As my wife and I returned from the northwoods on Wednesday, we tuned into the Lou Dobbs radio show. One particular exchange with a listener caught my attention. Lou complained that “it’s unfair for the middle class of America to be expected to compete with the low wages in other countries – people working for a dollar an hour or less.”
Before I go further, let me be clear that I admire Lou for his stands on trade and immigration. But I’m afraid that the reason for the trade deficit that Lou implied with this comment only helps to perpetuate the deficit. As long as people believe that we have a deficit because of low wages in other countries, there will be at least as many people who believe that we can “compete” our way out of the deficit. While acknowledging that we shouldn’t reduce our wages to match theirs, many believe that some combination of reducing wages, improving productivity, shifting the health care burden to the government and better use of technology will ultimately turn the tide in our favor. IT WON’T!! IT CAN’T!! IT’S IMPOSSIBLE!!
These measures can’t possibly work because there is no relationship between the trade deficit and low wages in other countries. If there were, then how do you explain the fact that, of our top ten per capita trade deficits in manufactured goods, only two are with nations that are relatively poor – Trinidad and Israel? Why do Ireland, Japan, Taiwan, Switzerland, Malaysia, Germany and Austria – all wealthy countries with highly-paid workers – literally kick our butts in trade? It’s because population density is what drives our trade deficit, not low wages. All of the countries I’ve mentioned above are more densely populated than the U.S. Most are many times more densely populated. If you’re new to this web site and this concept, I won’t rehash the logic behind this here, but suggest that you read the “Free” Trade page of this site, or consider purchasing my book, Five Short Blasts. We’ve been trying to improve our competitive position for decades – cutting jobs, cutting wages, cutting benefits and improving productivity – and the end result of working ourselves to death is that the trade deficit gets worse and worse.
Lou Dobbs and other well-meaning critics of our trade policies need to consider that perhaps the reason that we’re making so little progress on changing our trade policy is that they have the whole cause and effect relationship wrong, encouraging free trade supporters to believe that it’s just a matter of getting more competitive. Solutions based on false premises can never work. It’s critical that we see clearly how trade really works if we are to have any hope of restoring our economy.