The Looming Spectre of Protectionism

The BBC reports on the efforts of international governments to save jobs. The current economic crisis provides an environment pursuant to protectionism, and policies that protect domestic employment at the expense of free trade.

There are ways of assuaging the harms imposed on society by the painful corrections necessary to return economies to full employment. They must be embraced, or the world will be plunged into further economic despair.

It is easy to understand why governments are willing to spend money to prop up failing industry. When large firms go out of business, people lost their jobs and have nowhere to go. They can place a lot of strain on government welfare systems.

In the idealised market, the economy smoothly transitions to the new equilibrium. In practice, jobs are not created quickly enough to stem the tide of unemployment. There are costs imposed on society and individuals by unemployment, which can justify temporary subsidies for failing industry at a short-term.

Of course, it’s not a sustainable position. These costs will be imposed eventually, and deferral comes at enormous expense. Consider the foolish decision to bail out automobile manufacturers in the US, with no long-term objective in sight. The critics have been vindicated.

The transitionary costs that justify interventionism stem from the absence of job creation, and inflexibility in the labour market. These are not intractable problems. In order to reduce pressure for government action to save jobs, the state needs to aggressively pursue policies to counter these forces.

Restoring credit to expanding businesses and new enterprise should be a priority. In the US, some 15% of workers lose their jobs annually – regardless of the business cycle. This economical model is only sustainable through regular job creation, and the system breaks down when credit markets are frozen. The functioning of the banking system is integral to recovery.

It will also facilitate the correction of international trade when deficits become a problem. If firms can expand and develop to benefit from free trade, there will be less pressure on the government to take action when the economy takes a hit. If costs of free trade are asymmetric, the public can quickly lose faith and demand intervention to protect jobs.

Flexibility in the labour market is also key. When employment regulation (involving the hiring and firing of workers) is too rigid, firms do not take on new workers if the future of their business is uncertain.

This is especially true in an environment where businesses are risk-averse. Businesses still need to take risks, and be encouraged to expand their enterprise to exploit a new opportunity. They will forego potentially profitable opportunities and adopt survival tactics if business regulation punishes them for hiring new workers, by making it more difficult to get rid of them.

Those who currently have jobs have a vested interest in keeping labour markets rigid, at the expense of the economy’s competitiveness. Workers may benefit from flexibility in labour law, but they will have to be convinced of such.

If free trade and free markets are not to be another casualty of the global recession, it will not be the most difficult public policy debate to be had over the next couple of months.

© The Free Marketeer 2009



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