The Special Interest Effect

Economists are famous for disagreeing with one another. So a few years ago, Harvard professor Greg Mankiw put together a list based on various surveys of what economists agree about. He found that 93 percent believe tariffs and import quotas usually reduce general economic welfare, and 90 percent say the United States should not restrict employers from outsourcing work to foreign countries. This is a resounding endorsement of global free trade, but if you listen to the rhetoric of this year’s presidential candidates, you get a very different picture. Donald Trump and Bernie Sanders in particular loudly proclaim that international trade is sending our jobs overseas and destroying our country. Why do economists and politicians see trade so differently?

Economists (at least 93 percent of them) see trade as a “win-win” activity whereby all parties prosper. Consider a primitive society in which everyone is self-sufficient, each growing their own food, making their own clothes, and building their own homes and furniture. Life is tough, luxuries are few, but they are beholden to no one. If they were to specialize, they could become more prosperous: those with an advantage to farming become farmers; those who are good with tools become carpenters; those who are good with their hands become tailors, and so on. By specializing they can become very skilled at their vocation, but they then must use what they produced to get everything else they need: the farmer must trade some of his crop to the tailor to get clothes and the tailor must trade some of his clothes to the carpenter to obtain furniture. Thus, everyone becomes more productive and the society becomes more prosperous, but they also become dependent on one another for their basic needs.

At the national level, nations are endowed with different resources, climates and topography. The more the people of a nation trade with people of other nations, the more people in both nations can specialize, technology advances and prosperity increases … but these nations also lose some of their independence as they become dependent on their trading partners to meet their basic needs. Some nations may choose to be self-sufficient — what is called “autarky” — because they don’t want to conform, but autarky is more often imposed as a punishment to force a nation to conform. North Korea, for example, is an international pariah because its leaders want to make nuclear bombs, so its citizens are forced to subsist by eating rocks, rodents and tree bark.

Much of our prosperity and technological advances since the end of WWII is the result of specialization made possible by international trade. But trade can be disruptive; consider the United States and Japan. We have vast fertile plains for growing food, while the Japanese must cultivate the sides of mountains and harvest the sea to feed their people (why else would someone eat seaweed?). It makes great economic sense for the Japanese to let us produce their food, which we can do very efficiently, and for some of their farmers to go to work in factories making cars and T.V.s they can trade to obtain our food. But Japanese farmers oppose importing cheap food from America because it will destroy their way of life, while U.S. autoworkers oppose importing Japanese cars because they fear losing their high-paying union jobs.

This is a particular problem for democracies, and the crux issue is what economists call “the special interest effect.” This occurs when the benefits of an action are thinly spread over many people while the costs are concentrated on a few. Consider the U.S. auto industry. Last year, Americans spent $570 billion buying 17.5 million cars and light trucks, many of them imports. Competition from these imports keeps the price of all cars and trucks — foreign and domestic — about $2,000 lower than they would be without imports in the market, saving the average car buyer about $30 in their monthly car payment. But there are nearly 400 thousand members of the United Auto Workers Union who have seen their wages and benefits reduced by approximately $500 a month. The benefit to car buyers is $6.3 billion a year, while the cost to the auto workers is approximately $2.4 billion a year so an economist would say free trade in automobiles increases the nation’s prosperity by $3.9 billion a year.

But vote-seeking politicians see this very differently. In the political arena, you have 17.5 million unorganized consumers spread out across the country with a weak $30-a-month incentive to fight for free trade facing off against 400,000 autoworkers concentrated in “swing states” with a much stronger $500-a-month incentive to oppose it. Who is going to win? I would put my money on the autoworkers.

The special interest effect is a problem all democracies face when dealing with trade. Many economists believe the Smoot-Hawley Tariff Act signed into law on June 17, 1930, was a major cause of the Great Depression. The act raised U.S. tariffs on over 20,000 imported goods to record levels. The purpose was to protect U.S. jobs from foreign imports, but the result was the collapse of global trade.

That was why the present international trade regime discouraging the imposition of protective tariffs was established at the end of the Second World War. Those behind it believed the best way to avoid another world war was to expand trade, because nations with inner-twined economies seldom go to war with each other. The anti-trade mentality we are witnessing today — not only in the U.S., but in Europe as well — is nothing new. We have seen it before and the results are not pretty.