Five logical arguments against the protectionist fallacy

A case for greater freedom of immigration and trade

Credit: Chris Gash

John H. Cochrane

John H. Cochrane | Nov 29, 2016

Six months of xenophobic political bloviation do not overturn centuries of experience. Trade and immigration are good for the US economy.

As Adam Smith and David Ricardo explained two centuries ago, it is better for England to make wool and Portugal to make wine, and to trade, than for each country to do both. English winemakers likely disagreed.

The founders understood the benefits of immigration, complaining in the Declaration of Independence that “[King George] has endeavored to prevent the population of these States; for that purpose obstructing the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither. . . .”

Their Constitution brilliantly forbids internal protectionism against the movement of goods and people, setting up the world’s largest free trade and free migration zone and, not coincidentally, what became the wealthiest nation on Earth.

Two centuries of economic scholarship have only deepened and reinforced these lessons. We now recognize that much trade occurs among similar countries: the United States and Canada, not England and Portugal. This fact tells us that specialization of production and knowledge, the dizzying variety of goods a modern economy produces, and increasing returns are deeper sources of trade patterns than simple facts like British versus Portuguese weather. But the fact that your car—even an “American” one—is produced from parts made in a hundred countries remains vital to the low cost and high quality of the car you buy today.

Much trade also now travels on wires, not on boats, in the form of specialized services. Yet trading the best and most efficiently provided services from around the world—Hollywood movies and Silicon Valley software for Indian call centers and radiology readings, for example—is just as important to our economy as trading wine for wool.

Trade is already pretty free. The challenge is mostly to preserve and extend what we have and to avoid one of those periodic global disasters such as the 1930s, when the world slid into trade barriers, or occasional national disasters of isolationism, protectionism, and Juche (the term for self-reliance in North Korea).

Immigration is largely not free, so many of its potential benefits remain unrealized. Michael Clemens, reviewing current scholarship in the Journal of Economic Perspectives, summarizes current knowledge with the ballpark estimate that reducing barriers to immigration could double world income per capita.

In the last few decades, economists have also come to a much better understanding of the sources of long-term growth. This understanding only reinforces the importance of trade and openness. Economic growth itself depends on globalization, expanding the number of people with whom we trade ideas, skills, and goods. If you live in a village of 100, or even a small country of 10 million, inventing an iPhone makes no sense. You’ll never sell enough to recoup the costs. It only makes sense to innovate if you can sell it in a global market of billions of people. Growth comes from ideas, ideas are hard to come by, and expertise is specialized. The more people you are connected with, the more you grow. “The division of labor is limited by the extent of the market,” noted Adam Smith, and 250 years of work have fleshed out just how deep that observation is.

Against this backdrop, the economic and political discussion surrounding trade and migration remains stubbornly protectionist, mercantilist, and xenophobic.

In response to such forces, invoking study after study will do as much good as invoking a thousand scientific articles supporting Darwin at a revival meeting. The most good one can do is to point out the many simple logical fallacies adduced in the cause of restricting people’s rights to buy and sell what they want, to hire whom they want, and to move, produce, and live where they want. You’re being sold a bill of goods by people who want to use the power of the government to pick your pocket. At least recognize the snake oil.

It is perhaps understandable that the average person falls for economic fallacies. Individual experience as a worker or businessperson is a poor guide to the workings of an economy. We call this the fallacy of composition in economics. Each of us individually can get ahead if the government will force our neighbors to buy from us. But the country as a whole cannot get ahead by this means—though, heaven knows, our government tries.

But these traps are not an excuse for political leaders to ignore hundreds of years of solid knowledge and experience. The laws of physics are counterintuitive too. Everyday experience suggests that the earth is flat. Advocating flat-earth public policy in search of votes is not excusable. The major objections to free trade and more open immigration are that they will cost American jobs. To a lesser extent, trade is also about defending the profits of American exporting companies, which happily fund lobbying for protectionism. But they defend their actions in the name of jobs.

The logic that isolation will create more American jobs is false. But it is so pervasive we must dissect its fallacies.

Follow the money. When a Chinese company sells a product in America, we send money to China. The Chinese do not sit on the money. They use a lot of the money to quickly turn around and buy American goods. To the extent that they do not, they use the money to buy things from other countries—iron ore from Australia, oil from the Middle East, food, and an increasing amount of low-wage manufactured items and parts for its own manufacturing. The recipients of these dollars then turn around and spend them on goods from the US.

To the extent that all the dollars don’t end up buying American goods, foreigners end up buying assets in America, investing in our businesses. To the extent they do not buy private assets, they invest in our government bonds, financing deficits and US government spending that would otherwise vanish.

Every dollar comes back. This isn’t theory. It isn’t an “on the other hand” proposition. It’s simple arithmetic. And it doesn’t just come out even. Since, pretty much by definition, the foreign goods we buy are better or cheaper, and our goods better or cheaper there, each country is better off.

As often in economics, the problem is that of the seen and unseen. We see and hear from the worker who loses his job due to competition from abroad or to a new immigrant. We do not hear from and see the new job or business created by the foreign worker’s expenditure or the low-cost product enhancing the lives of widely dispersed American consumers. The politician can campaign on the doorstep of the “saved” factory. But it’s hard for him or her to take credit for nebulous increases in demand and employment spread throughout the economy or the appearance of an even cheaper jar of pickles at Walmart.

When you follow the money, it becomes clear that even tax benefits and subsidies enjoyed by foreign industries cannot make America worse off, as a whole. Sure, the industry in the US that must compete with a subsidized foreigner does worse. But the subsidized foreigner sells to us in exchange for money, and the money must come back. The foreign subsidy ends up distorting American output, but does not lower output or jobs overall. If the foreign country subsidizes all of its industries, the exchange rate must rise, undoing the subsidy.

Arguments against trade and immigration apply domestically too. If it is wise for the US to protect a job or business in New York from a cheaper competitor in Beijing, an immigrant from Poland, or a machine made in the United Kingdom, why is it not wise for the state of New York to protect that same job or business from a cheaper competitor in South Carolina, an immigrant from Louisiana, or a machine made in Santa Clara, California? The person losing the job or the lost business doesn’t care where the competitors come from.

Most Americans understand that free movement of people and goods between states benefits all of the states’ economies, and sniff the fallacy of local protectionism. Economics does not know national boundaries, so there is no argument for international protection that would not apply to national protection also.

The process of economic growth is painful. New, more efficient businesses come in and displace old, less efficient ones. In a competitive economy, anyone earning rents—extra compensation and an easy life—is a target for growth-producing disruption. Southwest and JetBlue disrupted United, TWA, and Pan Am (remember them?) and their employee unions. A&P put mom and pop out of business, Walmart destroyed A&P, and may displace Walmart. Uber is upending the taxi businesses. And we’re all getting cheaper and better goods and services as a result. Lots of people are doing well working for the new businesses. You might argue against “better” in the case of air travel. But that’s your choice: 1970 air travel at 1970 prices is still available. It’s called business class. The free market gives you better choices.

People who lose jobs or businesses to foreign competition are hurt—just as people who lose jobs and businesses to domestic competition and innovation are hurt. But as I hope these examples emphasize, the churn due to foreign competition is a lot lower than the churn due to domestic competition. It just comes from foreigners, who are easier to demonize.

The lump-of-labor fallacy. Adam Davidson, writing in the New York Times, explains a central misconception: “The chief logical mistake we make is something called the Lump of Labor Fallacy: the erroneous notion that there is only so much work to be done and that no one can get a job without taking one from someone else. . . . This argument is wrong.”

The lump-of-labor fallacy pervades thinking about trade and immigration, as well as many other misguided laws and policies. In the popular imagination, there are only so many jobs to be had. There are more people who want to work than there are jobs. Unemployment consists of people waiting around for a job to be “created,” especially by a politician hungry for a moment on camera.

This vision has nothing to do with reality. In the end, the number of jobs in the US is the number of people scaled by the fraction who want to work. China has 764 million jobs, while America has 159 million. China didn’t take 700 million jobs from the US—we don’t have that many people. China simply has a much
larger population.

“Jobs” is a nonsense argument. Economists who defend or attack trade on the basis of “jobs” are pandering to fallacious political rhetoric.

It is more reasonable to worry that trade and immigration affect wages, not numbers employed. But follow the money again. If by protecting an industry, the government can raise wages or profits in that industry, the money must come from somewhere. Where? Higher prices paid by consumers. When the government deliberately hobbles the productivity of the American economy, by skewing employment to less-productive industries, we can only lower
wages overall.

We can see direct evidence against the lump-of-labor fallacy in our own history. One of the greatest job invasions in all US history was the increase in women working. Women’s labor-force participation rose from 32 percent to 60 percent from 1950 to 2000. But 27 percent of men are not permanently out of work now as a result. In the “great migration,” about 6 million African Americans moved from the rural southern part of the US to northern cities. Despite widespread fears, riots, and shameful efforts to exclude these newcomers, 6 million whites did not suffer permanent unemployment as a result.

There has also been huge resistance to national free trade—mills moving from New England to the south, car companies relocating from Detroit to Indiana and Tennessee. Our state and local governments compete to waste taxpayer money on special deals for large employers. That political resistance doesn’t make the economics any
more logical.

The great churn. The great churn of the US labor force most clearly belies the lump-of-labor fallacy, together with trade protectionism, anti-immigrant protectionism, and all sorts of political efforts to subsidize specific industries in the name of “jobs.”

In the single month of January 2016, 4.9 million people in the US lost their jobs, out of a labor force of 159 million. At that rate, 60 million people, 40 percent of the labor force, will be out of a job by the end of the year. Why is this not a catastrophe? Because in the same month, 5 million people in the US got new jobs. The 100,000 new jobs “created” in that month, and bandied in the press, are not a 100,000 expansion in the lump of labor; they are the net difference of a great churn.

For this reason, net employment in the US is essentially unaffected by protection. If a political intervention could create 100,000 new jobs (if!), that is a drop in the bucket of an economy that creates 5 million new jobs a month. 

The utter incoherence of trade and immigration policy is a good sign of its dysfunction. Trade and immigration policy is mostly about labor protection. Republicans are against immigration, and are turning against trade, all under the banner of protecting American jobs. But why are they then against unions, minimum wages, the Equal Employment Opportunity Commission and the National Labor Relations Board, occupational licensing, and all the rest of the government’s misguided job- and business-protection efforts? Democrats are for all those labor protections, but then soft on immigration. The inevitable conclusion: most policy discussion favoring trade and immigration restrictions has other objectives. 

John H. Cochrane is distinguished senior fellow at Chicago Booth and a senior fellow of the Hoover Institution at Stanford University.

Excerpted from the chapter “Trade and Immigration” by John H. Cochrane, from Blueprint for America, edited by George P. Shultz, with the permission of the publisher, Hoover Institution Press. Copyright © 2016 by the Board of Trustees of the Leland Stanford Junior University. All essays from Blueprint for America are available for download here.