Economics, Social Justice

Protectionism as Cronyism

Supporters of protectionism such as President Trump say that they are trying to save jobs in the United States. What’s wrong, they ask, with showing some solicitude and help to our own workers hurt by foreign competition? Surely we cannot be against that.

The standard reply is that these laws help workers but hurt local consumers and foreign producers and their workers. This causes a net deadweight loss, or unrecovered loss of social welfare.

But this reply, correct as it is, does not go far enough: Protectionist laws harm workers in our own country. This is because when a government protects an industry it aborts the creation of jobs in other industries. As the economy is unable to adjust to the efficiencies of production, resources are artificially directed to the less efficient endeavors. Those resources are unavailable to the industries that need them to grow. The government assists workers in inefficient industries by erecting trade barriers, but in doing so it harms persons who are now unemployed because new industries that would have employed them have been aborted by the strangling effect of those laws. Seen in this light, workers who benefit from protection are not deserving of transfers of wealth in their favor, because protection is harming other workers in that society. Just as the firms obtaining protection get rich at the expense of foreign firms, so the workers in protected industries keep their jobs at the expense of the poor, in their own countries.

In truth, labor unions (and their management) agitating for protection are crony capitalists. A crony capitalist economy is one in which success in business depends on close relationships between business people and government officials. Success here is measured, for workers, by keeping their jobs. But success is not only success against foreign competition. Protected workers coercively achieve success at the expense of similarly situated workers who have not enlisted the coercion of the state. The public easily believes that the business owners who obtain protection are crony capitalists. The truth is that their workers are crony capitalists too.

  • ThaomasH

    It is NOT part of the standard economic analysis of the costs of protection to ignore the loss in the higher productivity that the “protected” factors would have in the unproductive sectors. The canonical “Lerner Theorem” demonstrates that an import tariff has the same effect as a export tax. How the “ill gotten” gain from protection is shared among the factors of production in not really part of standard simple trade theory but the old fashioned view was probably that labor being more homogeneous would earn about as much in one sector as another so that most of the benefits from protection went to owners of the protected firms.

    • Sean II

      “…the old fashioned view was probably that labor being more homogeneous would earn about as much in one sector as another…”

      No doubt this was true when those old fashioned views formed. The difference between shoveling horseshit and shoveling coal can’t have been too much, and probably broke to the positive in just about every example anyone could observe.

      Of course part of what’s going on now is that the pay for shoveling coal is approaching zero, while the pay for shoveling metaphorical horeshit is stubbornly high – educators, lawyers, management consultants, people who do “staff development”, a good half of everybody whose paycheck contains the words “Center for” or “Foundation”, etc.

      I wonder how long it will take for the malignant empathy crowd to decide its sad when robots lose their job. “Hal was created to perform a mission, and frankly we owe him one. Sentience before cents!”

      • ThaomasH

        Nice metaphor. 🙂

    • Theresa Klein

      I’ve been thinking about that lately. If we think back to the early 20th century, the economy was much more dominated by manufacturing work that involved uniform processes, in which workers were more or less interchangable units. You can train anyone to punch the same hole in a widget thousands of times in a row. This is the context in which labor unions arose. If all the workers are identical units, then it makes sense to demand uniform wages and to negotiate collectively as a group.

      However, over the last quarter century the economy has changed to one in which uniformity and interchangability of workers are no longer the rule. Consumers don’t even demand uniform mass produced goods. People want micro-brews, they want unique artisanal products. They want something handcrafted by a skilled worker. Automation has replaced most of the monotonous hole-punching work so that even in factories, jobs involve specialized skills, such as technicans who can repair and operate complex machines. Meanwhile the “means of production” in the fastest growing part of the economy is a laptop PC which anyone can afford.

      Thus, it seems to me that perhaps economic conditions have changed in a way that renders much of the old socialist dogma about workers vs. capitalists obsolete. Workers are generally skilled technicians and artisans distributed across many specialized fields, rather than interchangable units, and capitalists can include the self-employed web-developer who makes less money than you.

  • Theresa Klein

    I’d go a but further than that. There are some industries that use imports as their primary inputs to make more complex manufactured products. By erecting trade barriers against those imports you harm not just workers who might get a job in a future industry, but actually existing workers in existing industries. Worse, they are generally more advanced industries with higher paying jobs.

    Take the steel industry for example. For many years, politicians have sought to protect the US steel industry from foreign competition. But what about industries that use steel? There are numerous industries that need steel as an input from manufactuers to construction. By compelling them to use more expensive American-made steel, you harm the downstream industries in order to benefit the raw material producers.

    I could point at lumber as another example. Why are we protecting lumber jacks at the expense of construction workers?

  • CJColucci

    I, too, accept the freshman economics view of free trade, but for those who don’t, telling them that letting go of the bird in the hand will, eventually, and probably for someone else, get us, collectively, two in the bush isn’t likely to do the trick.

  • Robert Rounthwaite

    A nice example from the Economist: “Mr Bush’s tariffs, for instance, are estimated to have cost 200,000 jobs in these industries—more than the 145,000 Americans employed in steelmaking today.”
    http://www.economist.com/news/finance-and-economics/21721413-far-saving-jobs-it-will-destroy-them-protecting-american-steel-imports