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Returning to the subject of our own economy, though, I should briefly clarify here that when I say the US government doesn’t really need to protect any of its infant industries to keep up with the rest of the world economy, that’s not necessarily the same thing as saying it should never support any of its domestic industries for any reason. That would pretty blatantly contradict all the arguments I was making a moment ago about the importance of supporting scientific research and incentivizing technological breakthroughs and so on; obviously, I’m strongly in favor of supporting all kinds of efforts toward those ends. I should also add, though, that those aren’t the only areas in which government support for certain domestic industries might be justifiable for the greater public good. To give another example (repeating again from last post), I think there’s a good case to be made that in order to keep the country safe from catastrophic emergencies, the government should be allowed to provide ongoing support to domestic producers of certain goods to keep them up and running on a stable basis, even if it’s not quite as efficient as entrusting the entire supply of those goods to foreign suppliers, just in case (I’m thinking of things like food supplies in particular). This is something I’ve changed my opinion on fairly recently; I used to think things like agriculture subsidies were a prime example of egregious government waste – why spend valuable taxpayer money to keep domestic farmers in business when it would be cheaper just to buy all our food from overseas? – but now I’ve started to see a bit more of the logic behind having a functioning food production infrastructure already in place in case of some sudden unexpected crisis. Sure, it might be a slight drag on our economy 99.99% of the time – but in that other 0.01% of cases, like (say) if we’re ever stuck by some deadly super-pandemic that suddenly makes it impossible to import sufficient food from abroad, it seems like we’d be glad to have it. After all, food isn’t something you can just instantly start producing overnight; it takes months to grow and harvest. So although it’s true that you could prepare to some extent by having some necessities already stockpiled in advance – including some non-perishable food supplies being strategically held in reserve – it still doesn’t strike me as completely unreasonable to also want to have some operations already in place to produce more food as needed (including farmers who know how to run them), just in case.

Now, having said all this, I should stress again that I don’t think this should be the norm for every industry. For the vast majority of industries, I’m still strongly in favor of letting firms compete in the free market, and not trying to have the government control them or give them any kind of special protection. This has consistently proven to be the most efficient way to get the highest quality goods to the people who want them at the lowest cost. Nevertheless, there’s no denying that the market system has its downsides, and all the examples discussed throughout this post aren’t even the most obvious of these. Probably the most basic downside of all when it comes to market competition is simply that (like any competition) it will always inevitably produce losers as well as winners; when some companies succeed and outcompete others, the less competitive ones will be forced out of business, and their workers will have to find new jobs. For those newly unemployed workers, finding new work can be a difficult and painful process – and the harder it is for them, the more the broader economy misses out on their productive potential. But is there anything that can or should be done to mitigate this, or is it just something we have to accept in all its harshness as the price of having free markets? I don’t think the answer necessarily has to just be the latter; it seems to me that this is one more area where government support can help fill in some of the gaps created by market competition and act as a kind of economic lubricant to keep the economic machine running more smoothly. This is yet another section I’ll just be copying over wholesale from the previous post, so again, if you’ve already read that one you can just skip the rest of this bit; but if not, the rest of this section will be repeating a portion of what I wrote there. To start things off, here’s Wheelan’s summary of the basic dilemma:

A market economy inspires hard work and progress not just because it rewards winners, but because it crushes losers. The 1990s were a great time to be involved in the Internet. They were bad years to be in the electric typewriter business. Implicit in Adam Smith’s invisible hand is the idea of “creative destruction,” a term coined by the Austrian economist Joseph Schumpeter. Markets do not suffer fools gladly. Take Wal-Mart, a remarkably efficient retailer that often leaves carnage in its wake. Americans flock to Wal-Mart because the store offers an amazing range of products cheaper than they can be purchased anywhere else. This is a good thing. Being able to buy goods cheaper is essentially the same thing as having more income. At the same time, Wal-Mart is the ultimate nightmare for Al’s Glass and Hardware in Pekin, Illinois—and for mom-and-pop shops everywhere else. The pattern is well established: Wal-Mart opens a giant store just outside of town; several years later, the small shops on Main Street are closed and boarded up.

Capitalism can be a brutal, cruel process. We look back and speak admiringly of technological breakthroughs like the steam engine, the spinning wheel, and the telephone. But those advances made it a bad time to be, respectively, a blacksmith, a seamstress, or a telegraph operator. Creative destruction is not just something that might happen in a market economy. It is something that must happen. At the beginning of the twentieth century, half of all Americans worked in farming or ranching. Now that figure is about one in a hundred and still falling. (Iowa is still losing roughly fifteen hundred farmers a year.) Note that two important things have not happened: (1) We have not starved to death; and (2) we do not have a 49 percent unemployment rate. Instead, American farmers have become so productive that we need far fewer of them to feed ourselves. The individuals who would have been farming ninety years ago are now fixing our cars, designing computer games, playing professional football, etc. Just imagine our collective loss of utility if Steve Jobs, Steven Spielberg, and Oprah Winfrey were corn farmers.

Creative destruction is a tremendous positive force in the long run. The bad news is that people don’t pay their bills in the long run. The folks at the mortgage company can be real sticklers about getting that check every month. When a plant closes or an industry is wiped out by competition, it can be years or even an entire generation before the affected workers and communities recover. Anyone who has ever driven through New England has seen the abandoned or underutilized mills that are monuments to the days when America still manufactured things like textiles and shoes. Or one can drive through Gary, Indiana, where miles of rusting steel plants are a reminder that the city was not always most famous for having more murders per capita than any other city in the United States.

Competition means losers, which goes a long way toward explaining why we embrace it heartily in theory and then often fight it bitterly in practice. A college classmate of mine worked for a congressman from Michigan shortly after our graduation. My friend was not allowed to drive his Japanese car to work, lest it be spotted in one of the Michigan congressman’s reserved parking spaces. That congressman will almost certainly tell you that he is a capitalist. Of course he believes in markets—unless a Japanese company happens to make a better, cheaper car, in which case the staff member who bought that vehicle should be forced to take the train to work. (I would argue that the American automakers would have been much stronger in the long run if they had faced this international competition head-on instead of looking for political protection from the first wave of Japanese imports in the 1970s and 1980s.) This is nothing new; competition is always best when it involves other people. During the Industrial Revolution, weavers in rural England demonstrated, petitioned Parliament, and even burned down textile mills in an effort to fend off mechanization. Would we be better off now if they had succeeded and we still made all of our clothes by hand?

If you make a better mousetrap, the world will beat a path to your door; if you make the old mousetrap, it is time to start firing people. This helps to explain our ambivalence to international trade and globalization, to ruthless retailers like Wal-Mart, and even to some kinds of technology and automation. Competition also creates some interesting policy trade-offs. Government inevitably faces pressure to help firms and industries under siege from competition and to protect the affected workers. Yet many of the things that minimize the pain inflicted by competition—bailing out firms or making it hard to lay off workers—slow down or stop the process of creative destruction. To quote my junior high school football coach: “No pain, no gain.”

It’s true that there’s always the temptation, whenever the market is working its creative destruction like this, to leap to the conclusion that the market competition itself is the problem, and to accordingly want to impose drastic restrictions that prevent it from being able to so easily force firms out of business and force workers out of their jobs. But as Wheelan rightly points out, any government that intervenes in the market in an effort to counteract its negative effects has to be careful about whether it’s doing so in a remedial kind of way that still allows the positive effects to occur, or whether it’s simply blocking all of the market’s effects, both positive and negative, from ever occurring in the first place – because in the latter case, it may end up doing more harm than good. He continues:

What’s the problem [with trying to preserve obsolete jobs instead of letting them be eliminated]? The problem is that we don’t get the benefits of the new economic structure if politicians decide to protect the old one. Roger Ferguson, Jr., former vice chairman of the board of governors of the Federal Reserve, explains, “Policymakers who fail to appreciate the relationship between the relentless churning of the competitive environment and wealth creation will end up focusing their efforts on methods and skills that are in decline. In so doing, they establish policies that are aimed at protecting weak, outdated technologies, and in the end, they slow the economy’s march forward.”

Both politics and compassion suggest that we ought to offer a hand to those mowed over by competition. If some kind of wrenching change generates progress, then the pie must get bigger. And if the pie gets bigger, then at least some of it ought to be offered to the losers—be it in the form of transition aid, job retraining, or whatever else will help those who have been knocked over to get back on their feet. One of the features that made the North American Free Trade Agreement more palatable was a provision that offered compensation to workers whose job losses could be tied to expanded trade with Mexico. Similarly, many states are using money from the massive legal settlement with the tobacco industry to compensate tobacco farmers whose livelihoods are threatened by declining tobacco use.

There is a crucial distinction, however, between using the political process to build a safety net for those harmed by creative destruction and using the political process to stop that creative destruction in the first place. Think about the telegraph and the Pony Express. It would have been one thing to help displaced Pony Express workers by retraining them as telegraph operators; it would have been quite another to help them by banning the telegraph.

Needless to say, the idea of wanting to protect people’s jobs comes from a place of good intentions. But trying to accomplish this by interfering with productive market competition tends to backfire; by protecting unproductive firms and thereby keeping market efficiency artificially low, the cost of producing goods and services is kept artificially high – which leads to persistently high prices for customers, which means that those customers’ purchasing power stagnates rather than improving over time – the functional equivalent of denying them a universal pay raise.

So what’s a better alternative? Wheelan gave the answer already; there are certain approaches governments can take which actually do allow for the market’s creative destruction to take place, but then also provide a safety net as a supplement to it, so the benefits of market competition can still be realized while keeping the economic collateral damage to a minimum. Instead of trying to keep workers locked into their old jobs, government can, for instance, provide them with resources like transition aid and/or job retraining to more smoothly and easily transfer into new ones. As Wheelan puts it:

We can do things to soften [the] blows [of creative destruction]. We can retrain or even relocate workers. We can provide development assistance to communities harmed by the loss of a major industry. We can ensure that our schools teach the kinds of skills that make workers adaptable to whatever the economy may throw at them. In short, we can make sure that the winners do write checks (if indirectly) to the losers, sharing at least part of their gains. It’s good politics and it’s the right thing to do.

The logic behind this kind of strategy is clear enough: By allowing creative destruction to take place and make production more efficient (as opposed to resisting it with legal restrictions and so on), we can decrease costs for customers, so that even if a portion of those customer savings are then taxed and redistributed to workers who’ve lost their jobs, everyone can still come out ahead overall. And if this redistribution program includes training those workers for new jobs, it can increase efficiency and customer savings further still, by making it quicker and easier for firms to find qualified workers and bring them into positions where they can be most productive.

That being said, some have made the counterargument that whenever we’ve tried job retraining programs at various levels in the past, they’ve never really been all that effective, so they might not necessarily be the best way of helping out displaced workers. In fairness, a lot of these criticisms seem to just boil down to issues of execution, which seem like they could be fixable if administered more competently, so the criticisms shouldn’t necessarily be considered knock-down arguments against these kinds of programs. (From what I’ve read, it seems like some other countries have had great success with retraining programs, so our issues here may just be US-specific ones – more on that later.) But regardless of whether all the various logistical difficulties can be overcome, a more fundamental challenge when it comes to retraining workers is that, for a whole variety of reasons, a lot of them simply might not take to retraining all that well. As Alexander puts it:

Although “Well, they should retrain” is a nice thought, not every 50 year old grizzled miner can learn how to program social networking software. [Many] of them just [become] destitute and miserable.

Granted, it’s not quite such a dramatically binary situation in most cases; newly-unemployed workers do typically have other choices besides just software programming on the one hand and abject destitution on the other. The service sector, in particular, is one area where new kinds of jobs are being created all the time. (And what’s more, it’ll usually be the case that as new service-sector jobs open up, it won’t necessarily be the old manufacturing workers who are expected to fill them anyway; workers in more closely-related fields will tend to be the ones who fill them, and then those workers’ old jobs will be the ones that are available for manufacturing workers to step into. So for instance, if a new job is created in a service-sector field like nursing or computer programming or whatever, it might be filled by someone who would otherwise have become a teacher or something – and then as they switch into this new position, it’ll mean that there will now be an extra teaching position free to be filled by someone who might otherwise have become, say, a salesperson, which will mean there will now be an extra salesperson position available… and so on down the line until eventually a job will open up in a field that’s close enough to manufacturing that a former manufacturing worker will be able to switch into it fairly easily (or at least, more easily than switching into nursing or computer programming). So the argument that “you can’t expect lifelong miners and factory workers to pick up nursing or computer programming just like that” isn’t necessarily as significant as it might seem, because usually they aren’t being asked to make such a drastic change. More often, they’ll just be switching into the profession that they’re next-best-suited-to after manufacturing.)

Still, the point remains that sometimes workers really do have to switch into new fields that are completely foreign to them; and in those cases, there are all kinds of reasons why they might struggle to adjust to their new jobs. You might have some workers, for instance, who are great at working with their hands, but aren’t so great when it comes to extended interpersonal interactions, so they’re less naturally comfortable in jobs where they have to interact with customers a lot. Or you might have workers who function well in structured environments where their tasks are well-defined, but struggle to adjust to more abstract work where the objectives aren’t always as straightforward. Other workers might have a hard time working remotely if they’ve grown accustomed to having co-workers around them all the time. And the list goes on. Probably the biggest obstacle of all, though, is just the basic problem of having a skill set that no longer matches what the market is demanding. For workers who’ve been doing the same job for years, they’re likely to find that their extensive experience in their field isn’t worth all that much in other fields, so they basically have to start from square one all over again – which often means a significant pay cut. Of course, this is exactly why giving workers easy access to job retraining can be so valuable; the more quickly they’re able to get themselves up to speed in their new field, the more easily they’ll be able to maintain the quality of life they’re used to. But whether workers are able to succeed in retraining programs depends a lot on what kind of retraining is actually being offered and whether the workers are able to adapt and fit into the new jobs that they’re being trained for – and that’s not always an easy task if they don’t have the right background. So in light of the fact that every worker is different and every situation is different, another possible alternative to systematized job retraining is to simply adopt a policy of ensuring that every newly-unemployed worker will receive generous enough unemployment insurance payments that they’ll be able to make their own choices and pursue whatever path they think will be most rewarding for them in the end. In other words, rather than trying to put every unemployed worker through the same process and retrain them for jobs that may or may not actually suit them, it might be simpler and more efficient to take the funds that would have been spent on that retraining and just give them directly to the workers instead, so that they can either spend it on retraining if that’s what they prefer, or alternatively, put it toward something like getting a degree, or starting their own small business, or whatever else they think would be the best long-term investment for them given their specific circumstances. Similarly, another policy that might be helpful in this way would be to expand the Earned Income Tax Credit – rewarding workers with some extra financial cushion just for being able to secure any kind of job at all – so that once they do find new work, they’ll still be able to maintain a decent standard of living even if the new job doesn’t pay as much as their old one did. (This would also be useful as a kind of counterbalancing incentive to the unemployment benefits, since if those benefits were too open-ended, they might otherwise incentivize workers to remain unemployed for longer than necessary.) Likewise, making things like healthcare universally available – rather than having them be tied to people’s jobs – would go a long way toward making it easier and less stressful for people to change careers. And if all else fails, of course, there’s always the possibility of having the government step in and hire unemployed people directly, as a kind of last-resort stopgap employer for people who aren’t able to find any other way of making ends meet – so that even if they’re completely unable to find any other employer interested in making use of their labor, they can at least earn a living by contributing to public works projects that do some good in their communities. (This is the concept of countercyclical spending discussed earlier – or in its more ambitious form, a federal job guarantee.)

In short, there are a whole number of ways in which government can help take some of the sting out of the private sector’s creative destruction, by providing workers with enough provisional support between jobs to ensure that their period of unemployment is as short and painless as possible. Supporting workers in this way not only helps the market run more smoothly – by empowering workers to more quickly pick up necessary skills for new jobs, it can help it run more efficiently too. This in itself is reason enough to be in favor of it. But it’s not the only reason – and frankly, it’s not even the most important one. Up to this point, we’ve mostly been discussing all the things a government can do for its citizens in relatively pragmatic, utilitarian terms – all the economic benefits it can produce and so on – and to be sure, these are extremely important considerations. But in many cases, the biggest reason why a government should ensure that its people are taken care of is simply that they’re morally entitled to such treatment as human beings. Having the right to a fair living is a good example of this; if someone is willing and able to work, there’s no good reason why they should starve on the street because they can’t find a job. But it’s far from the only example – people’s basic human rights include plenty of others besides just the right to work – so it’s worth taking a moment to just give these rights their proper due and acknowledge their role in our broader discussion here.

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