Sen. Bernie Sanders and Donald Trump represent two opposite ends of the political spectrum. Sanders, a self-described socialist, draws support from the discontented Democrat base, while Trump has leapt to the front of the polls with help from anti-establishment Republicans. Both could be described as populists, but they appeal to very different audiences.
Yet, for all their differences, the two are remarkably similar when it comes to trade. Trump and Sanders both espouse economic nationalism, a mixture of protectionist, isolationist policies.
For these populists, America is suffering from the effects of free trade. America is losing jobs to cheap labor markets in foreign country, they claim. American trade policy needs to protect American workers and create jobs for American workers.
“They can’t get jobs, because there are no jobs, because China has our jobs and Mexico has our jobs,” Trump said in June.
And in a recent rally in Portland, Sanders said “You cannot continue sending our jobs to China when millions of people in this country desperately need work.”
Donald and Bernie, for all their differences, agree that measures ought to be taken to keep labor and capital from moving freely. In the past, Trump has called for a 20% tax on imported goods, and a 15% tax on outsourced jobs. While less specific, Sanders has advocated the elimination of America’s free trade agreements, presumably in favor of higher tariffs and other protectionist policies.
For both Trump and Sanders, it’s obvious that other nations with cheap labor markets are stealing American jobs. If America enacted protectionist policies and ended its free trade agreements, the US would stop losing jobs to China and other countries.
But that characterization has a fatal flaw–it treats the labor market as a zero-sum game. In economics, a zero-sum game is a situation in which someone’s gain must result in an equal loss for others.
Here’s an example. Let’s suppose that you and three friends have a pizza cut into eight slices. You take four of the delicious cheesy slices, which is great for you. You love pizza. However, while you gained four slices, your friends collectively lost four slices. Together, they have 4 slices to split between them. Your gain equals their loss.
In a zero-sum game, there are winners and losers.
Bernie, Donald and their ilk want you to believe that the world economy is a zero-sum game. There are only so many jobs in the world, and Americans are competing with the world for its share of a fixed number of jobs.
Except the economy is not a zero-sum game. There are not a finite number of jobs.
The economy is constantly growing and changing. Jobs and capital flow freely as the free market’s invisible hand guides individuals and businesses to optimize their resources and adequately satisfy demand. Jobs disappear in some areas as suppliers adjust to find the optimal use of their resources. Yet, new jobs appear as the capital saved is invested in new products and services. Supply and demand are in constant flux–the job market has never been, and never will be, static.
And yet the zero-sum myth continues. Americans continue to believe that a job taken by an immigrant or outsourced to another country means a net loss of one job for American workers. Part of the reason this belief persists is that it reflects our everyday experience. We all know friends or family members who have lost jobs from outsourcing. We directly experience the negative effects of outsourcing, but it takes a broader perspective to understand the positive benefits of free trade.
Think of it this way. Let’s say that the company you work for decides to lay you off in favor of cheap labor in China. In your mind, the only effect of the event is that you’ve lost your job. There’s no positive side of this story.
But why did that job get outsourced in the first place? A likely reason is that his overseas competitor is willing to work for far less. This is, understandably, not at all comforting to you. But think of the consequences of that business decision. Labor costs have just gone down, perhaps significantly. And while business owners may use part of the savings to pad their own profits, they’ll also pass along savings to the consumer or invest it in new projects. Prices will lower, benefiting many people.
Still, you’re not impressed. So what if you can buy a product at a cheaper price. What good is a low price if your income was just been reduced to zero? Even cheap products can’t be bought without money.
Again, let’s look at the unseen consequences. With consumers spending less money on that product, they have more money to spend on other products. And as people spend more money on other products, their respective industries grow. As those industries grow, they needs to hire more people to increase production. Pretty soon, new companies are hiring people like you.
Despite all these impressive benefits, people still only focus on that initial job loss. Yet that job loss has resulted in increased production, lower prices, and higher quality of life, not to mention a host of indirect benefits. Overall, outsourcing has created a net benefit to society.
It’s a difficult concept to grasp. We like to focus on the individual or small group who is hurt in these scenarios–it’s how our brains are hardwired. But when we do that, we close our minds off to the big picture of the free market.
Sanders, Trump, and other dime a dozen politicians would have you fixate on the loss of American jobs to outsourcing. But when they do, remember that they’re relying on the zero-sum fallacy. The labor market is not finite–its constantly in flux. Ultimately, when we allow the market to operate uninhibited, everybody wins.