Living Economics

When cheaper imported garments and steel threaten the jobs of U.S. workers, the adversely affected U.S. companies and their workers are not shy about asking the U.S. government for protection or trade adjustment compensation. And they usually get most of what they lobby for. But if Coke lost market share to Pepsi and asked the government for protection, Coke would be laughed out of the court. The reason is quite simple: if every loser in the marketplace is compensated, normal market competition would be stifled. Why then are the garment and steel industries compensated when other losing industries are not?

Losers are generally compensated when they can demonstrate that their rights have been violated. When consumers gradually change their preference from one brand of products to another competing brand, workers and shareholders of the losing brand usually adjust over time to their changing fortune. They wouldn't think of asking for compensation to make up for their lost market share. But if the loss happens overnight or if the adjustment process is artificially delayed, the losers somehow think that they deserve assistance or compensation.

What are the source of these presumed rights?

A sudden change of fortune somehow confers a right for sympathy. Thus, few people object to disaster relief. This compensation is much like an informal kind of community accident insurance.

Exclusive membership somehow also confers a right for special treatment. If U.S. companies are threatened by foreign competition, they have a right to be protected against the outsiders.

But these presumed rights would not have mattered as much if the loss is gradual and the adjustment process is not artificially delayed. When adjustment is artificially delayed, an unjustified expectation for benefits is created and factored into decision making. The longer the delay lasts, the greater is the buildup of unjustified expectations and distorted decision making. For example, an initially small protection might create vested interests in further delaying adjustment. The vested interests would grow stronger if the protected business is sold at a price that factored in the windfall resulting from the protection. Once the windfall is factored into the sale price, what was once a windfall then becomes part of the cost of the new owner. The new owner would not make a profit unless he gets more protection in the threatened business.

Presumed rights are of course powerless unless they are legally enforced. Here the presumed right holders carry most weight if their representatives are in the swing vote states in an evenly divided U.S. Congress or if the incumbent U.S. President has to depend on these swing vote states for reelection. For example, the much diminished U.S. steel industry happens to be located in swing states -- West Virginia, Pennsylvania, Ohio -- that President George W. Bush strategists deem critical to his reelection. That is why the U.S. steel industry might get more protection and financial assistance from the Bush administration.