Home > Uncategorized > When Trade Barriers Fall, Factories Close, Employment Eventually Rebounds… But Wages Fall

When Trade Barriers Fall, Factories Close, Employment Eventually Rebounds… But Wages Fall

May 20, 2015

Earlier today I posted an article describing the adverse effect PILOT agreements have on public funding. Sunday’s NYTimes business section featured an article by Binyamin Applebaum describing the impact of trade agreements on one community, Galesburg, IL. When NAFTA passed in the mid 1990s, Maytag closed the doors of its manufacturing plant in Galesburg IL and moved to Mexico. Years later, the dust has settled in the community and across the country and the results are clear and unambiguous… well at least unambiguous from two different perspectives as exemplified by these quotes from two Columbia economists:

David Weinstein… said the image of downtrodden Galesburg should be set alongside the prosperity of Silicon Valley, because the decline of manufacturing in the United States helped free resources to feed the high-tech boom.

“There was a sense that by losing the ability to produce computer chips, we were going to see the American electronics industry collapse, and it turns out that those cheap imported electronic components were just the thing that all of these companies needed,” he said. “What these critiques miss systematically is that the losers know who they are, but the winners don’t know who they are yet.”

(But) Joseph Stiglitz… said the magnitude of these losses was large enough that increased trade may now be harming the American economy.

“The argument was always that the winners could compensate the losers,” Mr. Stiglitz said. “But the winners never do. And that becomes particularly relevant when we have a society with as much inequality as we have today.”

Unsurprisingly to those who read this blog, I concur with Stiglitz’ analysis… and will take it a step further. NAFTA accelerated the race to the bottom on wages that began with the advent of PILOT programs. PILOT programs, after all, are a form of internal “trade wars”. IBM tells two communities it intends to consolidate its operations in one location and the communities bid against each other to provide “incentives”… which are really tax breaks that add to the profitability of each company at the expense of local taxpayers who lose either way. VW announces its intent to build a factory in the US and identifies three or four communities where they know they can pay low wages and avoid unionization. The communities then begin a bidding war and VW receives tax breaks that add to their profitability at the expense of local taxpayers.

The articles premise, which is that of most politicians, is that trade is good because jobs eventually come back, goods are cheaper, and, consequently, underpaid workers can have the same material wealth for lower wages…. but here’s the way that plays out on the ground:

The variety of imports has also roughly tripled since the 1970s, according to a 2006 study that Mr. Weinstein, the Columbia economist, helped write. “We benefit from the fact that it’s no longer just a choice between Maxwell House and Folger’s,” he said.

Walmart opened a supercenter in Galesburg in 2007, but Mr. Broughton said the arrival of the store could hardly offset the loss of the factory.

“The decline in the quality of life for working-class families has not been nearly matched by the low, low prices,” he said. “Maybe those diffuse benefits have benefited America more generally. But it’s not the case in Galesburg.”

The choices may have expanded over the past several decades, but the ability to choose is dependent on the wages one earns and when those wages are suppressed choices are between low grade products. And just as the 1% believes the lower 99% are better off because they can choose between more than Maxwell House and Folger’s, the 1% also believe having a choice between underfunded public schools and highly profitable cut-rate charter schools will add to the quality of life.

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