Greenspan Denounces "Protectionism" -- Is He Right?
Charlotte Observer, April 21, 1999
Knight-Ridder/Tribune Media Services, April 19, 1999
Federal Reserve Chairman Alan Greenspan grabbed some headlines this week by denouncing what he sees as growing "protectionism" in the United States. The remarks were clearly inspired by the current debate over whether China should be admitted to the World Trade Organization.
Mr. Greenspan is arguably the most powerful person in the world, in terms of his ability to influence the American and the global economy. This power derives from the Fed’s control over U.S. interest rates. Lately he has been using the bully pulpit that his position provides in order to advance other causes: on budget issues, Social Security, and now international trade. His latest remarks will probably help the Clinton administration in getting China’s admission to the WTO past potentially heavy opposition in Congress.
But did he get the economics right? Greenspan made the traditional textbook argument that free trade enhances economic efficiency by causing all countries-- including the U.S.-- to use their resources most productively. Part of this is based on the virtues of competition, with international competition providing the necessary incentive for firms to be efficient. That part is not so important, since there are simpler ways to promote competition domestically: for example, enforcement of anti-trust legislation within the U.S. economy.
The other part of Greenspan’s argument is known as the theory of comparative advantage. This theory states that all nations are made better off by moving toward freer trade, since each country specializes in those goods and services that they can produce most efficiently. Consumers in each country share these gains from specialization and trade, in the form of lower-priced consumer goods.
The problem is that the same theory also predicts that there will be "winners and losers" within each country. And in the United States the "losers" turn out to be the overwhelming majority of the population.
Thirty-five years ago the percentage of imports in the U.S. economy was about one fourth of what it is today. Volkswagen beetles (the pre-yuppie kind) were practically the only foreign-made cars on the road. But employees across the wage and salary spectrum shared in the gains from economic growth. From 1946-73, the real wage for a typical employee rose by more than 80%. No wonder people were optimistic about the future.
All that changed in the second half of the post-World-War-II era. Over the past 25 years, the median real wage has actually fallen, even as the economy has grown and the rich have become fabulously richer.
Economists now recognize that the increased opening of the U.S. economy to international trade has had a lot to do with this change, although there is dispute about exactly how much. But even the lower estimates of the impact of trade on inequality are much larger than the efficiency gains that Mr. Greenspan describes, for most Americans. In other words, by standard economic measures, the downward pressure on wages and salaries that has resulted from globalization has far outweighed any gains in the form of lower-priced consumer goods.
For Mr. Greenspan, this is not necessarily a problem. As Chair of the Fed, he has generally seen rising wages as a "threat" to the economy, under the theory they might possibly lead to an increase in inflation. This is the viewpoint of the bankers and big bondholders whose interests predominate at the Fed. Mr. Greenspan shares their concerns and although he has acted much more reasonably over the last few years, for most of his tenure he has been more than willing to raise interest rates, thereby increasing unemployment and stunting wage growth, when labor markets became "too tight."
But for most Americans, rising wages and salaries are not a threat, but rather the means by which they can pay their rent or mortgage or help their kids through college. Most of the public also has a more pragmatic attitude toward trade: if it raises living standards they are in favor of expanding it; otherwise not.
Economist Robert Solow, a Nobel prize winner, has noted that it is "perfectly reasonable that we might decide not to go any further along that path [toward freer markets] until we find a way to be more vigilant in taking care of the losers."
Remember that "the losers" in this process are not only the steel, textile, or electronics workers who are losing their jobs directly to cheap imports, but the overwhelming majority of the U.S. labor force. Solow’s conclusion runs counter to the goals of our political leaders-- increasing access for U.S. corporations to cheap labor and overseas markets-- and so such sentiments are denounced as "protectionism." But they are the logical conclusion from the last 25 years of economic data, and one that is becoming increasingly difficult to avoid.