Arriving in New York for a lecture tour early in 1921, Albert Einstein found a trade debate as emotional as today's. The World War I peace agreements had revived transatlantic trade -- and, with a demobilization and brutal recession cutting factory payrolls by nearly one-quarter, had given President Warren G. Harding the chills. Fearing for America's "industrial eminence," Harding argued in his Inaugural address that high U.S. wages meant American factories could not meet low-wage European and Asian competition without new tariffs.

A puzzled Einstein disagreed. He believed high wages made Americans respond to competitive challenges through continuous technical innovations, new assembly processes, and substitution of automated production for human workers. All helped make the country innovative and successful. He summed up his view with an aphorism, translated in brief above and more precisely as "once the machine is sufficiently developed, it becomes cheaper in the end than the cheapest labor."

Introduction: The Anxious Worker

Nearly a century later, American workers are anxious again and with good reason. Between the end of 2000 and the middle of 2003, with the U.S. in recession and the Chinese industrial boom accelerating, American factories shed 3 million workers -- more than one-sixth of the American manufacturing workforce. Since then, despite the return of growth and low unemployment, they have added no workers back.

The shift of 3 million men and women out of factory work would be traumatic at any time. It is even more so with the Internet -- using dozens of newly launched communications satellites and a million miles of freshly-laid fiber-optic cable steadily turning services businesses once only tangentially involved in the global economy not only into global exporters, but also into competitors with the new knowledge economies of India, the Philippines, and other nations.

This experience, of course, is not unique to the United States. All countries must grapple with the rise of new economic powers and the intrusions of the Internet. But the stress may be more acute here than in Europe and Japan, because there are more extensive national safety nets in those countries. Dislocated German, Swedish, or Japanese workers need not fear loss of health insurance or pension guarantees. Nor, with extensive access to free universities, need their families fear losing the chance to send a teenager to college. In some European countries, larger and differently focused trade union movements bolster government programs with extensive unemployment benefits and job training and placement services.

Americans have no national health care system, no wage insurance, no pension guarantees beyond Social Security, and only modest supports for college. Thus the loss of a job in the United States can be a fall from a cliff. Living standards can suddenly drop, health insurance can go, and 401(k) contributions can end. A family may be forced to send a high-school graduate to work rather than school. So, even with unemployment rates low by historical standards, and several years of strong economic growth, the American public has ample reason for anxiety.

In such an environment, it should not be surprising to see Harding's ideas return to fashion.

Newly elected Ohio Sen. Sherrod Brown (D) warns of the mass "movement of U.S. industries and U.S. jobs to low-wage countries;" while CNN journalist Lou Dobbs talks about the "destruction of America's manufacturing base;" and long-shot Republican presidential candidate Rep. Duncan Hunter (R-Calif.) echoes both. Intellectuals like William Greider and Jeff Faux back them up with gloomy books and statistics. All agree that the United States is "deindustrializing" as its businesses face impossible competition from large, low-cost countries. They suggest essentially the same remedy -- trade restrictions of various kinds to ease competition -- that Harding and his successors, Presidents Calvin Coolidge and Herbert Hoover, convinced the America of the 1920s to adopt. The only difference is that while the trade skeptics of that era were business-minded conservatives, most of their modern heirs tilt left.

Like Harding then, populists now get the diagnosis wrong, and suggest medicines that will make it worse. A closer look finds that the United States is not losing its industrial eminence today any more than it was in 1921 To the contrary, American factories are proving Einstein right and Harding wrong once again. As they adopt new technologies to save costs, their productivity is rising, their exports are soaring, and their share of world manufacturing remains strong. Trade restriction would damage rather than help them, by raising input costs and depriving them of overseas markets -- just as America's housing boom fades and the need for export markets is greatest.

But though populists are wrong about the cause of contemporary worker anxiety, they are often right about the symptoms. American industry is evolving very quickly, and its very success is eroding old sources of security for workers -- not only job security, but the confidence of families in their own health insurance and pensions, and their children's college prospects. The resulting anxiety is well-founded, and requires a systematic response -- through radical change in public policy, the trade union movement, and the postwar social contract.

We need to address these anxieties with public policies. But those policies must be grounded in an accurate diagnosis of the problem that is causing them -- and policies based on misdiagnoses are more likely to make the problem worse than to fix it.