All economists know that when American jobs are outsourced, Americans as a group are net winners. What we lose through lower wages is more than offset by what we gain through lower prices. In other words, the winners can more than afford to compensate the losers. Does that mean they ought to? Does it create a moral mandate for the taxpayer-subsidized retraining programs proposed by Mr. McCain and Mr. Romney? Um, no. Even if you’ve just lost your job, there’s something fundamentally churlish about blaming the very phenomenon that’s elevated you above the subsistence level since the day you were born. If the world owes you compensation for enduring the downside of trade, what do you owe the world for enjoying the upside?
Dani Rodrik likely wants to remind us again of the Stopler-Samuelson theorem. And Paul Krugman might add:
What all this comes down to is that it’s no longer safe to assert, as we could a dozen years ago, that the effects of trade on income distribution in wealthy countries are fairly minor. There’s now a good case that they are quite big, and getting bigger.This doesn’t mean that I’m endorsing protectionism. It does mean that free-traders need better answers to the anxieties of those who are likely to end up on the losing side from globalisation.
Update: Dani also weighs in.
20 comments:
Oh brother, and now I am feeling sympathy for both McCain and Romney. It is not just the law that is an ass.
Barkley
It seems that all discussion can be reduced to one of two positions.
Economic policy X improves the wealth of the society in the aggregate and is thus a "good thing".
Economic policy X (may) improve the wealth of society in the aggregate but it creates local winners and losers. Ensuring that the losers don't lose too much is more important (or equally important) to the overall growth. If the policy can't deal with the losers than it should be discarded or revised.
There is a threshold as to how big the loser and winner population should be to have a veto power over the policy. Putting buggy whip makers out of work was not enough of a loss to stop the subsidization of the auto industry.
Putting tens of thousands of auto workers out of work to benefit a select few in the financial community is another thing. Currently the ex-auto workers are weighted as heavily as the buggy whip makers were.
Even those who think they are helping the losers don't really have any effective policies. Retraining for non-existent jobs, or short-term transition payments have proven inadequate. Are the economic forces so great that politicians can't craft solutions, or is lip service all that's required?
Robert - agreed. Even conservative David Altig raises the point that we never do seem to get around to serious compensation of the losers. And now we see another strand of conservatives trying to argue that we really should not even worry about that at all? The latter strand strikes me as quite odd.
PGL:
Let's grant that there are these two personality types. The issue is how do those who support compensating the losers get the needed support?
The usual appeals are to some versions of charity, fairness or altruism. These don't go over well when people are feeling the pinch themselves.
There needs to be some sort of economic argument as to why it is "better" not to have a displaced sector than doesn't depend on ethics.
If a strong argument could be made (backed by data) then even conservatives should favor it. Currently individualism and the myth of the self made man are the ruling philosophies.
When the plight of the few becomes the misery of the many there is likely to be some form of change, both economic and political. It's unfortunate that the nature of man being self serving and avaricious leads eventually to its own destruction. That is simply historical fact. When the few consider themselves to be more deserving than the many, the many will come around to taking some steps to insure that they regain their place at the table. If it's not done through the electoral process due to an imbalance of political control, it will occur in some more disturbing manner. It is simply a matter of human historical fact. How long any cycle takes is any one's guess, but hard times for the many is a preceding phenomenon. Let's hope that this country gets it's head back on straight some time soon.
PGL: is this quote from Landsberg or Mankiw? If there is no compensation, it's not even clear that aggregate happiness has increased. This is so even for the buggy-whip makers - which is supposed to be this big reductio ad absurdam for opponents of free trade. If the marginal utility of a dollar to the typical buggy-whip maker is much higher than the marginal utility of a dollar to the typical beneficiary of the automobile, then total happiness may well decline!
I keep reading through Landsburg's essay and can't quite put my finger on what it is that is so unsatisfactory about his argument. I'm not an economist so I don't come to the discussion with an ideological bias disguised as a theoretical perspective. I think my dissatisfaction is primarily with Landsburg's analogies, which he uses to support his rationale concerning the values to be obtained from the free market and how the resulting dislocations are insignificant, of no consequence.
Landsburg refers to price competition between retail businesses within a locality. He mentions the value of advancements in science and technology, the physician vs. grandma. He compares restaurants of potentially widely disparate qualities, and the difference in rental costs between apts. which must be either in very different locations or of very different configurations. What do any of his analogies have to do with cheap labor? They strike me as spurious, and intentionally so.
In each case the former provider is likely to find new and willing customers for the product spurned do to cost. Move out of Manhattan and your landlord will kiss your butt for the favor.
Cheap labor in one economic environment has little benefit to the participants of a different and competing economic environment. Cheap labor does not in any way enhance the quality or character of the product. In fact it seems likely that an economy that is willing to exploit its labor pool in the egregious manner we see happening today, will also be willing to find other means of reducing the cost of its products at the expense of its customers. Pet food comes to mind, as well as lead coated toys.
I suppose Landsburg has a point though. In a free economy each is free to exploit the other. China while not being part of the free world has certainly made strides in the free market. Carry his argument to its ultimate conclusion and we don't need bother with any other protections that we've grown used to. Who needs the police? They interfere with free market activities more often than not. It's all a matter of what one considers appropriate free market activity. I don't happen to think that wage exploitation is such a good idea, whether it occurs in Osh Kosh or Hanoi.
I keep reading through Landsburg's essay and can't quite put my finger on what it is that is so unsatisfactory about his argument.
Hand over all your money, quit your job and have none coming in, then listen to me lecturing you on how good you have it.
Actually Landsburg and Rodrik are right on this, even though they look at it differently.
The issue is not that there are loosers and winners from some policy changes. There are winners and loosers from retaining the status quo. Why am I not being compensated by the extra costs I have to pay due to the fact that US sugar industry enjoys trade protection? Why should I compensate the sugar industry at all if and when their tariffs and subsidies are removed?
(this is another way of saying that Kaldor-Hicks IS a legitimate criteria even when no compensation takes place - on this issue)
What matters is not whether there are loosers nor whether they're being compensated or not. What matters (possibly) is;
1. How income distribution changes. If the looser just happened to be Bill Gates would the 'ah but the compensation never takes place!' folks be clamoring that he get compensated? In fact this is a good example. Breaking up a monopoly creates winners (most of us) and loosers (Bill Gates) - why is there no compensation for ex-monopolists?
So the issue here is overall equality not compensation. The 'compensation never takes place' is a red herring.
2. As Dani Rodrik notes, procedural changes
procedural fairness, i meant.
Also, I don't see any denial of Stolper-Samuelson whatsoever. In fact, the inclusion of the phrase "the losers" in that sentence implies that the author is well aware of it.
YouNotSneaky is right. The real debate is whether the outcome from a globalised market is "fair" or not, it has nothing to do with winners and losers. And that "fair" has nothing to do with economics as Rodrik says. Redistribution (hey it is not even a four-letter word) can be kept off the table in a democracy only so long as the outcome is not too extreme.
What is it about this "pop-economics" and its over-reliance on phony analogies and specious reasoning?
I understand this sort of thing comes with the Op-Ed territory; though economic related topics are usually particularly egregious.
In what way do fables about "fairness" in the rental market, pharmacies or the restaurant business (all places of course where the state does impose many minimum standards) have anything to do with the trade-offs inherent to international trade? Is there really no other argument that is less insulting to my intelligence? Or would such an argument concede to much? The bully example or the equivalence made between legal coercion and extortion are too cute to even discuss.
As an aside, I have an army of K-street lobbyists that begs to differ about whether Bill Gates or sugar producers wouldn't be compensated for any financial harm they might encounter.
yns - In the hypothetical case where the removal of protection would raise income and reduce utility (if uncompensated) - so, say losers lose 200 and winners win 1000, and the MU of a dollar is 6 and 1, respectively - there is no way that those who gain from protection remaining in place can compensate those who lose. So the parallelism you suggest doesn't seem to hold. What am I missing?
Kevin,
Well, yes, that's the point behind the argument that free trade is better than protection. In the first case the winners CAN compensate the loosers, but not in the second. Since there's no "natural" state to start with (at least not on any standard grounds that I can think of) this makes free trade better than protection.
But insisting that this compensation actually MUST take place (which is where the parallel with other situations where there are winners and loosers) is just the tyranny of the status quo and cannot be justified on this principle alone.
And ok. So shouldn't the winners from protection compensate the loosers from it at least somewhat? To the extent they're able?
jack - free trade (and its contrary) is ideology. Can be seen not only in pol econ history but as part of more recent decades ago shift into neoliberalism.
The fact that the latter has been a demonstrable failure may explain the use of analogies to which you refer rather than the macro picture - national & global - where the evidence has been clear. The post-1973 downshift in growth rates, etc, is no more mystery than the theory driven apologias.
"the post-1973 downshift in growth rates, etc, is no more mystery than the theory driven apologias."
Well, no, it doesn't line up. The down shift in growth rates started in early to mid 70's. Neoliberalism didn't really make any inroads in terms of policies around the world at least until early to mid 80's. At least. So it's more likely that the growing support for neoliberalism was the RESULT and not the CAUSE of the growth slow down, as folks got dissatisfied with government-led development like import substitution and so on, and rightly or wrongly, blamed these for the slowdown. So here you probably got your causality reversed.
The second wave of neoliberal reforms came in the early 90's, partly associated with the fall of the Soviet Union and reforms in Eastern Europe. This probably gave spurr to similar reforms elsewhere. But this was followed by the end of the growth slow down and the return to pre-1973 growth rates in many places, basket cases like Russia aside. However, I would hesitate to put this favorable development wholly at the doorstep of neoliberal reforms. More likely other factors, like higher exogenous technological growth undoubtedly also played a role.
The Washington Consensus wasn't a failure. It wasn't the spectacular success that some of its advocates promised either. It probably increased growth in some places, and in others, where pursued blindly and without reference to existing situation it made the economies vulnerable (again, Russia). In most places it perhaps added a bit to the growth rate though nothing crazy.
The problem is that this debate gets so wrapped up in black and white ideology - those who want markets to always fail, and those who think that they're a panacea for any economic malaise - that people forget to look at the actual facts on the ground, be modest in their conclusions and draw reasonable inferences (of course there are exceptions)
Sneaky:
I usually try to stay away from criticizing people directly, regardless of what you think, but why would you say anything this stupid:
"The problem is that this debate gets so wrapped up in black and white ideology - those who want markets to always fail, and those who think that they're a panacea for any economic malaise"
Who wants markets to always fail? Even the most anti-capitalists recognize that markets are the only way for transactions to take place. At most they want them to be properly regulated.
We can dispute what "proper" means, but all markets are regulated, you can't just walk into your local store and take what you wish.
You don't do yourself (and your positions) any favors by making such ridiculous remarks. Try again.
robert f,
You usually refrain from attacking people directly? Ummm, ooooooook... let's leave that aside.
I think the comments on this blog (though not necessarily the posters) and several others are an example (and hey, you got no problem of basing your entire world view on an observation of 1) that in fact 'some people always want markets to fail'. Not in the sense that they wish bad things upon the folks in the real world, but in the sense that no matter what the actual outcome, they will always insist that if markets were involved than it must've been an unmitigated disaster, because, you know, markets are bad!
If you actually understood that, and still think it's a stupid observation then, well, so be it. I can't help thinking that you have a pretty weird definition of stupidity though.
And speaking of ridiculous:
"Even the most anti-capitalists recognize that markets are the only way for transactions to take place."
Even putting aside the numerous examples of anti-capitalists who do not think that at all, the point is that there's a lot of people who everytime you increase the role of markets will scream bloody murder just on (a bad) principle.
Tu Qouque
Which is a fancy way of saying you are pulling it out of somewhere and then blaming your opponent for the resultant mess.
Give us a couple of those numerous examples and hopefully some that we have even heard of (and no Karl Marx doesn't count in context). NotSneaky you have set up a whole series of anonymous strawmen and lit them on fire. Liberals and progressives don't object to markets, as RDF suggests how else would transactions get accomplished, what we object to is market failures. On the other hand your typical classical economist insists that despite all evidence that markets don't universally clear at the level the fully informed rational market participants would have it (bubble anyone?) that their theory is correct anyway. For a NotSneaky guy you try to get away with quite a bit via bluster, bullshit and denial.
(Unlike RDF I don't have much problem criticizing people directly)
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