Trade – selling what we specialize in making and exchanging them for the wide range of things we need and want to consume – has made this possible. The pace of wealth creation and poverty reduction has accelerated in the last half century as the size of the markets in which we trade have expanded rapidly with falling costs and barriers to global trade.
‘No pain, no gain’
But new technologies that displace older ways of doing things require workers and firms to adapt. New skills must be learned to replace the old, no longer needed, ones. Americans have been particularly adept at such flexible adjustments and thus have experienced greater increases in wealth and living standards than most other countries. No pain, no gain, as we might say.
Workers and firms have tried from time to time to defend their positions from the competition of other workers and from firms with newer and better technologies. Protectionist tariffs enacted to “protect” American jobs in 1930 deepened and prolonged the Great Depression. The closed-shop autoworkers unions in Detroit seriously damaged the American auto industry. But generally Americans pushed aside these restraints on free markets and trade to the huge benefit of the population as a whole.
Nonetheless, such competitive advancements in our ability to produce more and more did require those with outmoded skills to acquire new ones. When the pace of innovation was measured, the required adjustments by workers and firms were easier to make. Younger workers would acquire the new skills from the outset while older ones would eventually retire.
The turnover of firms, even very large and well-established ones (Dell, Polaroid, Kodak, Motorola, Chrysler, Yahoo, etc.) has always been large in the U.S., continually making way for new and better ones.
The last half century has seen a rapid increase in the expansion of markets – globalization. While this increased competition and innovation has reduced poverty in the world at a never-before-seen rate, it has also increased the numbers of workers having to give up the skills they had refined and acquire new ones generally requiring a higher level of education.
These adjustments have often been difficult for those having to make them, especially for middle aged and older workers. We seem to be experiencing a backlash from those forced to adjust.
‘Two Industrial Revolutions’
“The experience of the past quarter century suggests strongly that the central factors of our era are not nationalism or militarism, but rather the two periods of radical change stimulated by technology and innovation during not one but two Industrial Revolutions. The first one began 175 years ago; the second, the information age, has now lasted about four decades.” (John Kornblum, “The Amerexit,” The American Interest, July 25)
Immigration is an aspect of globalization and the wealth-creating impact of free trade. It raises similar but even more challenging tensions between freedom and progress, and security and protection of the status quo. It also calls for careful management of the pace of immigration to soften the anxieties of potentially affected workers.
Politics and protectionism
More liberal trade agreements facilitate globalization. Ironically, President Obama, who opposed the trade agreements on the table when he first ran for the presidency, is now fighting for the adoption of the Trans-Pacific Partnership (TPP), while Hillary Clinton, never one to put the national interest above her own, who as Secretary of State helped start the TPP negotiations, now opposes it.
And Donald Trump, who shouts out whatever passes through his mind at the moment, is currently strongly protectionist (i.e. protecting the status quo).
Rapidly increasing globalization has enabled an incredible lifting of living standards but has also increased the insecurity and costs to those displaced and needing to seek out new employment.
We need to provide more effective assistance to these people. This should be the focus of our policy discussions, not closing off progress (protectionism).
Warren Coats, a former director of the Cayman Islands Monetary Authority, and former senior monetary policy adviser to the Central Bank of Afghanistan, Iraq and Kenya for the International Monetary Fund, is on the Editorial Board of Cayman Financial Review.