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Capitalism Untried

July 23, 2016

The great English writer G. K. Chesterton leveled this devastating charge against Christians: “The Christian ideal has not been tried and found wanting; it has been found difficult and left untried.” The same is certainly true of the capitalist ideal.

Fundamental to capitalist theory is that resources, including both capital and labor, are constantly reallocated to wherever they can generate a greater return. Capitalist theory therefore requires that resources be allowed the freest possible movement.

The European experiment constitutes an attempt, at least within Europe, to realize the ideal of free movement of capital and labor, allowing both to seek to maximize their returns. If a German consumer can buy cheaper goods in Poland, she is free to do so; if a Polish worker can earn more working in Germany, she is free to do that as well. The result is supposed to be that buyers can buy from and sellers can sell to a wider market than their own countries. This is supposed to enhance competition, which in turn is supposed to increase quality and reduce costs.

Free trade agreements such as the North American Free Trade Agreement and the proposed Trans-Pacific Partnership address the movement of some resources, but not labor – by facilitating trade among the member countries, free trade agreements ease restrictions on the movement of money and goods, without necessarily changing the rules that apply to movement of people.

One of the principle American complaints against free trade agreements is that these agreements put American workers into competition against workers who are paid much less, therefore disadvantaging the American worker. This is undeniably true: in 2014, for instance, the average American enjoyed a disposable income of $45,363; the average Mexican just $10,348. Even with lower educational and skill levels, poorer infrastructure support, increased shipping costs, and other disadvantages like geographical separation of American engineering and design from Mexican fabrication and assembly, many goods can be made as well but more cheaply in Mexico than in the U.S., both for American consumers and for export to the rest of the world.

Capitalist theory says that moving jobs to low wage countries will raise wages in that country. When the supply of jobs rises faster than the demand for jobs – or, stated conversely – when the demand for labor rises faster than the supply of labor – the price of labor rises to ensure that demand remains filled. As the price of labor in the low wage country rises, and as the wage differential shrinks, for every manufactured good there comes a point where the disadvantages of foreign manufacture outweigh the advantages.

Take China. From 1990 to 2006, Chinese gross domestic product grew by about 325 percent, compared to American growth of just over 60 percent. The difference in GDP per capita remains striking: American GDP per capita in 2015 was $55,805, compared to $14,107 in China. Nonetheless, the gap has narrowed enough that, given the disadvantages of foreign manufacture, for the first time in years, more American manufacturers are planning on creating manufacturing jobs in the United States than in any other country, for goods sold in the U.S.

For large American manufacturers, 31 percent are planning to add American jobs, compared to 20 percent planning to add jobs in China. These numbers are virtually flipped from survey results in 2013.

Furthermore, “reshoring” manufacturing jobs from China to the United States is gaining momentum, up 250 percent from 2012. Similarly, American manufacturers have also “reshored” some production from Mexico.

In other words, as long as the United States retains its comparative advantages in areas such as technology, education, and infrastructure, in the long run the manufacturing jobs will return well before foreign wages equal American wages. Meanwhile, there are two problems: we have to invest what it takes to maintain those advantages, and we have to be more creative and aggressive in assisting the people whose jobs are outsourced.

As a free trade Democrat, I favor free trade agreements, despite the hardships imposed on displaced workers, for three reasons.

First, reducing the wage gap between American and other workers is essential to long-term American security, and the fastest and most reliable way I know to narrow that gap is to maximize international trade.

Walling America off from international trade with lower wage countries only perpetuates the gap – and maintains the level of incentive for workers to find their way here, legally or otherwise. Donald Trump might build a wall between us and Mexico, but the notion that his wall will end illegal immigration is fantasy. If necessity is the mother of invention, then desperation is the mother of inventive rule-breaking.

A world where Americans and Europeans live in plenty while most of the rest of the world lives in want fosters resentment, then hatred, then hostilities. It’s bad enough that we choose to spend $610 billion a year on the military; imagine if we had no choice but to spend that much.

Second, increasing people’s economic well-being is good and just. And economic development fosters democratic development, which is also good and just. Creating a better and more just world is surely a proper goal of American policy.

And third, as the rest of the world develops economically, Americans benefit economically. Our own sellers can sell to and our own buyers can buy from wider markets, raising quality and reducing prices, increasing economic efficiency and standards of living for all concerned.

But there remain those two problems: retaining our comparative advantages in technology, education, and infrastructure; and creatively and aggressively assisting the people whose jobs are outsourced. We are currently doing a lousy job at both.

Fortunately, there is a single policy option that could solve a large part of both problems: sustained, high-level federal commitment to infrastructure development and maintenance. I’ve proposed adding $200 billion in infrastructure spending every fiscal year from 2017 to 2030, for a total of $2.8 trillion of the $3.6 trillion that the American Society of Civil Engineers estimates is needed.

Investment in everything from high-speed rail to high-speed internet would create quality jobs now, and would enhance our competitive advantage for decades to come. Replacing lead pipes, thereby reducing lead content in our drinking water, would literally increase our population’s median IQ, facilitating better education and technical training before even getting to classroom reforms. Rebuilding our highways, bridges and urban mass transit would improve both our economy and our quality of life.

Chinese wages are rising, and that’s a good thing. As Chinese wages rise, many of the jobs we sent to China will come back, and furthermore better paid Chinese workers will demand more of our products, from software to cars, adding even more jobs.

Our workforce must be ready to do those jobs, and our infrastructure must be ready to support them.


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