Populism: The real economic danger in this recession

When the going gets tough, the tough turn into populists. Or at least that’s what we have seen time and again throughout history. In the 1930s, as the Great Depression was savaging the American Economy, people trembled in fear at the economic devastation. Members of Congress, sensing they needed to do something to address those fears, enacted the Smoot-Hawley Tariff Act in 1930, raising tariffs on a wide range of imported goods. Most economists agree that Smoot-Hawley only made things worse.

In the early 1990s, as the Economy slipped into recession, populists again went on the War Path. This time it was the Japanese who were to blame for our economic ills.

Now, the U.S. is in recession again. And as is always the case, politicians are out in force looking for someone to blame. Depending on the day, this ranges from Big Oil to the Chinese, to Sovereign Wealth funds to short sellers. In the end, some party will take the brunt of these attacks and Congress will be forced to take action, if only out of political expediency.

The Democrats, in particular, have turned populist. Both Barack Obama and Hillary Clinton have attacked aspects of NAFTA, suggesting the treaty is at least partly responsible for American job losses. Clinton has gone out of her way to target Big Oil as another evildoer in her populist attacks.

While this may make good copy for Americans suffering as the economy turns down, it can only serve to worsen and deepen the recession. Let’s look at three issues in particular: NAFTA, the Chinese and Big Oil.

NAFTA: what went wrong?
First, NAFTA is no more responsible for American job losses than free trade in general. If one wants to point the finger, why single NAFTA out? The U.S. has been a net beneficiary of Free Trade in terms of lower prices and improved productivity from competition. This creates jobs.

That said, free trade does cost America jobs. What Libertarians and other supporters fail to take on board is that while free trade is a net plus for the US, there is a big difference between a Net plus and a plus. Yes, the U.S. has benefited on the whole and free trade has created jobs but some people have lost their jobs to free trade, as U.S. companies have been all too willing to outsource almost anything under the sun out of America and overseas to lower cost foreign workers. Without getting into the social responsibility of American companies to U.S. workers, it is fair to say that this represents a cost to our country. Free traders would say this is a cost we have to pay in order to be more productive as a nation and to move forward. It is a price worth paying, they would say, because the big picture says free trade is a net positive.

Well, people don’t put food on the table with the big picture. People don’t buy toys for their kids and put clothes on their backs with the big picture. The real question is how do you compensate those people who are the losers in free trade, people who may never regain the salary levels, the prestige and honor they once had in good paying, honest work? And, if free traders (like myself) don’t wake up to the fact that some people’s lives are crushed by losing jobs to free trade, they have only themselves to blame if populism results in protectionism and tariffs.

Let me be clear, tariffs only harm us by making goods more expensive. So, no one wins. I am a free trade advocate, but I recognized that the downside of free trade must be addressed if we are all to benefit and buy in to it as a way of life.

And speaking of free trade, let’s address NAFTA specifically again. Many believe that NAFTA is costing us jobs because production moves away from the U.S. to Mexico. But, free trade works two ways. The U.S. massively subsidizes agriculture, giving U.S. agricultural producers an unfair advantage vis-a-vis their Mexican competitors. When I read the Mexican press or visit, I am made keenly aware of the rioting by Mexican peasants demanding their government do something about NAFTA and the jobs its costing them in the countryside. Some economists even blame this job loss for an increased flow of Mexicans into the U.S. seeking employment as their livelihood at home in Mexico is destroyed. Americans seem oblivious to all of this, but I have seen this same story picked up in the German press. We need to take a good hard look at this issue. It cuts both ways.

The Chinese: Should we have free trade with them?
Now, what about the Chinese? The saying goes that the Chinese expect us to open up our market to their goods but they won’t open up their market to ours. Every toy I buy for my children is ‘Made in China.’ Any dishware or Electronics has that ‘Made in China’ moniker. I feel like everything is made in China nowadays.

But, that’s neither here nor there regarding whether we should have free trade with the Chinese. The fact of the matter is trading freely lowers prices to consumers and produces wealth for both sides. However, if one side does not open it’s market, it means that manufacturers and producers on the other side do not get equal benefit and ‘potential’ jobs are lost. For an economy in recession like ours that’s a real issue. Jobs that are lost to Chinese manufacturers can be regained through production of exports sold to the Chinese.

So, I ask myself: how do we respond when it is obvious that our trade partner is not opening up their market as much as we would like in key sectors of our economy like auto manufacturing? I don’t have the answer to that. I do know that tariffs are not the answer and can only be envisaged as a last result. Tariffs lead to retaliation, which leads to more retaliation and everybody loses. There must be an opportunity for the U.S. to negotiate an equitable agreement without having to resort to tariffs. Only time will tell.

Big Oil: the American evildoers?
In today’s world of special interests and Washington lobbyists, big oil has much more sway with the Bush Administration than it should. With both the President and Vice President coming to politics via the oil patch, conflicts of interest are inevitable. But, we have to be careful in tarring everyone in the oil industry with one brush. The fact of the matter is that Big Oil creates jobs. These are good-paying jobs for Americans with benefits and pensions.

Now, think back to Hurricane Katrina, which pummeled Louisiana and Mississippi. I remember vividly that Big Oil wasted no expense in getting their workers and their workers’ families into temporary shelter with food and clothing as soon as possible. Oil companies set up search parties to account for all of their employees and provided transportation back to the area as well as lodging for those employees that had been displaced and settled elsewhere. Valero Energy, in particular, was commendable in its efforts here. All of this was paid for by the companies themselves. Obviously, these companies wanted to get their employees back to work, so they were self-interested. But, some of these companies do truly care about their employees and the communities they serve.

A last thought on Big Oil revolves around the U.S. Government taxing their ‘excess profits’ to be able to redistribute it to others in greater need. This ‘Windfall Profit Tax” is a dangerous populist ploy that would ultimately end up costing jobs. First, one has to ask whether we want the government arbitrarily deciding when profits are ‘excess’ and when they are ‘just right.’ But, more than that, we know from past experience that windfall taxes are a bad idea because they result in under-investment in the affected industries. If a business manager sees fewer dollars from his investments because they are taxed away, she will invest less in that business than would otherwise be the case. So, a windfall tax merely diverts investment away from those industries where investment is warranted to less productive sectors of the economy. In the long run, the country loses.

I am going to end the post here. But suffice it to say, we live in dangerous times. Not because of Al-Qaeda but because of the politics of populism.