish Bhagwati and Vivek Dehejia makes clear, the FPE theorem is not without major theoretical problems, and the empirical evidence can be taken to mean that technological change, rather than freer trade, is the “explanation for the observed decline in real wages of the unskilled.” Moreover, it would be far better to upgrade the skills of workers subject to competiion from low-wage economies than to freeze them in jobs that will, in the end, fail to provide the sought-after steady increases in living standards.
But, so far, Republican free traders have failed to make these arguments. True, Lamar Alexander has pointed out that jobs flow in two directions, from Germany’s Mercedes Benz and Japan’s Toyota to America, and from America’s textile firms to Mexico and Asia. And the University of Arizona has released figures showing that Buchanan’s despised North American Free Trade Agreement has increased total employment in that state, which abuts Mexico, by between 2,000 and 5,000 jobs. But none of Buchanan’s rivals has come to grips with his contention that free trade does create losers, and not only in the short run. To do so would involve the painful process of deciding whether to propose policies to share the costs now borne solely by the losers, or remain true to the notion that any interference with the workings of the market will in the long run prove counterproductive.
Another quite respectable issue raised by Buchanan relates to the role of the corporation in American life. While attacking Buchanan as an oldline anti- big-business demagogue, Massachusetts governor William Weld and Bob Dole — the left and center of the party, respectively — seem to be agreeing with him that big corporations, fat with profits, and their managers, wallets stuffed with options and bonuses, should do more for their workers and their communities. Echoing the ideas now being put forward in Britain by Labour leader Tony Blair, mainstream Republican candidates have responded to Buchanan’s criticism of down-sizing in the face of Dow-rising by suggesting that corporate managers eschew mere profit-maximizing and heed the voices of ” stakeholders” in addition to those of shareholders.
This attention to the needs of stakeholders would include retaining workers who, although no longer needed, have served the company loyally in the past; providing training programs that equip workers to move on to new jobs when the old ones disappear; considering the impact of plant closings on local communities; and accepting a host of welfare4ike responsibilities traditionally left to private insurers or the government to provide.
The attraction of such an idea to liberal Democrats is obvious. With tax increases out of the question, exploding deficits out of fashion, and unfunded mandates more diff’lcult to impose on reluctant state and local governments, the liberals are out of money. So they are looking to corporate America to fund the programs that the voters are unwilling to pay for with taxes, in the full knowledge that those costs will be passed on to the unsuspecting voters in the form of higher prices.
It is not the liberal Democrats, however, but Pat Buchanan who has forced the Republican establishment to confront the possibility that the role of the corporation in American life might be reconsidered, and that this institution might be converted into an instrument of social-economic policy. The idea is not a new one. Ever since the great work of A.A. Berle and Gardiner Means in 1932 (The Modem Corporation and Private Property), we have been aware of the divorce between ownership and control of large corporations. Widely dispersed shareholders possess neither the knowledge nor the weapons with which to bring corporate managers to heel if they behave in non-profit-maximizing ways. True, shareholders can always express their displeasure by selling their shares and, more recently, by voting them in favor of a potential takeover by new managers. But, by and large, non-owner corpocrats have wide latitude in running the affairs of most major corporations. And they have used that latitude to engage in a variety of not-strictly-for-profit activities, including extensive charitable giving that is more often related to the need of the chief executive for ego-gratifying social approval and good seats at cultural events than to any benefit for the company’s shareholders.
Having conceded that they have a responsibility beyond mere profit- maximization, these corporate managers are ill-placed to resist demands that they expand their vision still more, to encompass the longterm interests of their workers and the communities in which their plants and offces are located, even if that means lower earnings-per-share. Indeed, if they were to ignore this issue completely, America’s executive class would be flying in the face of advice by such conservative thinkers as Irving Kristol, who has long argued that the corporation is a social as well as an economic institution.
This idea ignores the argument that corporations can best see to the interests of all their stakeholders — maximize workers’ wages, customers’ satisfaction, and their communities’ economic health–by behaving in the old- fashioned way. That is, by seeking to produce goods of the highest possible quality at the lowest possible prices so as to maximize profits, businesses will be led as if by an invisible hand to do good for all of their stakeholders. Not a very original idea, to be sure. And certainly not one with great appeal to those contending that the interests of stakeholdners can be served only if large corporations — and, presumably, other businesses — abandon their profit-maximizing ways in favor of some broader objective.
As with Buchanan’s trade policy, his plan to put new burdens on America’s corporations would not be without its costs. Efficiency-enhancing changes would become more expensive, and therefore be deferred or, worse, indefinitely postponed; production costs would rise, reducing competitiveness and imposing higher prices on consumers; corpocrats would have still another reason for avoiding the iron discipline of profit-maximization. But some portion of the cost of change would be transferred from workers and from their communities to stockholders. Buchanan thinks that is a good thing; the Establishment doesn’t know what it thinks. That has given Buchanan the upper hand in the argument so far. Free traders and pure profit-maximizers must now face Buchananism four-square and argue it down. We can no longer rely upon the dismissive power of the words protectionism, or Smoot-Hawley, or interference with free markets to do our work for us.
Irwin M. Stelzer, a frequent coutributer, is director of regulatory policy studies at the American Enterprise Institute.
