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[Skeks in the city]

Homeland Insecurity
By STAN D. DONNELLY
Barron's Editorial
March 28, 2005

HOW MANY TIMES HAVE YOU HEARD an economist say that he believes in free trade , because "if you produce what you're good at producing and another country produces what it's good at producing, both countries will be better off?" This distillation of David Ricardo is an economic article of faith, but it's a short-sighted policy for our country.

The free traders would have us believe that China is good at work that requires a content of manual labor. But is that so? The fact is that they aren't good at manual labor, they're just cheap. The economists are misusing Ricardo's theory of comparative advantage. China's cheap labor has nothing to do with China's manufacturing expertise, nor with any innate natural resource blessings. Instead it has everything to do with a bloated population starved for work. At a wage rate of less than 50 cents an hour, with no benefits or social protections of the sort that we have evolved, there is nothing free about this trade on either side of the ocean.

Free traders heartlessly assert that costs are costs, however they are derived. So ask them this: "If free trade means that a society is better off by sourcing its manufactures in low wage areas, regardless of the reasons why the wages are so low, what is wrong with trading with a nation who can offer the cheapest labor of all, slave labor? At those prices, wouldn't we be even more better off?"

The free traders would reply -- with justifiable indignation -- that such a thing would be immoral. Of course, they are right. Except that they now have admitted that costs are not just costs. Morality does have something to do with the equation after all. So let us ask the question again: "Is it moral (or even wise) to eliminate the manual-labor jobs of an evolved nation and disrupt its vital economic balance and social health?"

At its distilled essence, the wealth of a society is created by those people and corporations that make something from nothing. You've got to mine it, make it, or grow it. Manufacturing is directly about 20% of our economy; the other 80% depends on that wealth-generator. Some today scoff that our new "service economy" doesn't need this 20%. A caution: Even though your bones are only 20% of your body mass, without your skeleton, you're a puddle.


We must not fool ourselves that the bargains that we are seeing in China are any bargain at all. Nor should we fool ourselves that we can innovate and educate our way out of it. We already have a generation of millions that have flunked in our government schools. Whatever the reason is, they're here now, and more are on the way. What are we to do with them if their minds cannot be their salvation? What is wrong with letting their hands do the job instead?

Manufacturing today may be in much the same position as agriculture a century ago, when more than half of Americans worked on the land, making food. Today, it's about 3%. Most of that reduction was justifiably due to agricultural and mechanical innovation. But where did all those farmers go? They and their descendents were absorbed by a growing industrial economy that made things. So as farming went out, fortunately, new maker industries were coming in. The farmers and their descendants took up jobs that were in a known but unexpanded sector: Industry and manufacturing.

Interestingly and ominously, in the ensuing century Americans have not discovered any radically new methods to make things. Whether it's metal molecules or plastic polymers or a tree's timber, for all of the improvements and refinements we've made, we're still making things in essentially the same ways as we always have. But today, unlike in the days when the farmers left the fields, there are no new emerging and substantial maker-methods realistically in sight. So when their jobs are transferred to foreigners, where will our current makers go and what will they do?

This is the gamble at the heart of free trade policies: Free traders are betting with a blind faith that because in the past a burgeoning maker industry took up the slack during another maker-segment's contraction, a new one will somehow appear in this time of need and save the day. But 2.1 million manufacturing jobs have been lost in America in about three years.

What is the definition of a successful society? The business of business isn't everything. But it can effect everything. Can we honestly say that a society is successful that has driven its working-class folks' wages down to developing-nation levels? This is where we are heading. And we are all to blame. It is insidious.

Unemployment is not spiking up suddenly: The laid-off makers have generally taken lower wage service jobs. But as we enjoy those low China-made prices, like the slowly boiled frog, we do not feel the gathering danger. And while our leaders should see it, explain it, and lead us from temptation, the workers of America who are snapping up those China-made Wal-Mart prices are just as guilty. It's an awful circle that is slowly tightening into an unseen spiral.

Efficient and cost-effective organizations are forged on the crucible of good, hard competition. Competition is the mother of invention and the sister of efficiency -- but 50 cents an hour above slave wages has nothing to do with either.

Redressing unfair competition is not new, un-American, or anti-capitalistic. Standard Oil and Ma Bell were predatory and Americans used the power of government to restrain them. Is the militaristic dictatorship in China something less?

There are two ways to deal with the problem. First, recognizing the inherently impossible nature of the United Nations, where all sovereign nations -- including brutal dictatorships like China -- are considered legitimate, we must form a free-trade union of only the truly democratic nations.

And for those outside of that union who wish to do business with us, we need to create a simple and transparent tariff system that is adjustable. It would be like a golf handicap system. As you get better, your handicap goes down. What's par for the course? Here in the United States shooting par includes paid holidays and vacations, OSHA and EPA regulations, worker compensation and unemployment state-mandated insurances, hefty business, personal, and property taxes, 14.5% social security tax, time and a half over 40 hours per week, and a $5.15 minimum hourly wage. That's par for the course in America. And on our course, China should have a 36 handicap and accompanying duty. But as China develops, then, like an improving golfer, its handicap will drop. This is a handicap-tariff system that is fair, flexible, and feasible.

We are living in a lull. At present, the former makers are taking lower wage jobs, which is only masking the coming unemployment and disposable earnings problems. In time, people will be unable to afford even those cheap Asian prices Wal-Mart offers, and when that day arrives, so will the whirlwind.

This free trade is not free: Sooner or later, it will cost us dearly.