From Tonka trucks to pacemakers: Free trade isn’t free

Tonka truckPascal Lamy, director-general of the World Trade Organization, recently addressed the Economics Club of Minnesota.  His message, both in his speech and in a talk to students and faculty from the University of St. Thomas and from the College of Saint Benedict and Saint John’s University, was clear: “Trade improves the lives of people.”

In passing, Lamy noted: “There is another important part of the trade agenda for which change is urgently required — how we tell the story of trade.”  In particular, economists and policy makers emphasize the benefits of trade but don’t acknowledge the costs of trade. We need to change this.

I loved Tonka trucks when I was a kid and still have one in my office. I even visited the Tonka factory a couple of times on field trips in the 1960s and 1970s.

We don’t produce Tonka trucks in Minnesota anymore. We still buy Tonka trucks for our kids, but they are imported from abroad and we pay for them by selling cardiac pacemakers, iron ore and agricultural commodities.

Of course, we could still produce Tonka trucks here in Minnesota. That would require taking resources (workers, capital) and moving them out of agriculture, mining or medical devices and putting them to work assembling toys. It costs us less in terms of soybeans, corn, iron ore and pacemakers to send those things abroad and have them send us toy trucks than if we move resources directly out of those industries into toy production.

In economics jargon, Minnesota has a comparative advantage in products like medical devices because we can produce them at a lower cost in terms of lost toy trucks (and other goods) than can China or some other country. Similarly, Minnesota doesn’t have a comparative advantage in toys because the cost in terms of lost production is relatively high.

Economists tell these stories all the time and with good reason. As Lamy pointed out in his speech, “jobs tied to exports pay better, 6 percent better on average in the United States and 18 percent better in Minnesota,” primarily due to the specialization driven by comparative advantage.

Creative destruction

Tonka Toys, Inc. is gone, and the jobs in the Mound factory are lost. One big problem with the story of comparative advantage is that it ignores these costs. In the basic story, workers and capital move from producing toys to producing pacemakers with little or no cost.

We know that’s not the way the world works. Someone who worked for years building toy trucks might not have the skills to assemble pacemakers, or they may not even want to do something different.

Economists Joseph Schumpeter termed this process “creative destruction.” New industries, created by new technologies or by increased openness to trade, destroy jobs and companies in existing industries and sometimes wipe out entire sectors.

We always tell comparative advantage stories in our introductory economics courses. Lamy’s point is that we need to add the creative destruction story to our courses and our public-policy discussions.

Facing up to the costs of trade

“The link between trade and jobs is complex, and when making the case for trade we need to acknowledge that there are those who are hurt by trade,” Lamy noted. “We need to support programs that help get such people back on their feet.”

The most famous program to help workers displaced by trade is called Trade Adjustment Assistance (TAA).  Unfortunately, according to research reported by Timothy Taylor, managing editor of The Journal of Economic Perspectives based at Macalester College in St. Paul, TAA is “misaimed” and has only a limited effect.

For instance, Taylor quotes a study as follows: “Our results imply that while the TAA program may provide an income safety net, it does not help the average displaced worker who is enrolled in the program find new, well-paying employment opportunities.”  The same study, however, noted: “Although the income support, job and relocation payments, and other TAA benefits may not help workers find new, well-paying employment, training seems to improve employment outcomes for these workers.”

Minnesota’s economy continues to benefit from the greater opportunities for specialization and growth that trade affords us, but we incur costs in terms of lost jobs and industries when we avail ourselves of these prospects. This means that we have to work at both the state and national level to formulate policies that minimize the costs and maximize the benefits.

Let’s recognize that we all benefit from open trade but that we are currently allowing the costs to fall on citizens whose lives are disrupted, at best, and destroyed, at worst. We can hope that the private sector will deal with these problems, but hope is not a plan.

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Comments (9)

  1. Submitted by Neal Rovick on 05/02/2012 - 12:10 pm.

    I’m afraid that Medtronic does not really help out with out trade imbalances. Medtronic has it’s own plants world-wide and makes a significant portion of it’s products elsewhere. Much of its revenue is tax sheltered in off-shore banks with a current dispute with the IRS over a billion dollars in taxes avoided due to overseas money movements..

    It is difficult information to find, but the cost of a pacemaker device overseas is a fifth to a tenth of what it is in the US (not including implantation costs). What is the reason for the differences? Is it that the overseas customers will not stand for the slush funds and gigantic sales force compensation, or huge profits that are present in the US?

    Also, from a wider perspective, given how most medical spending is a non-tradeable good that ends up as an addition to the bottom line of every product or service made in the US, it’s hard to see how greater medical spending is helpful. Medical spending swallows 16% of the GDP now and US spending per capita is twice what the rest of our international competitors spend.

    Just imagine the competitive boost if we could bring our medical costs into line with our competitors in Europe and Japan ! If that were the case, wouldn’t there be a cut in the bottom line cost of everything of about 10%?

    So while I agree with the theory of the article, I disagree strongly that expanded medical is the way to the future economy. Instead it is a negative force that is destroying our economy and forcing costs for everything upward, including our goods and services that we sell to the world.

    • Submitted by Neal Rovick on 05/02/2012 - 03:53 pm.

      Or put more succinctly, until our hospitals and waiting rooms are filled with paying foreign patients, and until the majority of our medical device sales are to overseas customer, medical spending is a net drag on the economy.

  2. Submitted by Logan Foreman on 05/02/2012 - 12:13 pm.

    We take care of the corporations times 2

    And totally ignore the unemployed, displaced hourly workers. This has been going on since before nafta, and the effect has been to accelerate the demise of the middle class in America.

  3. Submitted by Rich Crose on 05/02/2012 - 12:14 pm.

    Well Said. Free trade isn’t free

    The private sector passes the human costs of free trade to the public sector while the private sector reaps the monetary benefits.

    The problem in today’s political environment is that when the Government tries to recover the costs, the private sector screams “Government Intrusion” and “No More Taxes” and the private sector walks away laughing all the way to the Wall Street Bank.

  4. Submitted by Ray Schoch on 05/02/2012 - 01:01 pm.

    Beyond trade

    Good piece.

    A similar public accounting ought to be done for capitalism in general. Humans have yet to invent a better system for generating wealth and improving the material standard of living of huge numbers of people, but those benefits, like the benefits of trade (and in part *because* of trade), also are not “free,” and come with quite substantial costs to individuals and societies.

    Most of the economics courses I endured, and most of the economic treatises that I’ve read over the ensuing decades, blithely ignore those costs, and instead focus more or less exclusively on the benefits. From what I can tell, that’s still the case, and there continue to be plenty of apologists for “free” markets that never existed, but that do immense harm to broad swaths of the population while benefiting a relative few, often in conjunction with substantial damage to the only environment to which humans are adapted to live.

    I often regret that I’m not the next brilliant economic thinker. I’ve not been able to devise a better alternative than the often-terrible economic system upon which we currently rely. The more inequality it produces, the less chance there is for something approaching genuine democracy, not to mention an equitable society with long-term stability.

  5. Submitted by Karen Sandness on 05/02/2012 - 06:16 pm.

    I spent my high school years in Mound and worked at Tonka Toys the summer between college and graduate school. The original owners bragged that they had the best workers in the world, a lot of them from the farms that were then within easy driving distance of the plant, and that there had never been any unionization drives, because they treated their workers so well. Wages were good by the standards of the time, even for temporary workers like me.

    But then the company was sold to outside investors. “Sold to outside investors” is a term that should strike terror into the heart of any working person, because it usually means mass layoffs and offshoring, not because there’s anything wrong with what the current employees are doing but because the outside investors want to milk an already profitable company for every penny they can.

    I’ve seen this happen again and again. The outside investors take over, and the employees’ lot worsens. The quality of the product and/or service deteriorates. Workers who are not laid off are asked to do two and three times as much work as before, they don’t get raises, and their benefits are no longer as generous as before. The company stops contributing to local charities. Meanwhile, the outside investors reward themselves and their pet executives with huge salaries and bonuses and tell the world that they “need” this lavish compensation or they “won’t be motivated to work hard.”

    These are examples of what Robert Reich called “paper entrepreneurism” back in the 1980s: making money not by inventing or improving a product or service but by buying and stripping other companies. The business press saw the paper entrepreneurs of the 1980s as heroes, “cutting the fat” to make “lean and mean” companies, but the results on the ground were rarely praiseworthy.

    • Submitted by Dennis Tester on 05/03/2012 - 08:29 am.

      It’s ironic

      that Robert Reich would coin the term “paper entrepreneurism” since he’s become quite a wealthy man himself and all he’s ever produced are words.

  6. Submitted by Victoria Wilson on 05/03/2012 - 07:17 am.

    What are social costs?

    What I always look for in articles that try to express social costs are examples. After all it’s hard to account for something if we don’t know what it is. In this article there is a suggestion that workers whose jobs are taken overseas incur costs. But the specifics are not investigated. Is it the cost of temporary unemployment? Because we have a safety net in place for this situation whether work is taken elsewhere or is seasonal or is lost due to a poor economy. Is it a cost incurred because others get better jobs? One doesn’t really expect the public to pitch in every time a co-worker gets a raise or leaves for a better position at another firm – so that can’t be it. Is it a cost incurred by having to take a job that isn’t a dream job? There again, I believe there are quite a few workers out there toiling in far from ideal work situations without any expectation that the public will compensate them in some way for their job dissatisfaction.

    So what is this angst felt after Schumpeter’s “creative destruction” has been particularly active? It reminds me of the feeling expressed when observers talk about boarded-up houses in the city, or school closures, or vacant plants in Detroit. These scenarios don’t share free trade as a root cause. They do share a sense of loss. I think if we can flush out this loss, give it form and parameters we can better understand it. And once it is understood, we can better manage it.

  7. Submitted by Greg Kapphahn on 05/03/2012 - 09:59 am.

    Lack of the Ability to Experience or Express Compassion

    It’s my belief that the economists whose “free market” religion has been in vogue and who have blissfully and blithely ignored the destruction of large swaths of American workers and their families have been afflicted with a psychological dysfunction that renders them incapable of experiencing empathy or compassion.

    Being unable to imagine what it might be like to be someone other than themselves, they are sorely lacking in the ability to form satisfying relationships. They also generally lack the ability to appreciate their own intrinsic worth.

    It’s almost inevitable that they turn to money as a substitute for those things, using “net worth” as a way to seek to prove to themselves and others that they are worthy of respect, care and concern, the problem with that approach being, of course, that a sense of self worth is an internal, psychological/spiritual issue which no externally-applied material goods can impact.

    Trying to use wealth to make yourself feel as if you are a worthy individual doesn’t work, but always holds out the promise that it WOULD work if you only had MORE wealth.

    When we allow such people’s ideas to dominate our national discourse, as we have for the past 30+ years, they will do exactly what their dysfunctions drive them to do: continuously consolidate their own wealth and power, proclaim that anyone else could be as rich as they are if they would just become clones of themselves, and blame the symptoms of poverty, poverty for which they, themselves, are quite directly responsible, on the moral failings of those whose lives they have destroyed.

    When the destruction of the greater society becomes increasingly obvious, the only solution their dysfunctions will allow to enter their awareness is more and more draconian versions of the same destructive policies they’ve previously pursued.

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