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Ian Fletcher Headshot

We Can't Just Compensate Free Trade's Losers

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It is sometimes argued that although free trade has some victims, its benefits exceed its costs, so it is possible for its winners to compensate its losers out of their gains, everyone thereby coming out ahead in the end.

This is, in fact, the usual fallback position of mainstream economists once they admit that free trade has drawbacks. (They don't usually admit to civilians there are drawbacks, but press them even moderately hard and they'll usually 'fess up.)

It is sometimes even mischievously argued that if such compensation doesn't happen, any problems are due to society's failure to arrange it, and are therefore not the fault of free trade per se.

Hmm... Sounds like a perfect excuse.

Now in theory, they might be right (if the rest of free trade economics is valid), but it also means that a bureaucratic deus ex machina is required to make free trade work as even its supporters admit that it should. So free trade turns out to be laissez faire on life support from big government. (As we all learned from the 2008 financial crisis, if not sooner, this is a recurring pattern in America.)

In any case, such compensation rarely occurs, because free trade's winners don't have to pay off its losers. They pay off their congressmen instead--to vote for more free trade agreements.

How is such compensation supposed to be implemented? Try the U.S. Government's Trade Adjustment Assistance (TAA) program, which has provided supplemental unemployment benefits, training subsidies, and relocation assistance since 1974.

But this program is small, compared to the damage wrought by free trade: under a billion dollars a year. Few workers have actually used it, and the concept suffers from intrinsic problems.

For one thing, it is often impossible to identify who has lost a job due to free trade, as changing technology and consumer tastes also cost jobs (and legitimately so).

Furthermore, free trade does not necessarily work its harm by reducing the quantity of jobs: it can reduce their quality, that is their wages and benefits, instead. And when free trade drives down wages, it can do so industry-wide, region-wide, or even nationwide, so its victims are impossible to pinpoint.

TAA has tended to function simply as supplemental unemployment insurance while people wait to get their old jobs back, not as a means of helping people transition to new jobs. This is its official purpose, based on the (mistaken) idea that the harm done by free trade consists entirely in transition costs.

TAA is also a deeply dysfunctional program. According to a recent ruling by the U.S. Court of International Trade (Former Employees of BMC Software Inc. v. the United States Secretary of Labor), it routinely denies legitimate assistance requests by workers. (For another fairly negative evaluation of TAA's effectiveness, see the General Accounting Office's 2000 report on it.)

The time is past for free-trade band-aids. We need to stop treating the defects of free trade as mere imperfections to a fundamentally sound policy and realize that free trade itself is the problem, and should be ended.