Have Cake and Eat It Too?

Some readers by now have probably picked up on the fact that I’m in favor of free trade. However, I am sympathetic to the concerns of those who oppose free trade on labor standards grounds, environmental grounds, and protecting domestic industry grounds. Nevertheless, free trade is a net positive for both trading partners, meaning that at the end of the day, when trade is liberalized, there is enough money to simultaneously compensate workers in affected industries while leaving society at large better off. Tying free trade to labor and environmental standards is justified on moral grounds and economic grounds (ensuring that the terms of trade actually reflect the production costs in each country). A few years back, Robert E. Litan (*) coauthored an editorial in the Financial Times (2/28/2001) describing what such a system would look like:

The main question centres on whether—and if so, how—the administration can craft an approach to free trade that somehow ensures any further trade agreements adhere to labour and environmental standards, primarily among less developed countries, without offending the business community or pure free traders.

Labour and environmental standards are important but they reflect an underlying anxiety that many Americans have about trade. Whether or not they work in trade-related industries, workers fear that expanded trade will cost jobs and suppress wages.

… No amount of supporting evidence is likely to ease workers’ growing concern.

… Mr Bush and the Congress should introduce programmes better designed to cushion the economic pain of job losses, in a way that encourages workers to find gainful training and employment quickly.

… The current unemployment insurance programme eases some of the pain but does not address two of the greatest concerns of workers: the decline in wages often associated with accepting a new job and the inability to pay for health insurance while unemployed.

… One way to allay fears is to take up a recent, but little publicised, recommendation by the bipartisan Congressional Trade Deficit Review Commission. This argued for a new, more comprehensive worker adjustment package that included “wage insurance” and that would be available to displaced workers regardless of the cause of the loss of employment.

…Robert Litan and Lori Kletzer of the Institute for International Economics have costed out such a programme on the assumption that the compensation equals half the drop in a worker’s income, is capped at $10,000 per year, and is paid for up to two years after the loss of the initial job.

Even if the unemployment level rises to 5 per cent (well above the current 4.2 per cent), the annual total cost of this programme would be just under $3bn. That compares with more than $20bn spent by the federal government each year on unemployment insurance.

For more on this, see “ A Prescription to Relieve Worker Anxiety: Wage and Health Insurance for Displaced Workers,” by Lori Kletzer and Robert E. Litan


(*) Litan was on Carter’s CEA; under Clinton he was Deputy AG for Antitrust and then OMB associate director; Litan currently is a senior fellow in Economic Studies at Brookings.