In response to Readers Question Free Trade; Does Nonreciprocal Free Trade Cost Jobs? Paul Krugman "Was" Right!, reader Ken is wondering about legacy capital and the destruction of capital.
Ken writes ...
I really enjoy your explications of economic ideas, and I think the world really needs them, since many are so economically illiterate.
I do have a question about free trade and loss of capital. My father and uncle both trained at Detroit's illustrious technical high school. My dad went on to college and became a physiology researcher and professor, my uncle developed a state of the art machine shop making rocket engine parts.
When job and factory loss occurs there is also loss of the physical capital of the legacy tools and machines, and not all of them are worthy of obsolescence. In addition there is the loss of human capital embodied in persons and organizations.
Here I am thinking of institutions such as the famed Detroit technical high school, and of individual trained personnel such as the senior master machinist who has years of experience and detailed practical knowledge that can only be relayed in person from a master machinist to a developing journeyman machinist.
I recognize that there is radical technological innovation ongoing, but there still must be some value in this legacy capital. I would be interested if you might address this consequence of free trade in your writing.
Legacy Capital Disappears Over Time
As technology advances, the value of legacy capital depreciates at varying rates, but skills can change from being very needed to completely obsolete quite fast, even overnight.
Is there any legacy capital left for ability to use a slide rule? I suspect none at all. I have that skill and it is totally useless other than as a conversation piece.
My freshman year in college in an engineering curriculum, knowledge of how to use a slide rule was important. And the better you could use one, the more likely you were to arrive at the correct answer.
One semester later, skill in using slide rules was rendered totally useless. Texas Instruments came out with small hand-held engineering calculators that made the slide rule obsolete, overnight. Having a good slide rule and knowing how to use it was needed one semester, but on day one of the next semester having an engineering calculator was a requirement.
Robots are now doing much machine work. Boeing recently replaced highly skilled riveters with robots that do a far better job with fewer errors. See KUKA Systems develops robotic riveting system for Boeing 777 wide-body fuselage assembly.
Is there legacy capital for highly skilled airplane riveters? The answer is pretty clear: Except for niche applications, need for that skill just vanished.
Over time all sorts of skills become obsolete or relegated to small niches. Horse riding is a good example of niche use. Horse riding skills are needed for jockeys at the racetrack, wild west shows, recreational uses, and perhaps some ranching functions. Unlike the slide rule there is still some demand for horse riding and training, but not like in 1840.
Someday, and sooner than most think, truck driving skills will be of limited use, perhaps even no use at all. Right now, truck driving skills are still valuable.
With that let's return to free trade and tie up some loose ends.
It's the kind of political power Australian agricultural industries can only dream of.
America's sugar producers continue to benefit from government subsidies, import quotas and tariffs, despite the vehement opposition of the influential American business lobby and the agreement of numerous free trade deals, including one with Australia in 2005.
It's long been a sore point for Australian cane growers, who hope the Trans-Pacific Partnership (TPP) will bring change.
But while business is optimistic, other political observers in Washington DC say Australia will be lucky to win any concession on sugar.
Scott Miller, from the pro-trade Washington think-tank the Centre for Strategic and International Studies, said the "political intensity" of the US sugar lobby is "unrivaled" and he's blunt about the prospects for change in the TPP.
"Sugar, I'd hold out no hope for," Mr Miller said.
"The United States has had a sugar protection scheme since about 1794, and that will probably continue through my lifetime."
It's notable that on Capitol Hill, even some who advocate for free trade and support the Trans-Pacific Partnership believe sugar concessions are a bridge too far.
The US Chamber of Commerce represents major sugar manufacturers including Mars, and the Chamber's Asia director Catherine Mellor says protection policies are unfair and don't make economic sense.
"It's raised the cost of sugar in the US and we've lost 30,000 jobs - 30,000 jobs out of Chicago have gone because sugar manufacturers have left the United States to go to Canada so that they can import sugar," she said, calling on American leaders to show courage in tackling sugar subsidies and tariffs in the Trans-Pacific Partnership negotiations.
Free Trade Agreement?
After 5 years of wrangling TPP is nowhere close to a free trade agreement.
What about Steel?
Looking for more tariffs that likely will not go away? If so, consider steel. Here's a Google search I did for Steel Tariffs.
Scroll down the list and look for recent listings. You will find a bunch of complaints for and against the US and EU.
Steel Tariffs Won't Save Jobs
A decent article to consider is the accurate assessment in July of 2014 by Forbes contributor Tim Worstall who says Why Steel Tariffs Won't Save Jobs. The article even mentions TPP.
The latest round of steel tariffs are a classical, sui generis, example of how politics really works. Larded with a great deal of rhetoric about how this will save jobs, make America great again and possibly improve the flavour of Mom's apple pie the reality is that it protects some number of politically important jobs at the cost of more, less politically important, jobs elsewhere in the economy.
Now with trans-Pacific and trans-Atlantic trade talks missing deadline after deadline, Washington is slapping new tariffs on steel imports. This election-year gift to U.S. steel giants and their unions will raise prices for other U.S. firms, handicap domestic energy production and alienate trading partners world-wide.
On Friday the Commerce Department imposed duties on hundreds of millions of dollars in annual trade with South Korea and eight other countries, including India, Vietnam, Turkey and Taiwan. As punishment for allegedly dumping steel into the U.S. market at unfair low prices, South Korea's exporters will face tariffs of about 10% to 16%, while smaller players from other countries face rates up to 118%.
Essentially, what is being repeated is the mistake of the Bush steel tariffs back a decade or so.
As a result of a Section 201 ("safeguard") investigation brought at the behest of the U.S. steel industry, President Bush in March 2002 imposed tariffs on imports of certain steel products for three years and one day. The tariffs, combined with other challenges present in the marketplace at the time and in the months that followed, boosted steel costs to the detriment of American companies that use steel to produce goods in the United States. The resulting negative impact included job losses for thousands of American workers.
200,000 Americans lost their jobs to higher steel prices during 2002. These lost jobs represent approximately $4 billion in lost wages from February to November 2002.
One out of four (50,000) of these job losses occurred in the metal manufacturing, machinery and equipment and transportation equipment and parts sectors.
More American workers lost their jobs in 2002 to higher steel prices than the total number employed by the U.S. steel industry itself (187,500 Americans were employed by U.S. steel producers in December 2002).
Does the above sound reasonable? It does to me.
Why? Because US auto and other US manufacturers that use steel in any form had to pay higher prices for it than foreign competition. People bought foreign cars that were better and cheaper.
We saved steel jobs but at far greater expense of other jobs.
Turning TPP to TP
Obama's Trans-Pacific Partnership is not a step in the right direction. It would serve a better use as toilet paper.
For further analysis, please see my article that started this chain of posts: Obama's Trans-Pacific Partnership Fiasco vs. Mish's Proposed Free Trade Alternative; How Will TPP Function in Practice?
I repeat for the third time ...
I am in favor of free trade. An excellent free trade agreement would consist of precisely one line of text. I propose the following agreement: "All tariffs and all government subsidies on all goods and services will be eliminated effective June 1, 2015."