Free Trade Fallacy

This is good. Lucid, clear.
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Problem with ‘free trade’:http://thearchdruidreport.blogspot.co.uk/2016/11/the-free-trade-fallacy.html

“….see link to LONG blog post…..Now let’s imagine that all of the nations we’ve imagined are convinced by a gaggle of neoliberal economists to enact a free trade zone, in which there are no barriers at all to the free movement of goods and capital. What happens?

When there are no trade barriers, the nation that can produce a given good or service at the lowest price will end up with the lion’s share of the market for that good or service. Since labor costs make up so large a portion of the cost of producing goods, those nations with low wages will outbid those with high wages, resulting in high unemployment and decreasing wages in the formerly high-wage countries. The result is a race to the bottom in which wages everywhere decline toward those of the worst-paid labor force in the free trade zone.

When this happens in a single country, as already noted, the labor force can often respond to the economic downdraft by turning to the political sphere. In a free trade zone, though, employers faced with a political challenge to falling wages in one country can simply move elsewhere. It’s the mismatch between economic union and political division that makes free trade unbalanced, and leads to problems we’ll discuss shortly.

Now of course free trade advocates like to insist that jobs lost by wealthier nations to poorer ones will inevitably be replaced by new jobs. History doesn’t support that claim—quite the contrary—and there are good reasons why the jobs that disappear will never be replaced. In a free trade system, it’s more economical for startups in any labor-intensive industry to go straight to one of the countries with low wages; only those industries that are capital-intensive and thus employ comparatively few people have any reason to get under way in the high-wage countries. The computer industry is a classic example—and you’ll notice, I trust, that just as soon as that industry started to become labor-intensive, it moved offshore. Still, there’s another factor at work.

Since wages are a very large fraction of the cost of producing goods, the overall decrease in wages brings about an increase in profits. Thus one result of free trade is a transfer of wealth from the laboring majority, whose income comes from wages, to the affluent minority, whose income comes directly or indirectly from profits. That’s the factor that’s been left out of the picture by the proponents of free trade—its effect on income distribution. Free trade makes the rich richer and the poor poorer, by increasing profits while driving wages down. This no doubt explains why free trade is so popular among the affluent these days, just as it was in the Victorian era.

There’s a worm in the bud, though, because a skewed income distribution imposes costs of its own, and those costs mount up over time in painfully familiar ways. The difficulty with making the rich richer and the poor poorer, as Henry Ford pointed out a long time ago, is that the wages you pay your employees are also the income stream they use to buy your products. As wages decline, purchasing power declines, and begins to exert downward pressure on returns on investment in every industry that relies on consumer purchases for its income.

Doesn’t the increasing wealth of investors counterbalance the declining wealth of the wage-earning masses? No, because the rich spend a smaller proportion of their incomes on consumer goods than the poor, and divert the rest to investments. Divide a million dollars between a thousand working class family, and the money’s going to be spent to improve the families’ standard of living: better food, a bigger apartment, an extra toy or two around the Christmas tree, and so on. Give the same million to one rich family and it’s a safe bet that much of it’s going to be invested.

This, incidentally, is why the trickle-down economics beloved of Republican politicians of an earlier era simply doesn’t work, and why the Obama administration’s massive handouts of government money to banks in the wake of the 2008-9 financial panic did so little to improve the financial condition of most of the country. When it comes to consumption, the rich simply aren’t as efficient as the poor. If you want to kickstart an economy with consumer expenditures, as a result, you need to make sure that poor and working class people have plenty of money to spend.

There’s a broader principle here as well. Consumer expenditures and capital for investment are to an economy what sunlight and water are to a plant: you can’t substitute one for the other. You need both. Since free trade policies funnel money away from expenditure toward investment by skewing the income distribution, it causes a shortage of the one and a surplus of the other. As the imbalance builds, it becomes harder for businesses to make a profit because consumers don’t have the cash to buy their products; meanwhile the amount of money available for investment increases steadily. The result is a steady erosion in return on investment, as more and more money chases fewer and fewer worthwhile investment vehicles.

The history of free-trade eras is thus marked by frantic attempts to prop up returns on investment by any means necessary. The offshoring fad that stripped the United States of its manufacturing economy in the 1970s had its exact equivalent in the offshoring of fabric mills from Britain to India in the late Victorian era; in both cases, the move capitalized on remaining disparities in wages and prices between rich and poor areas in a free trade zone. In both cases, offshoring worsened the problem it was meant to fix, by increasing the downward pressure on wages in the richer countries and further decreasing returns on investment across the entire spectrum of consumer industries—then as now, the largest single share of the economy…..see link…..”