Democrats and the Presidency

The Herald Tribune reports on the Iowa debate among the Democratic contenders for the presidential nomination.

[Howard] Dean’s rivals — and particularly a feisty Senator Joseph Lieberman of Connecticut — sought vigorously to shake the former Vermont governor from what increasingly appears to be a dominant position built around a strong antiwar stance and a potent fund-raising apparatus…. [W]hen Dean repeated an assertion that the country had not been made safer by the capture of Saddam Hussein — he noted that U.S. fighter jets were now escorting commercial airline flights out of terrorism fears — Lieberman pounced. Lieberman, who strongly supported the Iraq war, said, ‘‘I don’t know how anybody could say that we’re not safer’’ with what he called a ‘‘homicidal maniac’’ in prison instead of on the loose.

It’s cheering to see the one serious candidate for the Democrat presidential nomination say this, but dispiriting that it needs to be said in what is traditionally a party of liberal internationalism. Just as Senator Henry ‘Scoop’ Jackson, the greatest post-war President America never had, failed comprehensively in his bids for the Democratic nomination in 1972 and 1976, so Lieberman is commendably unacceptable to the mood of his party’s activists.

Yet, excluding the obvious fringe candidates such as Dennis Kucinich, there is one candidate for the Democratic nomination who would be even more of an affront to liberal principle than Dean. That man is Richard Gephardt. (In fairness I should record that whatever I happen to think of Kucinich, he has received the endorsement of a children’s book character called Grandfather Twilight, who declares, “Every night, I see children snuggling with moms and dads who read them a story, and kiss them goodnight. They are the lucky ones. They go to sleep under the pearl of the moon, who spreads her light over everyone. But the world is not at peace. The air is full of smoke and sorrow. The trees tell me they feel it too, even the waves of the sea.” Presumably the air was indeed full of smoke when he said this.)

I first properly noticed Gephardt when he ran for the Democrat nomination in 1988. A centrepiece of his campaign was a demand for a ‘results-oriented’ trade policy with regard to Japan. What this meant was quotas on imports. The campaign was founded on the hair-raisingly tendentious twin assumptions that the size of the Japanese current account surplus could only be attributable to ‘unfair’ trading practice, and that it was in the interests of American jobs to attempt direct action to curb that bilateral surplus with the US.

Unfortunately, while Gephardt lost the nomination and the Democrats lost the election, this discreditable campaign did increase the political pressure on an inexperienced President Clinton five years later to ‘get tough’ with Japan. With good advice from leading economists associated with the Democratic Party (several Nobel laureates, including James Tobin, Paul Samuelson, Franco Modigliani and Lawrence Klein, signed an open letter to Clinton in 1993 protesting against his populist economic stance on Japanese trade), the international economic policies of the Clinton administration did improve markedly from that point. On Nafta and in successive global currency crises (Mexico in 1994, Asia in 1997-8) the administration did a good job against which the international economic diplomacy of the Bush administration compares unfavourably. But bad economic ideas are resilient beasts (resurfacing in Clinton’s declared sympathies with the aims of the rioters at the Seattle World Trade Organisation summit), and the case for liberal internationalist principles in trade policy appears to be an enfeebled one within the Democratic Party once more.

Gephardt is the prime culprit. I’m baffled that some perfectly sensible and liberal (in the best sense) Democrats take this demagogue seriously, for his policies would damage and disrupt an international trading system that is the best hope for developing countries seeking to lift themselves out of poverty. Gephardt sets out his ideas here, in one of the most ignorant and inflammatory speeches I can recall from a supposedly mainstream presidential candidate:

The trade imbalance is both an American crisis and a global tragedy. Around the world, millions of workers have no choice but to work for meager wages under inhumane conditions. In the race to the bottom, multinational corporations have thrown morality to the winds and sought out those countries where exploitation knows no bounds.

So far from being a tragedy, the US trade imbalance (specifically demand from US consumers) has lately been an important factor supporting a sluggish global economy. So far from seeking ‘exploitation [that] knows no bounds’, multinational companies typically bid for relatively skilled labour in overseas markets, such that their workers earn a wage premium compared with what they would have been paid in the absence of foreign direct investment. (The empirical evidence suggests that this wage premium associated with foreign direct investment happens in developed countries – even the United States - as well as developing countries, so a consistent economic populist, if there can be such a thing, ought to favour the abolition of all restrictions on foreign ownership of domestic industry.)

Wages in developing countries are of course low compared with US wage levels, but that is because productivity is lower. One of the most important benefits of an open economy is that, by allowing specialisation, productivity and thereby living standards can be enhanced. There is evidence that multinationals assist this process by means of ‘technological spillover’, or transfer of technology to local firms. Introducing labour and environmental standards as a matter of course into trade agreements is a policy that I can only politely describe as colonialist in its aims. As Fareed Zakaria of Newsweek rightly noted a couple of years ago:

Gephardt's insistence on dictating labor standards to the world is particularly hypocritical given that the United States refuses to ratify such standards itself. The International Labor Organization has four "core standards": freedom to unionize, no child labor, no prison labor, freedom of association. The United States has ratified only one of them! It's not that we don't believe in or adhere to such standards, but we don't think it proper for international law to trump our national and state laws on something as complex and local as the rights and responsibilities of employers and workers. And yet we would be asking countries such as India, Mexico and Malaysia to do what we will not do ourselves.

It’s also a transparent protectionist device to prevent developing countries from deploying their relatively cheap resources – such as land, water, air and labour - in order to make themselves richer.

I principally oppose Gephardt’s policies because they would damage the economic prospects of developing countries. But they would also damage living standards in the United States, with an especially regressive impact on poorer consumers.

Gephardt erroneously frames the issue in terms of the supposed effects of trade on American jobs:

The truth is, when you look at our national trade policy, the real outsiders are American workers. They are the ones losing their jobs because of bad trade agreements that are not good for anybody.

No, they’re not. The net effect of trade on US employment is approximately zero. In an open economy, jobs will be lost in import-competing industries, and these will be balanced by the creation of jobs elsewhere in the economy. It is not possible – even supposing it were desirable – for a government to act directly to restrict imports without at the same time depressing exports. On Planet Gephardt, exports are seen as a benefit, but in fact they are a cost: they are the goods America has to give up in order to acquire imports. If foreign countries find their ability to sell into the US market constrained, they will thereby find it more difficult to earn the foreign exchange necessary to buy US goods. And the irony of the professedly pro-labour Gephardt’s policy is that the jobs that would be saved by restricting imports are on average low-wage jobs, while those that could be created in export-competing industries are on average high-wage jobs. The US tends to import labour-intensive products, such as textiles and shoes, and export skill-intensive products, such as aircraft and industrial chemicals.

Any policy that causes a change in the relative prices of goods in an economy also changes the returns to the factors of production. Trade does this by affecting the distribution of employment and income. By distribution of income, I mean the distribution between skilled and unskilled labour, not that between labour and capital. Typically, Gephardt gets this wrong:

Well, we now face the reality that the jobs of the twenty-first century may not be American jobs. We are shipping them all overseas in pursuit of higher corporate profits and lower corporate overhead, a fool's bargain that can only end with fewer American consumers and a weaker American economy.

The profit share of national income did rise in the 1990s, but that was not at the expense of the labour share, which has remained at roughly 70% for decades. What declined was not labour income but net interest accruing to the owners of capital, owing to a fall in interest rates.

There is an important and legitimate question in public policy for liberals to raise about assistance programmes for workers who lose their jobs in import-competing industries. But instead of examining ways of assisting those workers directly, the Gephardt programme engages in aggressive unilateralist rhetoric to the detriment of US living standards and in violation of internationalist principle.

What a shambles of a campaign. What a disgraceful politician.

Comments

[Scott]

"The US tends to import labour-intensive products, such as textiles and shoes, and export skill-intensive products, such as aircraft and industrial chemicals"

Kim Du Toit suggested the opposite may be happening now or in the near future with the outsourcing to India -- I don't know (and am not qualified to comment) on how much truth there is to this, but I'd be interested to hear your take on his article if you haven't seen it already:

http://www.kimdutoit.com/dr/weblog.php?id=P2476

[Simon]

Quite agree regarding Gephardt. he has also dragged other Democrats down with him. Dean was historically pro-NAFTA and pro free trade in general, but in order to win the nomination (as in so many other policy areas) he has played left by denying this altogether!! Still, let's hope that Dean knowcks out Gephardt in Iowa and someone sane like General Clark defeats them all when it swings South. That being said, I am no Bush fan!

[Jerry]

Another excellent commentary by Oliver Kamm. It comes at precisely the right moment because the Democratic party is in the process of moving into the camp of protectionism. Gephardt has long been the most outspoken protectionist among leading Democrats but many others are tending in that direction.

For example, Sen. Charles Schumer of New York has an op-ed in today's N.Y. Times (http://www.nytimes.com/2004/01/06/opinion/06SCHU.html) entitled "Second Thoughts on Free Trade," which he coauthored with -- hear this -- Paul Craig Roberts, an economist long associated with the far right of the Republican party. On the same page is an op-ed by Joseph Stiglitz, winner of the Nobel Prize, and former member of the Clinton economic team as well as chief economist of the World Bank, seriously questioning the benefits of Nafta.

Clearly, any Democratic nominee will have to trim his sails on free trade. And since organized labor is a powerful force in the Democratic party, look for a lot of demagoguery on the issue of "protecting American jobs." It will be a tough one for Bush to counter, especially if the jobless rate doesn't decline significantly between now and next November.

It could be we're entering a period much like late 19th century America, where both the Democratic and Republican parties were defined largely by their stance on free trade and protectionism, with the Democrats this time the advocates of protection and the GOP the voice of free trade.

[Jeremy]

Bear in mind, Gephardt comes from St. Louis, which is a big union town. So he has to take the union stance, otherwise he could never be elected as a representative from there. (And he genuinely believes what he is saying).

Secondly, while I'm for free trade, the US is getting the short end of the stick of it, job wise. Maybe not quantity, but quality.

It used to be the US lost manufacturing jobs overseas. Now it's losing technical jobs, things like software production, technical support, etc.

What's left? We cannot be a nation of fast food workers and lawyers.

The basis of free trade (as I understand it) is basically that if you specialize in one area of manufacture or production, you'll be able to do it more efficiently than others, and thus be able to trade your excess for goods and services. And so can other people who specialize in things. So everyone wins, because things are made more efficient.

But instead of increased efficiency, other countries have production advantages because of lack of similar labor and enviromental laws, as well as lower costs of living. Things the US will never be able to compete with. So while we do get cheaper goods in return, we also end up losing good jobs. And that is looking less and less appealing. At least to a lot of people (those who have lost a job).

[Nick]

An excellent and badly needed piece, congratulations.

Jeremy clearly doesn't understand the conceptual basis of trade theory (comparative advantage) -- the notion that a country can 'compete' on the basis of low wages, low environmental standards etc. is a mercantilist myth, suggesting that the aim of trade is to endlessly accrue tokens of value (gold, foreign currency, whatever). On the contrary, trade is an opportunity for reciprocal specialization (hence improved efficiency in all cases).

Much of this nonsense comes out of a semi-deliberate attempt to avoid public honesty about the US trade deficit. Far from resulting from unfair overseas competition, it results from incontinent government finances in the US, which require large-scale capital inflows, which necessitate a trade deficit. If the US decides not to balance its budget, seeking instead to import foreign capital, then naturally the foreign holders of that capital are compelled to refrain from spending it on US goods. It's straightforward arithmetic, no mumbo-jumbo about 'race to the bottom' or 'unfair wage competition' needed.

Obviously I also agree that Gephardt is a disgrace. It disturbs me that his brand of ignorant populism even counts as a serious political position.

[Scott]

Whether Jeremy does or does not understand the conceptual basis of trade theory, I think his main point was this:

It was easy to look the other way when it was just textile jobs that were going overseas (easy that is if you worked in a more specialized field).

But now we're losing higher level/specialist jobs ie programmers and so forth, and the trend seems to be working its way upward. Plenty of developing countries provide sufficient education to offer a workforce with job skills that can compete with what is available locally, for substantially less salary.

I don't know how much impact this has in Europe but in the US it's huge; in the link above it mentions 4,500 more programming jobs were moved overseas to India.

I see no reason why this would not go the same way as with textiles production and etc, and I think it's fair to say that would be a disaster for the US.

I don't really know how this would be avoided but so far I have not seen any globilization advocates address this issue -- if anyone has a link to such please let me know as I would like to find out if there is a silver lining of some kind to this or if it is basically just a really bad thing for America...