Naked Economics: Undressing the Dismal Science pdfdrive com

particularly those among the more free-market “Chicago school,” are sometimes
perceived to be hostile toward government. It would be more accurate to
describe them as skeptical. The broader the scope of government, the more room
there is for special interests to carve out deals for themselves that have nothing
to do with the legitimate functions of government described in Chapter 3.
Tyranny of the status quo. If small groups can get what they want out of the
legislative process, they can also stop what they don’t want, or at least try.
Joseph Schumpeter, who coined the term “creative destruction,” described
capitalism as a process of incessantly destroying the old structure and creating a
new one. That may be good for the world; it is bad for the firms and industries
that make up the “old structure.” The individuals standing in capitalism’s path of
progress—or destruction, from their standpoint—will use every tool they have to
avoid it, including politics. And why shouldn’t they? The legislative process
helps those who help themselves. Groups under siege from competition may
seek trade protection, a government bailout, favorable tax considerations,
limitations on a competing technology, or some other special treatment. With
layoffs or bankruptcy looming, the plea to politicians for help can be quite
compelling.
So what’s the problem? The problem is that we don’t get the benefits of the
new economic structure if politicians decide to protect the old one. Roger
Ferguson, Jr., former vice chairman of the board of governors of the Federal

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Reserve, explains, “Policymakers who fail to appreciate the relationship between
the relentless churning of the competitive environment and wealth creation will
end up focusing their efforts on methods and skills that are in decline. In so
doing, they establish policies that are aimed at protecting weak, outdated
technologies, and in the end, they slow the economy’s march forward.”
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Both politics and compassion suggest that we ought to offer a hand to those
mowed over by competition. If some kind of wrenching change generates
progress, then the pie must get bigger. And if the pie gets bigger, then at least
some of it ought to be offered to the losers—be it in the form of transition aid,
job retraining, or whatever else will help those who have been knocked over to
get back on their feet. One of the features that made the North American Free
Trade Agreement more palatable was a provision that offered compensation to
workers whose job losses could be tied to expanded trade with Mexico.
Similarly, many states are using money from the massive legal settlement with
the tobacco industry to compensate tobacco farmers whose livelihoods are
threatened by declining tobacco use.
There is a crucial distinction, however, between using the political process to
build a safety net for those harmed by creative destruction and using the political
process to stop that creative destruction in the first place. Think about the
telegraph and the Pony Express. It would have been one thing to help displaced
Pony Express workers by retraining them as telegraph operators; it would have
been quite another to help them by banning the telegraph. Sometimes the
political process does the equivalent of the latter for reasons related to the
mohair problem. The economic benefits of competition are huge but spread over
a large group; the costs tend to be smaller but highly concentrated. As a result,
the beneficiaries of creative destruction hardly notice; the losers chain
themselves to their congressman’s office door seeking protection, as any of us
might if our livelihood or community were at risk.
Such is the case in the realm of international trade. Trade is good for
consumers. We pay less for shoes, cars, electronics, food, and everything else
that can be made better or more cheaply somewhere else in the world (or is made
more cheaply in this country because of foreign competition). Our lives are
made better in thousands of little ways that have a significant cumulative effect.
Looking back on the Clinton presidency, former Treasury secretary Robert
Rubin reflected, “The economic benefits of the tariff reductions we negotiated
over the last eight years represent the largest tax cut in the history of the world.”
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Cheaper shoes here, a better television there—still probably not enough to get
the average person to fly somewhere and march in favor of the World Trade

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Organization (WTO). Meanwhile, those most directly affected by globalization
have a more powerful motivation. In one memorable case, the AFL-CIO and
other unions did send some thirty thousand members to Seattle in 1999 to protest
against broadening the WTO. The flimsy pretext was that the union is concerned
about wages and working conditions in the developing world. Nonsense. The
AFL-CIO is worried about American jobs. More trade means cheaper goods for
millions of American consumers and lost jobs and shuttered plants. That is
something that will motivate workers to march in the streets, as it has been
throughout history. The original Luddites were bands of English textile workers
who destroyed textile-making machinery to protest the low wages and
unemployment caused by mechanization. What if they had gotten their way?
Consider that at the beginning of the fifteenth century, China was far more
technologically advanced than the West. China had a superior knowledge of
science, farming, engineering, even veterinary medicine. The Chinese were
casting iron in 200 B.C., some fifteen hundred years before the Europeans. Yet
the Industrial Revolution took place in Europe while Chinese civilization
languished. Why? One historical interpretation posits that the Chinese elites
valued stability more than progress. As a result, leaders blocked the kinds of
wrenching societal changes that made the Industrial Revolution possible. In the
fifteenth century, for example, China’s rulers banned long-sea-voyage trade
ventures, choking off trade as well as the economic development, discovery, and
social change that come with them.
We have designed some institutions to help the greater good prevail over
narrow (if eminently understandable) interests. For example, the president will
often seek “fast-track authority” from Congress when the administration is
negotiating international trade agreements. Congress must still ratify whatever
agreement is reached, but only with an up or down vote. The normal process by
which legislators can add amendments is waived. The logic is that legislators are
not allowed to eviscerate the agreement by exempting assorted industries; a trade
agreement that offers protection to a few special interests in every district is no
trade agreement at all. The fast-track process forces politicians who talk the talk
of free trade to walk the walk, too.
The unfairly maligned World Trade Organization is really just an international
version of the fast-track process. Negotiating to bring down trade barriers among
many countries—each laden with domestic interest groups—is a monumental
task. The WTO makes the process more politically manageable by defining the
things that countries must do in order to join: open markets, eliminate subsidies,
phase out tariffs, etc. That is the price of membership. Countries that are
admitted gain access to the markets of all the existing members—a huge carrot

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that gives politicians an incentive to say no to the mohair farmers of the world.