Free Trade: The Best Weapon Against the “Free Traders”
The trade agenda of the “free traders” appears to be hitting a political dead-end as it becomes ever harder for them to get new trade pacts approved by Congress. While the mass-based opposition to the economic elites is inspiring, it comes at a point at which the “free-traders” have already won most of their agenda. They have used trade to effectively place the less-educated portion of the labor force in the United States (workers without college degrees) in direct competition with the lowest paid workers in the world.
This policy has had exactly the effect that trade theory predicts. It has lowered the wages of less-educated workers relative to workers with college degrees and especially workers with advance degrees. We can reverse this upward redistribution by adopting trade policies that subject the most highly educated workers to the same sort of international competition that textile workers and autoworkers now face.
Interestingly, trade has not had much impact on profit shares, at least in the last decade. The profit share of corporate income in the current business cycle is approximately the same as in the 90s cycle, in spite of a massive increase in trade and the size of the trade deficit over the last ten years. The winners from the latest round of redistribution have not been owners of capital, but rather the most highly paid workers: doctors, lawyers, investment bankers, hedge fund managers and of course CEOs.
This is reassuring. It means that competition has effectively kept corporate profit margins in check. As corporations replaced relatively high cost labor in the United States with much lower paid workers in Mexico or China, the prices they charge fell accordingly, keeping their profit margins unchanged.
The big winners in this story are the workers who manage to keep themselves protected from international competition. As a result of recent trade and immigration policy, these highly paid professionals can buy low cost furniture, cars, and clothes. They can also have their homes renovated and their gardens maintained at low prices. They can even get cheap nannies for their kids.
But the key to the success of these highly paid workers is maintaining their own protection from international competition. There are long list of professional and immigration barriers that protect doctors, lawyers, and even economists and journalists from the same sort of international competition faced by textile workers and dishwashers.
In addition to the professional and licensing barriers that impose obstacles to foreign professionals working in the United States, there are also immigration barriers. These barriers prohibit a Wal-Mart Hospital or Wal-Mart University from hiring the lowest cost qualified foreign professionals from anywhere in the world, in the same way that Wal-Mart buys the cheapest clothes and toys from any country in the world.
The way to fix this problem is simple: we create transparent licensing requirements for the licensed professions that can be met by students training anywhere in the world. (Let them have test sites in their own country—administered by U.S. certified testers, of course.) We then remove any comparable pay requirements for these professions. The rule is free trade, just like with steel and clothes. If a Chinese doctor is willing to work in the U.S. for $50,000 a year or an Indian journalist is willing to work for $30,000, then they can be hired at these wages as easily as Wal-Mart buys cheap toys from China.
We can limit the total number of immigrants to a level comparable to what we have now, so we don’t have a population explosion. We should also have a tax on the earnings of these professionals, which would be repatriated to their home countries. This would allow developing countries to educate two or three professionals for every one that comes to the United States.
The result in this story is a win-win situation. We get lower cost health care and college, as well as other services from highly educated professionals, increasing the real wages of all but the most highly paid workers. Developing countries get a huge spurt to growth, as their professionals will now have the opportunity to compete in the world market on a level playing field. (A further benefit is that this downward redistribution of wage income would eliminate much of the projected Social Security shortfall.)
If the “free traders” actually backed free trade, they would be out in the streets demanding this sort of opening. But don’t hold your breath.
There are reasons besides immigration barriers, too, for lack of competition to professionals. We used to draw scientists who'd nurture the future and students who'd become the future more readily. The clumsiness of the war on terror has made it more difficult to get student visas or even to get past the airport scrutiny on a pleasure trip. The costs of universities have risen far more quickly than inflation. The "Republican war on science" and privitization of everything in sight has made this a less attractive country in which to do research. The image of this country abroad as a beacon has dropped in other ways as well.
Why not just stay home, people must feel? Maybe the overreach of the Neocon's self-styled American empire will just make the United States financially less able to compete with Asia and the European Union over time, they may think, anyhow. The future to them then lies elsewhere.
John
http://www.haberarts.com/
October 7, 2007 8:06 AM | Reply | Permalink
It's already happening. I work in a 180-bed hospital where 15 of 17 hospitalists are immigrants. The company is actively recruiting nurses from China and the Phillipines.
I blame rockstar CEO salaries. If you're going to work 80 hours a week and have no family life, why be a doctor and top out around half a million a year. High-flying corporate execs make 10-100 times that. And who wants to study difficult math and science classes to (hopefully) get into med school, when you can get a much easier MBA in half the time.
Add to that a Bush Administration that is openly hostile to facts and science, and no wonder so many students are majoring in business!
October 7, 2007 9:25 AM | Reply | Permalink
I think I'm with you but I ask this question in all honesty and not out of any desire to start an argument (because I really don't know the answer):
Aren't executives and hedge fund managers owners of capital, even if their job descriptions paint them as employees of shareholders?
Don't most execs own signifigant equity stakes in their companies? Aren't hedge fund managers as general partners in limited partnerships, not only the most powerful equity holders of their fund companies but of the companies that their funds (under general partnership control) invest in?
I could be wrong and I know you'll tell me if I am, but I think that some people lumped into the employee class, like executives and fund managers, are really capital owners more than they are employees.
thosethingswesay.blogspot.com
October 7, 2007 12:17 PM | Reply | Permalink
I think the wheels are gonna fall off of the
whole business sooner or later, there's already
funny noises and smoke, soon it'll be sparking
on the road...will we be able to watch it on
COPS when they pull up to the white house? LOLOL
October 7, 2007 12:32 PM | Reply | Permalink
Mildly on topic, I was admitted to a hospital last year, with a unexplained attack of intestinal bleeding. For the record, I do have the photographs from the safari through my colon, which prove, at one point, I was not full of it.
I was less than pleased with the hospitalists. Chatting with the second one, I learned he was Pakistani. He said he wasn't sure what was wrong, but I was improving and clearly had stopped bleeding. As he turned, on a whim, I said "Insh'allah." He stopped as if he had run into a glass wall, asked me to repeat it, and then, as he left, in a very dubious voice, bade me goodbye in Arabic. Almost exhausting my vocabulary, unless there was an opportunity to order dinner, I replied appropriately.
Two nurses came by a couple of hours later, and wanted to know what happened. They said he was usually rather depressing, but he came out of my room, grinning from ear to ear, and gave instructions that I was to get the best conceivable care.
--
Howard
*equal opportunity offense to both extremes*
"Those who cannot remember the past are condemned to repeat it" [George Santayana]
October 7, 2007 12:45 PM | Reply | Permalink
I doubt that it is possible to maintain the huge differential in wages among workers in different countries doing the same type of work. In the old days it certainly was possible, and that led to our current standard of living. But, as we edge towards "free trade" it gets more and more impossible.
People who get CEO jobs don't get them because of their unique abilities. They get them because of their connections. They don't keep those jobs because they perform them so well - and they don't need to because they all get huge golden parachutes if they lose their jobs anyway. So, there really isn't any functional reason why a man or woman from India couldn't do the CEO of General Motors job.
Doctors and nurses already are "free trade" jobs. My personal physician is from a Moslem country, and the last time I was hospitalized the nurses were largely from other countries. It won't be long before all salaried jobs are equally free traded.
Hoppy in Sacramento
October 7, 2007 12:53 PM | Reply | Permalink
Interestingly, trade has not had much impact on profit shares, at least in the last decade. The profit share of corporate income in the current business cycle is approximately the same as in the 90s cycle, in spite of a massive increase in trade and the size of the trade deficit over the last ten years.
Questions:
First, There has been a lot of questioning of tax fraud by the large corporations
both our own and foreign operating in the US. Would this not be one explanation?
Second, gross averages can give gross results. Start up costs can be high to shut down plants and open new ones overseas. Also Different industries can have greater returns and others less.
Third, we are talking profit share of corporate income, another way to have a greater total income is to reduce price keeping the same margin but with greater sales you
have a greater total income.
What is the case?
Why use profit share of corporate income only?
This is reassuring. It means that competition has effectively kept corporate profit margins in check. As corporations replaced relatively high cost labor in the United States with much lower paid workers in Mexico or China, the prices they charge fell accordingly, keeping their profit margins unchanged.
Don't know how you can state this with the overview you provided.
Do you have other data?
-----------------------------------------------
Today, are we searching for I deals or Ideals?
-Thinking
October 7, 2007 1:00 PM | Reply | Permalink
No. That's the beauty of hedge funds, you get to gamble with other people's money. A typical fund collects a management fee as a percentage of assets (say 2%), but then they also get 20% of the profits. Now suppose a fund is worth $1 billion and you have $1 million of your own invested. Suppose the fund makes a 20% profit. You get $200,000 on your capital but you get 10 times that from the commission. This trick is why many are outraged that hedge fund managers can treat the earnings as capital gains. It's not their capital!
Another example of the difference in magnitude between employees and owners. The CEO of Walmart is one of the highest paid executives in the country (after all Walmart is the largest firm). He gets $30 million per year. The Walton family which owns a controlling interest gets about $1.5 billion in dividends. $30 million sounds like a lot, and it is, but it's peanuts compared to what the owners get.
There are some more egregious cases, the management team of United Health Care managed to get themselves a package worth $1.5 billion, but this includes stock options and severance payments. The Walton's get their $1.5 billion every year.
--- Policies not Politics
Daily Landscape
October 7, 2007 1:06 PM | Reply | Permalink
Hey, if you want real free trade, why don't we get rid of the protectionism for business: intellectual property, copyright, and patent protections? These "free trade" deals are chock full of those protectionist provisions. And heaven knows protectionism limits trade. Removing these provisions would lower the price of all goods, which would be fantastic for all consumers.
October 7, 2007 1:12 PM | Reply | Permalink
No objection from me on eliminating copyrights and at least some patents.
On the profit data, I'm referring to data from the Bureau of Economic Analysis National Income and Product Accounts, Table 1.14. The appropriate comparisons are for business cycle profit peaks, 1997 and 2006 in this case.
October 7, 2007 1:36 PM | Reply | Permalink
I understand that a hedge fund manager invests other people's money, but it's not quite like you described (which is closer to a mutual fund).
A hedge fund is, by definition, a limited partnership. It's the same structure that private equity andf venture capitalists use. The manager of the hedge fund is the general partner. The investors are limited partners. The general partner has pretty much all of the rights and controls. The limited partner is... well, limited.
If you're the manager (general partner) of a $1 billion hedge fund, you own capital, whether or not you put any money into your own fund. You have control. You can vote shares, demanded changes from management, etc.
It's important not to mistake a hedge fund manager for a mutual fund manager or any other fiduciary. A hedge fund manager is actually the sole authority in a very legal business partnership and that manager is far more an owner of capital than an employee of anyone.
thosethingswesay.blogspot.com
October 7, 2007 2:08 PM | Reply | Permalink
While there are a substantial number of foreign born doctors, we are very far from free trade in physicians services. There are still very large barriers that make it far more difficult for a physician trained to India to work in the U.S. than their comparably trained counterpart in New York.
I always love it when economists, who presumably know some economics, argue that we have free trade in doctors, economists, accountants etc. because their doctor was born in India or the person in the next office was born in China. This is known as the Mexican Avocado Theory of International Trade," because it would mean that we have free trade in agricultural products because we can buy an avocado grown in Mexico at the supermarket.
Of course, economists don't usually accept such generalizations from specific examples in their analysis. We know that there are all sorts of barriers to trade in agriculture, but that doesn't mean that we have no trade in agricultural products. The same is true of barriers to foreign professionals working in the United States. There are plenty of smart and ambituous foreigners that overcome the barriers and work as professionals in the United States, but that hardly proves that such barriers don't exist.
So, next time you hear an economist deny that there are barriers to foreign professionals working in the U.S. because they know a foreign born doctor/lawyer/economist etc., tell them to come back and talk about trade after they have learned a little economics.
October 7, 2007 10:43 PM | Reply | Permalink
There is no such thing as "free trade", there is only managed trade.
October 7, 2007 10:48 PM | Reply | Permalink
destor,
now you know why the tax code is 40,000 pages long.
By the way, when they "reform the tax code" you can bet those you mentioned won't be reformed.
October 7, 2007 10:55 PM | Reply | Permalink
All right, all right, Howard, what does
"Insh'allah" mean?
Allah ackbar,
John
October 7, 2007 10:58 PM | Reply | Permalink
"God willing". A very common Arabic phrase characteristic of the fatalistic attitude.
Also, "mumkin" has been translated to me as "perhaps". The linguist involved said that "mumkin" is rather like the Spanish "manana", but without the Spanish implication of urgency.
--
Howard
*equal opportunity offense to both extremes*
"Those who cannot remember the past are condemned to repeat it" [George Santayana]
October 8, 2007 3:41 AM | Reply | Permalink