Monday, June 06, 2005

Unintended Economic Consequences

Sugar farmers aren't happy about CAFTA, the proprosed free trade agreement. However, if there is anything we've learned in history. Free trade, while it produces losers, it produces far more winners.
I am a big fan of those sci-fi movies where characters go back in time. Usually the idea is to go to the past and undo some error or kill someone evil to avoid a catastrophe of some kind. The main character will either kill Hitler to avoid Nazism, advise the Czar about the coming revolution to avoid Communism or break up the Bee Gees to avoid disco.

A small change appears insignificant but it can alter the chain of future events. Does the benefit outweigh the detriment that often results from the change? Or should we always fear upsetting the balance of history.

This relates to the economic law of unintended consequences. It is a law busy-bodies ignore all the time. Busy-bodies use government's coercive powers to tinker with the free market expecting marvelous results for the every man. Employees would have happier, more secure jobs. Industries would be able to employ more Americans. The rich can pay just a little bit more for luxuries and extra government revenues can assist the poor.

However, each of these changes to employment laws, trade relations and tax laws are impediments to the free market. They intrude on the voluntary decisions of consumers or coerce people to do that which they would prefer not doing. And the unintended consequences of their actions are often much worse than the problem or crisis being corrected.
Today, we see the sugar tariff proponents looking to save jobs in Florida and Louisiana where the sugar beets are farmed. If CAFTA is not passed, all of us will continue to pay double what sugar from Central America would cost, This looks like small change when spread out among all consumers. However, let's remember how back in 1990 the Brachs Candy employees lost their jobs in Chicago. In “Does International Trade Kill American Jobs?” Douglas Irwin writes in The American Enterprise Magazine:

In 1990, Brachs Candy Company announced that due to the high domestic price of sugar it would close a factory in Chicago that employed 3,000 workers and expand production instead in Canada—which does not artificially inflate the price of sugar to protect its sugar producers. In 1988, the Department of Commerce estimated that the high price of domestic sugar due to U.S. protectionism cost almost 9,000 jobs in food manufacturing because of increased imports of cheaper sugar-containing products, and 3,000 jobs in the sugar-refining industry because of lower demand for sugar. At the time of this study, U.S. sugar-producing farms employed about 35,000 workers—but the sugar-processing and sugar-using sectors employed about 708,000 workers! A great many workers in the sugar-using industries were put at risk, in other words, to save the jobs of the few workers in the sugar-producing industry.

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