2009Jun12 Free Trade & Protectionsism

  

Can free trade significantly contribute to the US coming out of this economic recession?

 

In spite of the guffaw in the mainstream press about the job losses created by free trade zones, the vast majority of respondents remain strongly in favor of free trade as an economic catalyst to move us out of the recession. Fewer than 6% are opposed to free trade as part of the resolution to our economic malaise.

 

We can argue over why jobs have moved off-shore. In reality, it is a combination of factors with cheaper labor being the major culprit of blame. In a global economy, cost of labor, benefits, capital and regulations cumulatively impact the marketability and profitability of any global offering. It often ignores the higher innovation and productivity of US workers as a magnet for foreign manufacturers to build plants in the United States. The latter has created more, but often different jobs, than the US has lost to offshore outsourcing.

 

We assume the respondents have seen the positive impact of free trade in job creation and lower costs. It is nearly unanimous.

 

Can national protectionism significantly contribute to the US coming out of this economic recession?

 

Respondents were unanimous in this area. Protectionism materially lengthened the Depression and amplified the economic damage. During times of economic contraction, it is not unusual to cry for protectionism and stronger border enforcement to “keep the interlopers out.” We don’t want to repeat the mistakes of the 30s and close the door on our own foot. Open trade policies require continual adjustments for manufactures, sellers and purchasers but the economic dance brings benefits to all participants.

 

Has the current economic downturn made you any less likely to buy shares in companies?

 

Slightly more than two thirds of respondents are less likely to buy back into the equity markets as a result of the recent downturn. This is consistent with behavioral finance theory. Having suffered losses, which are the most recent history, the human mind extrapolates the losses forward. We, naturally, want to avoid more losses and pain. When sufficient validation of positive results has occurred, we would expect to see these responses reverse.

 

Has the current economic downturn made you any less likely to start up your own business?

 

Periods of high unemployment often create a surge in new business starts. However, this week’s respondents are much more pessimistic with more and 80% indicating they are not likely to start their own business. Economic circumstances may create a need to do so anyway.

 

Self-employment is not everyone’s choice, but it is better than no job or income at all. As the Millennial generation enters the workforce, their primary competitive edge will be the willingness to work for lower wages than their older, more experienced competition. Even then, it is a larger generation than the Boomers and the overall lack of job openings will force many into self-employment ventures not anticipated during the college years. This bodes well for the US over the next decade as small entrepreneurial activity brings innovation and progress. Just think back a quarter century to the impact of Bill Gates, Steve Jobs and others.

 

Does the government need to do anything more to turn the economy around?

 

Evidence of continuing concern over our economic condition is the almost even split in responses to the acceptance of more government intervention. The “No” responses eked out a 53% to 47% majority over those in favor of more government. Traditionally, we have been a country of individual responsibility altered by FDR’s New Deal during the Great Depression and enhanced with Johnson’s Great Society. Both programs materially worsened the country’s financial strength and did not achieve their goals for resolving unemployment or poverty.

 

Major economic advancements came during the 80’s when we briefly scaled back government and tax rates to allow individual creativity and innovation to flourish. Pushed against hard times, our societal reaction now leans more strongly upon government agencies to provide relief. Oddly, after two generations of post-war socialism, that is the position that Europe is in the process of unwinding.