May, 2001: Publius

By Greg Rushford
Published in The Rushford Report

Testifying before the Senate Finance Committee on April 4, Federal Reserve Board chairman Alan Greenspan offered a primer on why free trade is good for America. His testimony — or at least the snippets that were duly culled by the wire services — did not receive a great deal of coverage. Major newspapers like the Washington Post did not even consider Greenspan’s warning of the perils of increasing American protectionism important enough to report it at all. Too bad. What Greenspan had to say was very important. He was essentially sounding the alarm, warning senators of the consequences if America’s international economic leadership continues to decline. As I report in the Players column elsewhere in this issue, not all of the senators seemed to understand — or to want to understand — these basic economic truths. But for readers who are not senators, Greenspan’s analysis is actually quite easy to understand; this is the economic key to rising global and domestic prosperity. Because he said it better than I can summarize, the relevant excerpts of Greenspan’s testimony are reprinted below:

“One of the most impressive and persistent trends of the last several decades is the expansion of international trade. Trade across national borders has increased far faster than world GDP…As a consequence, imports of goods and services as a percentage of gross domestic products worldwide, on average, have risen from approximately 12 percent 40 years ago to 24 percent today.”

“To most economists, the evidence is impressively persuasive that the dramatic increase in world competition — a consequence of broadening trade flows — has fostered markedly higher standards of living for almost all countries that have participated in cross-border trade. I include most especially the United States.”

“Certainly, market-directed capitalism has become the paradigm for most of the world, as central-planning regimes have fallen into disfavor since their undisputed failures around the world in the four decades following World War II.”

“The international trading system that evolved has enhanced competition and nurtured what Joseph Schumpeter a number of decades ago called ‘creative destruction,’ the continuous scrapping of old technologies to make way for the new. Standards of living rise because the depreciation and other cash flows of industries employing older, increasingly obsolescent technologies are marshaled to finance the newly produced capital assets that almost always embody the cutting-edge technologies. This is the process by which wealth is created incremental step by incremental step. It presupposes a continuous churning of an economy in which the new displaces the old.”

“While major advances in standards of living are evident among virtually all nations that have opened their borders to increased competition, the adjustment trauma resulting from technological advances as well as globalization has also distressed those who once thrived in industries that were once at the cutting edge of technology but have become increasingly noncompetitive. Economists will say that workers should move from the steel districts of western Pennsylvania to Silicon Valley or its equivalent. And eventually they, or more likely their children, will move.”

“In the end, economic progress clearly rests on competition. It would be a great tragedy were we to stop the wheels of progress because of an incapacity to assist the victims of progress.”

“Our efforts should be directed at job skills enhancement and retraining, a process in which the private market is already engaged, and if necessary, selected income maintenance programs for those over a certain age where retraining is problematic. Thwarting competition by placing barriers to imports will prevent markets in the United States and other nations from deploying capital to their most productive uses, that is, the most cost-effective production of those goods and services most highly valued by consumers.”

“Protectionism will also slow the inevitable transition of the workforce to more productive endeavors. To be sure, an added few years may enable some workers to reach retirement with dignity, but it will also keep frozen in place younger workers whose opportunities to secure jobs with better long-run prospects diminish with time.”

“I regret that trade policy has been inextricably linked with job creation. We often try to promote free trade on the mistaken ground, in my judgment, that it will create jobs. The reason should be that it enhances standards of living through the effects of competition on productivity. It is difficult to find credible evidence that trade has affected the level of total employment in this country over the longer run. In deed, in recent months, we have experienced the widest trade deficit in history with unemployment still close to record lows.”

“If trade barriers are lowered by both parties clearly, each clearly benefits. In almost every credible scenario, if one lowers barriers and the other does not, the country that lowered barriers unilaterally would still be better off having done so. Raising barriers to achieve protectionist equality with reluctant trading partners would be neither to our benefit nor to theirs. The best of all possible worlds for competition is for both parties to lower trade barriers. The worse is for both to keep them up.”

“Protecting markets from new technologies has never succeeded. Adjustment to newer technologies have been delayed, but only at significant cost.”

“Moreover, even should our trading partners not retaliate in the face of increased American trade barriers — an unlikely event — we would do ourselves great harm by lessening the vigor of American competitiveness. The United States has been in the forefront of the postwar opening up of international markets, much to our and the rest of the world’s benefit.”

“It would be a great tragedy were that process stopped or reversed.”

“Most economists would argue that we must reaffirm the United States’ leadership role in the area of international trade policy in order to improve standards of living in the United States and among all of our trading partners.”

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