If we want mass flourishing, government should be an umpire, not a coach — leave protectionism behind.
If we want mass flourishing, government should be an umpire, not a coach — leave protectionism behind.
Editor’s note: The following is adapted from chapter 4 of The Wall and the Bridge, by Glenn Hubbard, with permission from Yale University Press. All rights reserved.
O ren Cass is an earnest and smart contributor to the discourse on offering opportunity for workers in depressed industries and places. Cass carries none of the bombastic demagoguery of some political opponents of openness. Indeed, his book The Once and Future Worker offers an interesting diagnosis of the larger social and economic problems driving structural change and populist protests. He also offers policy ideas for training and reskilling workers, while supporting low-wage work.
But — and it’s a big “but” — Cass’s argument is built on an intuitive but fatally damaging notion. He argues that from Adam Smith onward, economists have gotten the big picture wrong — the “wealth of a nation” lies not in consumption or living standards but in jobs, good jobs, even particular jobs, using manufacturing jobs as the symbol of “good jobs.” If this is true, economists’ big-picture claims about gains from a market economy and the “dynamism” and “innovism” it brings are misplaced. We would need to start over. The tinkering with the market economy that drew Smith’s ire may actually be part of a solution to making the economy right by recentering policy on jobs and the dignity of work. And, if some policies resemble recommendations from mainstream economists, why bother splitting hairs about policy foundations anyway?
Adam Smith attacked mercantilism because its tinkering in the economy for special business reasons made citizens worse off by shrinking income and living standards. Openness to new ideas and ways of doing business was critical for prosperity and necessary, though not sufficient for mass flourishing. Later thinkers saw that openness led to a continuous process of disruption and greater opportunity and “wealth of a nation” over time. Yes, paeans to openness have often skipped over disruption’s wake, where some businesses and workers were left behind by change. But can we just make a course correction, or do we need a new economic framework and system?
Recentering policy on jobs raises several economic problems. Smith’s focus on consumption and open competition led to rapid economic growth and amazingly high living standards and opportunities. The search for ideas and their commercial application, free from concerns about protecting jobs, has propelled the economy in modern times.
If jobs are to be the center of policy concern, which jobs? Employment in the United States, as in other advanced economies, has evolved from agriculture to manufacturing to services.
Who determines this mix of jobs over time? Returning to classical economists’ telling, per Smith, consumers express their wishes through market consumption. Their tastes and incomes shape opportunities for firms and dictate hiring. Competition ensures efficiency in business and low prices and substantial variety for consumers. The open market allows individuals to “have a go” — as major entrepreneurs, yes, but also as small-business owners or investors in skills to advance in or change one’s career.
In Cass’s telling, policy should focus not just on jobs, but on manufacturing jobs. Winding up from there, Cass shows how high wages from manufacturing raise incomes and spending in communities, spending that supports service-sector workers and firms and their incomes. And, yes, many Americans are not satiated with what they want in goods. Why not produce more? Produce more here? With more jobs? Good jobs?
Relatively high wages in manufacturing reflect productivity in that sector (your Econ 101 professor told you that). Manufacturing employment has declined in the United States in recent decades, but not simply because companies moved jobs overseas. Factory jobs have also declined globally, now even in China, as the twin forces of productivity in manufacturing and shifts in consumer demand propel the economies. Even Cass acknowledges that today’s American factories need fewer workers because of automation. The shift of employment opportunities that follows is a global story, not simply a story of the fallout from American capitalism.
One very practical way to see the folly of investing in particular jobs of the past is the significant evolution of jobs available in the economy. One hundred years ago, we would not be talking about the job market in computers, solar energy, or air travel. By 1940, the U.S. Census added as a new occupation “automatic welding machine operator,” in 1990, “certified medical technician,” and in 2010, “wind turbine technician.” Indeed, economists David Autor, Anna Salomons, and Bryan Seegmiller estimate that fully 60 percent of jobs done in 2018 had not yet been designed or invented in 1940! We would not have wanted to protect “1940” jobs — and we should not want to focus on “today’s” jobs.
The evolution of jobs and industry happens within larger structural change. Old work declines and may be eliminated, but new work grows and often exceeds the old. Technological change is not necessarily a job killer in the aggregate. Indeed, the portion of American adults working rose throughout the 20th century, even as many jobs were automated. While many factors are at work here, automation makes workers more productive in core nonautomated tasks, from physicians using diagnostic machines to home-repair specialists using electronic tools. A more relevant question is whether workers are prepared for the jobs of tomorrow.
What’s dangerous, and ultimately costly to the nation’s — our — living standards, is when governments protect a specific sector, industry, or firms. That protectionism reduces the “wealth of a nation.” And domestic regulation and tax policy should not put our firms at a competitive disadvantage abroad.
Cass offers what looks like a gentle industrial policy guided by social scientists worried about work. But it results in something worse, a tinkering through the state for special interests, precisely the kind of tinkering that prompted Smith’s criticism of mercantilism. Two decades ago, University of Chicago Booth School of Business economists Raghuram Rajan and Luigi Zingales wrote a compelling critique of Cass’s position: While government should be an umpire to ensure the workings of competition and market forces, as Smith argued, private interests will inevitably compete behind the scenes in a self-interested manner to influence outcomes. Rajan and Zingales worried in particular about an alliance between struggling incumbent firms (for whatever reason) and unemployed or disaffected workers. Once we start making exceptions as Cass suggests, their alliance can turn the “umpire state” toward a “protectionist state,” generating some winners with many more losers — the economy as a whole — from lower living standards.
The avoidance of government tinkering is not just practical, but also moral. Part of Smith’s intellectual assault on mercantilism was to attack the power of special interests. Taking Rajan and Zingales a step further: Once government explicitly starts tilting the playing field of commerce, various businesses or trades will band together to use government as a tool to redistribute income to themselves at the expense of the public. As described in a different way by Nobel laureates James Buchanan and George Stigler, these interest groups make economists inherently skeptical about many forms of economic regulation as benefiting special interests, not the public at large. Smith depended upon the process of competition to drive the invisible hand, not on individual competitors. He defended business as an organization for exploiting new opportunities, markets, and ways of doing things, but his work — as with that of economists to follow — was “pro-market,” not “pro-business” in the sense sometimes touted by conservative politicians.
Real or perceived special-interest intervention by the state thus leads not only to economic inefficiency but also to social distrust. The tinkering, by limiting the invisible hand of competition, a source of economic gains in Smith’s market economy, yields a smaller “size of the pie.” It has a corrosive effect, with many people concluding that some “slices of the pie” are unjustly received, and that ordinary people shouldn’t bother trying to “have a go” at it.
We should therefore avoid special-interest tinkering on principle, regardless of the social reasons suggested by Cass. Otherwise, all state subsidies or preferential tax or trade arrangements would be on the table, pace Smith. We cannot practically expect to root out special-interest tinkering while preserving the seemingly “good” interventions that Cass suggests. Who watches the regulators’ motives? Quis custodiet ipsos custodes? (That is, who watches the watchers?)
That’s why Cass’s otherwise reasonable argument for trade-offs falls flat. He asks, shouldn’t we be willing to give up a few cents on the dollar of efficiency to ensure broad social solidarity? Isn’t that the price of “mass flourishing”? Well, no: Such small trade-offs are not really what is on offer in the anti-wealth-of-nations logic.
Smith’s competitive economy still requires government as an umpire. Government as a coach instead raises very different issues of accountability. And by reducing efficiency, we generate fewer resources for Cass’s other policies, including supporting work through wage subsidies. It is the success of the market economy itself that provides the wherewithal to finance bridges of support. The walls shrink, not expand, the resources that can be applied toward that or any other worthy end.