Trading Prosperity

 Trading labor instead of products.


    Trade has largely been a drag on our economy, as evidenced by our persistent trade deficits. Although a mixed bag in opening markets for American goods, the current trade regime has excelled at opening cheap labor markets. This has lowered the cost of producing consumables destined for America, and has reduced both domestic wages and employment.  Simply put, today’s version of “trade” is more about cost-cutting than true economic growth.
    Trade policies purported to increase economic opportunity and standards of living have yielded just the opposite. Cheap foreign goods competing alongside American products puts pressure on American companies to seek out more cheap labor, which places greater downward pressure on wages and weakens the consumer ever further.  
    This dynamic of falling wages and jobs being shipped overseas is described succinctly in the February 21, 2010 New York Times:

    Large companies are increasingly owned by institutional investors who crave swift profits, a feat often achieved by cutting payroll. The declining influence of unions has made it easier for employers to shift work to part-time and temporary employees. Factory work and even white-collar jobs have moved in recent years to low-cost countries in Asia and Latin America. Automation has helped manufacturing cut 5.6 million jobs since 2000 — the sort of jobs that once provided lower-skilled workers with middle-class paychecks.
    “American business is about maximizing shareholder value,” said Allen Sinai, chief global economist at the research firm Decision Economics. “You basically don’t want workers. You hire less, and you try to find capital equipment to replace them.”

    This mindset is largely a consequence of Wall Street's focus on quick gains via short-term profits.  Wage reductions and mass layoffs can certainly hold down costs, fattening the bottom line quickly and cleanly.  However, the profit increase is much more an act of accounting than an increase in a firm's true economic value.  Cutting labor costs will keep more money in the corporate treasury, but it will not necessarily help increase sales, add new revenue, or increase market share.  Cost cutting is not growth.
    It's pretty simple, actually.  Economics 101 tells is that the goal of business is to maximize profits.  We know that profits rely heavily on consumer spending.  We know that sustainable consumer spending is supported by strong personal income growth. Yet conventional corporate wisdom is to minimize labor cost.   
    Negative feelings toward better wages seem baked into the system. The slightest sign of wage growth is usually accompanied by nervous chatter by anonymous "officials," warning of "inflation" and the need to "cool things off."  This institutional aversion to rising incomes may increase accounting profits, but will inevitably lead to lost market share.  After all, who's going to buy all the stuff if pay continues to shrink and jobs keep vanishing?
    Another serious knock against trade's impact on pay is the barrier it poses to retirement.  Aside from municipal and other government jobs, pensions have largely been replaced with 401(k)s, I.R.A.s, and other such fee-harvesting products of Wall Street.  And holding cash has been a losing proposition throughout the decade, with meager returns on traditional savings accounts, CDs, and money market accounts.  Low interest rates and the disappearance of pensions have directed long-term savings into stocks, bonds, and real estate.  These nest eggs have very little margin for error.  They are grossly underfunded, and many households simply can't afford to increase their payroll deductions to catch up.  The retirement fortunes of millions of Americans are entirely dependent on market swings. 
     Whether through global trade squeezing wages, or trading our retirement savings in the volatile financial markets, it seems that we're quickly trading away the security, opportunity, and prosperity that each generation of Americans strives for.  "Free" trade isn't free.