“Free Trade” and Risk-adjusted returns – The impact on middle class families

David Glasner has written an excellent post on how most people consider their work to be far more important than what they consume – so what our economy gains with free trade is different than what most people value in their lives. Free trade puts their jobs at risk, and they get to consume a bit more.

For most people, an increased risk of losing your job is not worth moderate gains in their consumption. The absolute returns from free trade might be higher to them, but how about the risk-adjusted return?

Here is David:

“What people do is a far more important determinant of their overall estimation of how well-off they are than what they consume. When you meet someone, you are likely, if you are at all interested in finding out about the person, to ask him or her about what he or she does, not about what he or she consumes. Most of the waking hours of an adult person are spent in work-related activities. If people are miserable in their jobs, their estimation of their well-being is likely to be low and if they are happy or fulfilled or challenged in their jobs, their estimation of their well-being is likely to be high.

And maybe I’m clueless, but I find it hard to believe that what makes people happy or unhappy with their lives depends in a really significant way on how much they consume. It seems to me that what matters to most people is the nature of their relationships with their family and friends and the people they work with, and whether they get satisfaction from their jobs or from a sense that they are accomplishing or are on their way to accomplish some important life goals. Compared to the satisfaction derived from their close personal relationships and from a sense of personal accomplishment, levels of consumption don’t seem to matter all that much.

Moreover, insofar as people depend on being employed in order to finance their routine consumption purchases, they know that being employed is a necessary condition for maintaining their current standard of living. For many if not most people, the unplanned loss of their current job would be a personal disaster, which means that being employed is the dominant – the overwhelming – determinant of their well-being. Ordinary people seem to understand how closely their well-being is tied to the stability of their employment, which is why people are so viscerally opposed to policies that, they fear, could increase the likelihood of losing their jobs.

To think that an increased chance of losing one’s job in exchange for a slight gain in purchasing power owing to the availability of low-cost imports is an acceptable trade-off for most workers does not seem at all realistic.

This is just fantastic set of points:

  1. Workers care more about their job than what they consume
  2. Losing a job has a far larger impact on well-being than minor increases in consumption welfare

Steve Randy Waldman has made similar points before about how difficult it is to sum up gains from trade. Still, I think there is a related point which isn’t being made strongly enough. The risk of losing your job from free trade as it exists today for US workers located in the midwest almost certainly has swamped any possible benefits from slightly lower prices they might pay.

Imagine you are a working in a factory located in a small town in the midwest – like London, Kentucky. Imagine a plant closing and going overseas – so you and roughly 500 other people lose their job in this town. 500 people at a single is an underestimate – I personally know a facility in London that employs far more than 500 people.

The population of London, Ky is 7,993 in 2010- but I bet it has grown since then, so lets give it 8,500 people.

This plant closing and going overseas potentially ruins your life, and potentially ruins the life of nearly everyone you work with, and makes everyone in your town poorer.

You are probably not getting another job in London. You will have to travel to get work if you can find it. Even if you do find work in London, 500 other people are also looking for work. Getting a job means you are getting a job instead of someone you probably know personally. So even if you get great news for you, terrible news for your buddy and his family. Glad to survive, not so glad to see your friends not do as well.

Your situation is actually worse if you worked hard and got promoted a few times! Getting a management job was hard, now you will find it financially difficult to go back to working for less money – and other companies less likely to hire you for line worker jobs, as they think you will jump ship as soon as you get a better offer.

Anyone with 50% of a brain can see this doesn’t even have to happen to the place where you work personally. A plant with 500 people closing a few towns over makes you worry about your own plant closing. It brings new people into town to compete for jobs, people who look really hungry for your job. You’ll probably know at least a few people that lose their jobs – and see how it impacts them and their families.

The risk associated with losing your job is vastly higher when we have “free trade” like we have today. Even if the entire country ends up a with a bit more stuff, the added riskiness to living is significant for many, many people.

In finance, it’s extremely common for analysts to compare risk-adjusted returns. Risk-adjusted returns are a far better way to think about how much you are getting for an investment than flat-out gross returns.

So, for people facing competition from “free trade” agreements, what is the risk-adjusted return of “free trade” to them personally? Undoubtedly, middle-class families are getting much, much lower risk-adjusted returns on their family income than they would under some level of protectionism.

Here is something else to consider – free trade impacts people who are probably more risk adverse than most people. How would you describe someone who likes living in a small town, and working in a not-very-stressful job? Risk adverse fits. And yet these are the people who are most at risk to lose their jobs to outsourcing from free trade.

We should probably at least be considering the risk-adjusted returns to family income for “free” trade. It doesn’t seem to be something that has been examined at length – despite the fact lower risk-adjusted income is dominating one of the dominant themes in this election.

 

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Expert in business development, product development, and direct marketing. Developed strategic sales plans, product innovations, and business plans for multiple companies. Conceived the patent pending Spot Equivalent Futures (SEF) mechanism, which allows true replication of spot and swap like products in the futures space.

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