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March 20, 2008


Pete Murphy

I think it's a misconception that our free trade policies are rooted in Reagan/Bush or in the Republican party in general.

You have to go all the way back to pre-Depression days. Until the Great Depression, America relied on tariffs to protect our domestic industry and to provide all federal revenue. (There was no federal income tax in those days.) As a result, the U.S. built itself into the preeminent industrial power in the world and the wealthiest nation on earth.

However, conditions following WWI - a global glut of capacity that had been built up during the war, the terms of the Versailles Treaty which impoverished post-war Germany, the stock market bubble and so on - produced the stock market crash of October, '29 and The Great Depression was underway. Then, in June of '30, the Smoot-Hawley Tariff Act was signed into law. Even though the Depression had already been underway for six months, and even though at the height of the Depression the decline in trade accounted for only 2% of the decline in GDP, free trade advocates saw an opening. Eager to try out an untested 115-year old economic theory known as "comparative advantage," they blamed The Great Depression on the Smoot-Hawley Tariff Act, which had raised tariffs only very slightly higher than the previous Fordney-McCumber Tariff Act of 1922.

For some reason, America's leaders bought into this tortured logic. America then lead a global effort to break down trade barriers and signed the Global Agreement on Tariffs and Trade in 1947. Since then, every administration has supported this organization, the predecessor of the World Trade Organization, and has supported its free trade agenda. By 1975 our trade surplus was gone, never to return. Since then, our cumulative trade deficit stands at nearly $9 trillion and America is nearly bankrupted.

The "principle of comparative advantage" was proposed by economist Ricardo in 1815. It states that every nation benefits when it trades what it makes best for products made best by other countries. It sounds reasonable but is actually fatally flawed. At that point in history, Ricardo could not imagine how population density could alter the equation. He could not foresee how a population density that has grown beyond an optimum level begins to erode per capita consumption. This happens because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (which always rises), inevitably yields rising unemployment and poverty.

This population density effect is actually imported when we attempt to engage in free trade with another nation that is much more densely populated. Our economies combine and become one. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets access to our healthy market, in return we receive access to a market that is emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of manufacturing jobs.

Our free trade policies won't be abandoned until economists acknowledge that the principle of comparative advantage upon which they are based is fatally flawed.

Pete Murphy
Author, "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America"

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