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Free Trade vs the American Worker

March 9, 2016

Libertarians and economic conservatives, from Rand Paul to Art Laffer, are thorough “free traders.” That attitude has a long intellectual history going as far back as Adam Smith’s Wealth of Nations (1776) and David Ricardo’s On the Principles of Political Economy and Taxation (1817).

Trade agreements that have transferred American industrial wealth to other countries where products can be manufactured more cheaply are now a hot political issue in the American presidential election of 2016.

Donald Trump has tapped into anger about loss of jobs in manufacturing and presents the Republican party with a crisis of faith.

How can we reconcile the need for productive employment of American workers and the GOP’s traditional commitment to free trade?

The answer may be found in a little known aspect of the Jobs Act of 2012. Title III of that act calls for relief from restrictions on investments first placed on Americans by the U.S. Securities and Exchange Acts of 1933 and 1934.  Those acts segregated the American people into two economic classes: accredited and non-accredited.

For more than eighty years, non-accredited investors, defined today as persons with assets of less than one million dollars, may not invest in non-registered securities. In other words, you may buy stocks and bonds, real estate and collectibles, but you many not purchase a security that has not been registered with the SEC which regulates publicly traded securities.

The Jobs Act of 2012 was designed to break down this segregation of Americans into two economic classes by permitting “crowdfunding.” Selling non-registered securities–stocks in local companies primarily–to ordinary Americans (the “crowd”) was, finally, made legal.  At least that was the intent of Congress.

Unfortunately, the U.S. Securities and Exchange Commission has not followed up on what it was directed by Congress to achieve and has delayed promulgation of “crowdfunding” regulations.

Here’s how this matters: If on the one hand Republicans advocate free trade and on the other hand American manufacturing can’t compete and workers lose their jobs, the American worker is the loser.

Calling for tariffs, one of Donald Trump’s campaign pledges, will only make the cost of manufactured products more expensive. All those gadgets and large items like automobiles that we buy that are made in Mexico, China, Vietnam, Cambodia and other low wage countries will suddenly increase in cost.

What is the solution, if there is one?

The answer is to free up our capital markets and make it possible for entrepreneurs to finance new companies. Under current conditions, only “accredited” investors–millionaires–may invest in non-registered securities.  And even they, since the banking crisis of 2008, have withdrawn from making “high risk” investments.

For the past seven years “risk capital” has dried up.

Freeing up that capital can only be accomplished by permitting the “crowd” to take risks by investing in entrepreneurs who need financing to build new companies.

The United States is an enormous country with a population of more than 330 million persons of which at least 2% would like to start their own businesses. Business startups require very little financing–at most $100,000–to get off the ground, demonstrate there is a market, and then seek financing of greater amounts.

Unfortunately, the SEC has chosen to forbid that. Here’s why. Crowdfunding the Jobs Act of 2012 and the SEC

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