Wednesday, January 24, 2007

Economic Populism

this is the expanded version of an essay i wrote for one of my grad school applications. the topic is economic populism; it's something i've been thinking a lot about lately. the next few posts will most likely be variations on this theme.

Economic Populism and the Threat to the World Economy

In 1930 Congress passed, and President Hoover signed, the Smoot-Hawley Tariff Act. It was meant to alleviate rapidly escalating unemployment and rapidly deflating prices by making competing goods more expensive. Other countries followed suit with their own protectionist policies and by some accounts real international trade decreased by fourteen percent. What was meant to combat the oncoming Great Depression may have, in fact, exacerbated it and assured its hold on the world economy.

Most policy makers and politicians today understand the negative effects that old-fashioned protectionism can have, not only on world trade, but on the national economy. That being said, there never seems to be a shortage of those who propose a little bit of protectionism as a means to fix supposed inequalities and inefficiencies in the economy. Today, there are those who speak in the euphemism of “Fair Trade” and claim they are sticking up for the working man against big business and global competition.

In fact, it seems that this sort of Economic Populism has become the Democratic Party’s new big idea. They have taken a lesson from Karl Rove and the Republican Party’s former hold on the so-called “values voters” and found their own set of issues and policy initiatives to exploit. That is not to imply that the threat comes solely from Democrats. The real threat is that politicians on both sides of the aisle may rush to “out-populist” their opponents.

This is a particularly ripe era for the message of Economic Populism. Our parents worked for one or two employers their whole lives and those employers provided healthcare and pensions. Now we see that the average person will switch jobs numerous times and that our healthcare and retirement expenses are no longer automatic. Also, our economy seems to be primarily fueled by consumer spending on goods that are increasingly being produced elsewhere. Some argue that free trade, and in particular the spread of discount big box stores like Wal Mart, is gutting us of our manufacturing base and leaving us with low-paying “Mcjobs” in their place. The language of Economic Populism speaks directly to those fears.

Fear can be an extremely powerful human motivator and, as such, can cut both ways. A middle-aged man who has a heart attack might be scared into better eating habits at the thought of dying young and leaving behind a widowed wife and orphaned children. Unfortunately, fear also has the power, at times, to circumvent our rational thought process. The sort of fear that fuels Economic Populism does exactly that; it prevents us from seeing the forest for the trees and is grounded in certain false economic assumptions.

These false economic assumptions manifest themselves in a number of ways. The first problem lies in the characterization of the global economy as global competition. Economic populists portray the global economy as a zero sum game. If the Indian technology sector or Chinese manufacturing is booming, then it must be at the expense of American jobs. If working conditions in Chinese factories are not up to our standards, then it must be that the American consumer’s greed for cheap products is maintaining those conditions. An extension of that problem, lies in applying this zero sum mentality to the domestic economy. If some other guy is getting richer, then it must be because I’m getting poorer. And if I’m getting poorer, it must be because something isn’t fair. That’s where the invisible hand of the marketplace is usurped by the all-to-conspicuous hand of politicians.

It is never politically popular to tell people that we may be better off in the long run losing manufacturing jobs rather than propping up inefficient industries and that the rise in living standards in far-off places like China and India are positive outcomes that do not fundamentally threaten our own standard of living. In fact, by making certain goods and services cheaper they may contribute to a rise in real wages.

In a rapidly shrinking world where consumers are armed with more information, they are going to find the lowest prices whether they come from the factory next door or from one on the other side of the globe. Retailers like Wal Mart are more the reflection of that phenomenon then they are the cause of it. Likewise, in a world where people are always looking to further their education and obtain new skills it makes sense that the market for employment will be much more dynamic than in the past.

There is a real threat that economic debate will be hijacked by those looking to cash in on what is most certainly a more uncertain age. Economic Populism will be a major issue in the next few election cycles. The world is getting smaller; that is a fact. If we arm ourselves with sensible policy and do not give into fear, that phenomenon has a chance to impact the world in a number of positive ways. However, that will only happen if we continue to make trade policy based on economically sound principles and not by pandering to people’s fears.

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