Max Sawicky's old blog, now manned by new faces, is apparently no longer specializing in passionately and unapologetically left-wing heterodox economics. Now they just spout random nonsense:
Econ bloggers have really missed the point about Landsburg’s free trade screed. The estimable Dani notwithstanding, the issue isn’t ultimately ethics or even procedural fairness. The problem is that doctrinaire economists understand less about trade than the average person with no academic training in the subject.Ordinary people in many parts of the world, and not just in the US, worry about trade because they are afraid that jobs lost to imports will not be counterbalanced by jobs gained through exports. They worry that there will be fewer economic opportunities for them and their children. They worry that their wages or working conditions will be pushed downward through competition with even more vulnerable, desperate workers in other countries. They are right to worry about these things. Such miseries are not destined to happen, but they cannot be ruled out either.
Except in standard economic models which begin with the assumption that increases in imports automatically call forth equally valued increases in exports. If trade balances on the margin we live in the happy world of comparative advantage, and it is indeed true, as Landsburg says, that “when American jobs are outsourced, Americans as a group are net winners.” But the assumption that trade balances at the margin is simply a modeling convenience, something that enables Landsburg to regale his students with blackboards full of elegant diagrams and equations. It is not grounded in real experience, and especially not the experience of the US economy since the 1970s.
You have to be very well trained in economics and have high-level skills to make such a brain-dead assumption and not even know you’ve made it. Then you don’t have to give serious consideration to counterarguments because, hey, why pay any attention to the fallacies of economic illiterates and mathphobes?
Ordinary people in many parts of the world worry about getting fatal diseases because witches have cast an evil spell on them. That doesn't invalidate the germ theory of disease. Notably, doctors using the germ theory of disease have produced far more cures than doctors attempting to chase out the bad spirits with an energetic series of bloodlettings. And economies with (classically) liberal rules about trade both among the citizenry, and with citizens of other countries, tend to be much, much nicer places to live than the economies that charge you $1,500 for the privilege of importing a laptop.
But we needen't resort to complicated economic theories to illustrate that Peter Dorman is speaking twaddle. His post strongly implies--without daring to actually say something quite so stupid--that if we liberalize trade, we'll end up buying more than we export.
There are three possibilities for what will happen if we liberalize trade:
1) We will sell more stuff to foreigners than they sell to us. Since we can't use all those funny banknotes, we will essentially be giving them free stuff.2) Over the long run, we will sell about as much stuff to foreigners as they sell to us.
3) Over the long run, foreigners will sell us more stuff than we sell to them. Since they can't use all those funny banknotes, they will essentially be giving us free stuff.
Situations numbers two and three are obviously preferable to the first--but the first is what mercantilists want. After all, then we've got more jobs than those nasty, nasty foreigners!
As I've pointed out elsewhere, worrying that "all the good jobs" will go to India is definitionally stupid. If that is really true, and all we make are stupid t-shirts that say "I'm spending my kid's inheritance", then we will have nothing worth selling to India, and they will stop trading with us.
Now, one could take him to be saying "ordinary people are worried that their particular job will go to India, and they themselves aren't well suited to do anything much else except flip burgers at Arbys". But that would hardly justify a rant against economists, since the problem of unequally distributed gains from trade is a bog-standard argument of conventional trade economics.
Update Yeah, I don't know what I was thinking either. Weirdness fixed.
You have totally distorted his words. Arby's does not sell burgers.
Arby's doesn't sell burgers, they sell a variety of roast beef sandwiches.
No wonder folks are worried... Arby's has laid off all their burger flippers.
Why wouldn't any Indians want T-shirts saying "I'm spending my kid's inheritance?"
I like #2 best, for it's a truism:
"Over the long run, we will sell about as much stuff to foreigners as they buy from us"
Altho #1 is fun, too, since it seems we'll be giving the foreigners an unadvertised 2-for-1 special:
"We will sell more stuff to foreigners than they buy from us. Since we can't use all those funny banknotes, we will essentially be giving them free stuff."
"There are three possibilities for what will happen if we liberalize trade:
1) We will sell more stuff to foreigners than they buy from us. Since we can't use all those funny banknotes, we will essentially be giving them free stuff.
2) Over the long run, we will sell about as much stuff to foreigners as they buy from us.
3) Over the long run, foreigners will sell us more stuff than we buy from them. Since they can't use all those funny banknotes, they will essentially be giving us free stuff."--MM
"Situations numbers two and three are obviously preferable to the first--but the first is what mercantilists want. After all, then we've got more jobs than those nasty, nasty foreigners!"--MM
Are you really arguing that Constructive Fraud is a positive feature of the fiat schema? Or, if I misunderstand, what's the point of the use of the phrase: "all those funny banknotes" ?
And, past that, to Sanjay's point, Indians(everyone) would like shirts like that..
This is a little disingenuous, or at least oversimplified: if we run a persistent trade deficit, foreigners will use those green pieces of paper to buy U.S. assets from us. We could go on to sketch the likely consequences, which in my view aren't too serious and don't likely result in the Chinese foreclosing on the Capitol, but the argument is a little more complicated that McArdle sets out here.
Foreigners buying assets in the US to cover our trade deficit is a special case of McArdle'c case 2 -- they're buying as much stuff from us as we are from them, but some of the stuff they're buying from us stays here physically.
There are actually useful examples of what happens to countries that run trade surpluses. Japan in the 1980s bought up all sorts of assets in the US and Europe with their yen, at rather high prices. The prices of those assets fell, and they were the first things sold when Japanese firms needed cash. These firms took massive baths on their "investments" though they likely did better than they would have by putting that money into the inflated Tokyo property market.
The US has been a master at using foreign funds to fuel investment bubbles and then buying them back at cents on the dollar once hard assets are created. Dot.coms, telegraphs, railways, and canals are but a few of the speculative bubbles that have drastically increased America's capital stock at the cost of foreign investors. Of course asking for any sort of literacy from populist or leftist economists is the least productive thing one can do with one's time.
I've always wondered about the "problem" of foreigners buying up land and buildings in the US. If they buy stuff that is here and that they can't readily move abroad, doesn't that mean that we could always take it back from them if they abused it? And we can still control how they use it?
Is this some esoteric economic concept, or is it a typo? How can you sell more stuff to someone than they buy from you?
Was #1 perhaps supposed to be "we will sell more stuff to foreigners than we buy from them" and #3 "over the long run, foreigners will sell us more stuff than they buy from us"? I.e. #1 is a trade surplus, #2 is balance and #3 is a deficit? That would make more sense...
Protectionists like Peter Dorman are not much better than Creationists. They might even be worse. How many times do economists have to explain to these people that trade is not a zero sum game--that both trading partners generally benefit from the trade?
As Megan argues, it isn't just a matter of elegant theoretical models--there is ample empirical proof that countries that trade freely do much better than countries that don't. There is also ample reason to believe that there is nothing inherently bad about trade deficits. If a country is borrowing from abroad to fund productive investment then those deficits are actually very good.
But, whatever the evidence, some people will refuse to believe that trade is mututally beneficial and that God didn't create the world in seven days.
"India" is a metaphor for any place with lower labor/production costs than the United States, in the context of what people worry about. I don't see how that fear is "definitionally stupid." The textile, manufacturing and IT industries would beg to differ with you. "All" the jobs may not go, but any number from "some" to "many" almost certainly will go as long as there is competitive advantage to be gained. That's simply how the capitalist free market system works. That's why I keep saying that this "correction" is inevitable; unless we want to go back to tariff wars and massive protectionism I don't see how we can prevent it. What we need to focus on instead is 1) cushioning the blow to domestic workers whose jobs get outsourced and 2) working to reduce the comparative advantage by RAISING the cost of labor overseas, not through tariffs and protectionism, but by whatever combination of other means (education, lifestyle, whatever) reduces the disparity in labor costs between the United States and those countries.
I'm not going to weigh in on the Landsburg/Dorman argument over "trade balancing at the margin." That's probably over my head. But it does seem intuitively true to me that comparative advantage in a free market environment inevitably leads to a race to the bottom in terms of production costs; that's one way you maximize profits, the other being raising prices (but in a competitive world there's a limit to how far you can go that way as well); and I think that's Dorman's point. Keep it real, economists.
rwe:
What is your basis for calling Dorman a protectionist, Moe.
Here's Dorman, from that very post, on what he thinks needs to be done:
"We should create rules for international trade that minimize downward pressure on wage, environmental and social standards and that limit dangerous imbalances."
How you get from there to "protectionists like Dorman" is a complete mystery.
EI:
Sure we could. And then who would ever buy anything here ever again? It would be nationalization in the same sense as nationalizing an oil production facility. I think we oppose that, in general...
"All" the jobs may not go, but any number from "some" to "many" almost certainly will go as long as there is competitive advantage to be gained.
Liberalrob points to the jobs that are destroyed by trade (in manufacturing for example), but ignores the jobds that are created (in services). Peter Dorman seems to think that persistent trade deficits mean that we are losing more jobs than we are creating. Thirty years ago the unemployment rate was 6.4%. Now it's 5%. So clearly there has been no net loss of jobs.
"But maybe there has been a decline in average living standards," one might object. Well, according to standard economic theory, trade allows for a more efficient allocation of resources, higher labor productivity and higher living standards. But a quick glance at the data shows that isn't true--real GDP per capita has almost doubled in the last 30 years.
So unemployment has dropped and average income has risen sharply. So what's the problem?
I'm not advocating nationalizing or siezing foreign assets as policy. I'm just pointing that if we ever ended up in a war with a nation that owned a bunch of real estate, we would just take it back. And in the meantime, whatever they use it for probably benefits us as well, especially if they spend money to improve it.
liberalrob wrote: "India" is a metaphor for any place with lower labor/production costs than the United States, in the context of what people worry about. I don't see how that fear is "definitionally stupid." The textile, manufacturing and IT industries would beg to differ with you. "All" the jobs may not go, but any number from "some" to "many" almost certainly will go as long as there is competitive advantage to be gained.
...and come, when there is a competitive advantage to be gained. Or did you not hear about how Toyota designed a full-size truck specifically for the US market, and then built a $1.3B facility to manufacture it about 120 miles southwest of ya?
And one does (with the caveat being keeping it in the near term of a decade or so; I believe no one is arguing that the average standard of living in 1978 was higher than it is now). The question that is always brought up by the left and dismissed by the right is "are those replacement jobs comparable in terms of income to the jobs that were lost?" All we ever get back is "look at GDP per capita and the employment percentage." Well whoopdee-doo, GDP per capita's effect on the average standard of living is disguised by the increased disparities of income between the highest and lowest, and the employment percentage disguises the answer to our very question, just what is the quality of those jobs we have more of?
See above. As far as theory goes, that's exactly Dorman's point in his post: things may look great in the theoretical world, especially if you make assumptions that help your theory look better; but when you try to apply your theories to real life it may not turn out to be such a pretty picture.
I'm not arguing for protectionism, and neither is Dorman (at least in that post). Far from it.
The improvement has benefitted the few at the expense of the many.
liberalrob,
"All" the jobs may not go, but any number from "some" to "many" almost certainly will go as long as there is competitive advantage to be gained.
Globalization and international trade has been growing for decades, but our unemployment rate is close to record lows and our standard of living has been constantly improving.
What we need to focus on instead is 1) cushioning the blow to domestic workers whose jobs get outsourced
Why do we "need" to focus on this? How big of a problem is it, and what are our obligations to address it? Did you read the Landsburg piece?
and 2) working to reduce the comparative advantage by RAISING the cost of labor overseas, not through tariffs and protectionism, but by whatever combination of other means (education, lifestyle, whatever) reduces the disparity in labor costs between the United States and those countries.
Hard to know what this is supposed to mean in policy terms. Trading with poor countries has been spectacularly successful at raising their living standards.
liberalrob,
And one does (with the caveat being keeping it in the near term of a decade or so;
Then one needs to educate onself.
Median Household Income, 2006 dollars
2006: $48,201
1996: $45,416
Source: U.S. Census Bureau.
And that's just income data. There is strong evidence that income data substantially understates the true increase in standard of living.
Of course, even if real incomes had declined over the past decade, attributing that to international trade rather than some other cause isn't justified without evidence.
squeak:
Yes, and Ford and GM are teetering on the verge of bankruptcy because of lost sales and ever-increasing labor costs. Are all those workers in Detroit supposed to move to Texas because that's where Toyota built their plant? What are they supposed to do? But that's a different argument we can have some other time
As far as the auto industry goes, this Toyota plant is being built here precisely because we raised holy hell about auto imports in the 1980's. We picketed and boycotted (symbolically) their dealerships, made jokes about rice-burners and basically shamed them into negotiating with us. I'm sure we also engaged in high-level talks with the Japanese automakers and cut them incentive deals to build factories here in the U.S.; I lived through this time, I remember it going on. There were strident calls for trade barriers on Japanese auto imports; the Big 3 wailed about how the Japanese would drive them out of business. In the end, the Japanese companies may drive them out of business anyway but it won't be because of cheaply-produced imports.
So we managed to salvage some aspects of the auto industry when it was threatened with "outsourcing" through foreign competition. The textile and steel industries haven't come back. Why do you think that is? The resources are still here; I don't think we ran out of iron deposits to mine, or cotton to harvest. So why haven't those industries returned?
It's because there is no comparative advantage to do so, because labor costs here are so high. And you can blame unions if you want, and in some sense you would be right to, but only because you put the bottom line of the company above the bottom lines of the workers; and that's the bottom line we should be arguing about.
Rob,
I'm unsure what you mean by "The improvement has benefitted the few at the expense of the many."
(Not being facetious, I'm confused)
If you compare the standard of living of the median member of the bottom quintile (in the US)in 1980 with the that of the equivalent person today, you will find that today is much, much better.
It is true that the top quintile has seen its income expand considerably more quickly, but that does not invalidate the impressive gains at all levels of income.
Is your main objection to the inegalitarian distribution of benefits? Or is there a specific group (or set of groups) you have in mind that have been harmed by free trade? Or do you mean something else?
Liberalrob,
I agree with you--at least to some extent. According to conventional economic theory, when a wealthy nation with abundant capital and skilled labor (like the US) lifts its trade barriers with a poor nation with abundant unskilled labor (like India), the unskilled workers in the richer country can find their wages falling. That follows from the Stolper-Samuelson Theorem
As you seem to agree, though, restricing trade is not a good solution to this problem, since that would harm both countries and would create more poverty in the long run.
So, contrary to what Landsburg says, trade adjustment assistance holds some appeal if it helps to build support for free trade. Job retraining programs also sound good, though the evidence I've seen indicates that these have not generally been very effective.
More important, though is improving the quality of public schools. Again, from what I've read, much of what gets blamed on trade is actually due to technological change. With or without trade, the rewards to unskilled labor in this country would be declining (relatively). The best way to address the problem would be to make sure poor kids get some skills.
Mix:
I suppose it depends on how you measure "standard of living." My first inclination would be to compare the increase in median income (which I still look sideways at; the upper end of the distribution has an inordinate effect on the median) to the increase in the CPI (156 in 1996, 201.6 in 2006, a 23% increase as compared to a 5.8% increase in the median income), though the CPI may not be a completely accurate indicator of "standard of living" and I'm not a statistician. There is at least strong anecdotal evidence that the impact of globalization on standard of living has been net negative. My feeling is we need to find some way to accommodate inevitable globalization while minimizing its negative impacts domestically.
And before you all scream at me let me clarify that I believe globalization may be a net negative DOMESTICALLY; I agree that net net it is positive. And inevitable.
liberalrob wrote: Yes, and Ford and GM are teetering on the verge of bankruptcy because of lost sales and ever-increasing labor costs. Are all those workers in Detroit supposed to move to Texas because that's where Toyota built their plant? What are they supposed to do?
Toyota doesn't have a monopoly? Crap, and I just loaded up on stock on that very presumption. Guess I better go dump it; I mean, competition can't possibly produce better products out of the competing manufacturers. The new Chevy Malibu getting all those awards was surly just a rigged mistake.
liberalrob wrote: And you can blame unions if you want, and in some sense you would be right to, but only because you put the bottom line of the company above the bottom lines of the workers; and that's the bottom line we should be arguing about.
Good grief, are you always on?
2) working to reduce the comparative advantage by RAISING the cost of labor overseas, not through tariffs and protectionism, but by whatever combination of other means (education, lifestyle, whatever) reduces the disparity in labor costs between the United States and those countries.
The simplest means to raise their standard of living (and wages) is to buy their products. At first it may seem like the profits are only going to the owners of companies but as their companies and economies grow, more people are hired. Eventually unemployment becomes low enough that the companies will have to compete with each other for workers and pay higher wages to attract labor. They do this not out of the goodness of their hearts, but in order to make more profits.
There is at least strong anecdotal evidence that the impact of globalization on standard of living has been net negative.
Anecdotes are not evidence.
Even the bottom fifth of households by income have seen an increase in real income over the past decade.
heedless:
My argument is that while that may be true, the standard of living of the median member of the uppermost percentile is much much much MUCH better today. Do we really want a society where the uppermost percentile enjoys such a disparate lifestyle? Do we really want an aristocracy again?
When you get right down to it, yes, that's it. The rising tide may have lifted all boats, but a few peoples' boats fared far better than most. Those on the Right choose to call this "envy," I call it "fairness."
The workers who get downsized, have their benefits cut, or are forced to relocate because of comparative advantage have been harmed by free trade. I don't see how you can deny it or explain it away with "well they can just get a service job" and just let the good times roll for the winners. Protectionism isn't the answer but something has to be done for these people, both in the short term (retraining and relief) and in the long term (trade policy and foreign development aid). I think it's only justice that those who have benefitted the most from globalization and free trade bear most (or at least some) of the cost of these transitional policies.
Sorry, I just love chatting with you guys (when you're not calling me names). I'll go home now.
I'm unfortunately rather an econoramus, to coin a phrase, so I can't really evaluate the Dorman quote. However, Matt Zeitlin has a post on the Landsburg op-ed that makes two pretty reasonable-seeming and pragmatic points- basically
a) "The philosophical one is that political economy doesn’t work with a vision of a prelapsarian “free market” whereby all cooperation is voluntary, all contracts are recognized and the government has only the barest, watchman like presence. Instead, as a democracy, we make collective decisions about our economy and markets. . . ."
and "The second argument against Landsburg is simply that trade adjustment assistance and other forms of compensation for the “losers” of trade are a political necessity if we want to continue trade liberalization and an open economy. "
The Dani Rodrick post Dorman so quickly dismisses sounds pretty good too.
More broadly - and again, maybe I'm missing something obvious - Landsburg's piece seems really kinda bizarre. For starters, how on earth are government-funded retraining programs "protectionism"? And why is Landsburg yelling that unemployed American workers who might desire such programs are "fundamentally churlish" and akin to bullies? After all,
a) such folks have lost their jobs due to international trade decisions made by our elected representatives; perhaps public policy in such instances perhaps shouldn't be based on the standards and morality of individualized, small-scale economic choices, especially when the individuals involved had so little input into the general practices of their industries?
b) Whatever the strength of their specific moral claims, many of these workers are in pretty bad economic straits. If one believes in even a somewhat limited role for gov't, arguably gov't should lend them a hand (and retraining programs would seem the definition of 'teach a man to fish' assistance). To do otherwise seems not just uncharitable to our fellow citizens, but inefficient. And especially in cases like Detroit, where the damage is to whole local or regional economies, it would seem all the more pressing, given the kind of social unraveling and general harm that can result under such stresses.
c) And as Zeitlin points out, if you support free trade, this is a rather bizarre way - esp, in a democracy - to go about it. I mean, we're talking (probably quite modest) retraining programs, and he's throwing a fit and screaming about bullies and such in a way that seems either intended to be offensive, or the product of limited social skills (ok . . .). It just comes across as an really odd and rather sneeringly nasty little piece. My non-economically-literate position (if one can glorify it as such) on free trade has generally been along the lines of: seems like there are lots of potential for at least short-term problems, but if carried out 'with a human face', sounds as it could be genuinely and widely beneficial. This sort of thing honestly makes the folks rather on my left start sounding a bit more convincing. (Crap, I sound like a concern troll. Damn, damn, damn.)
Now, if there are reasons why government-funded retraining programs might be a bad idea, I'd be happy to hear them (as well as any better ones). But if what we should expect when we're free trading is lots of jeering at churlish losers, it shouldn't be especially surprising if some of the folks for whom the benefits haven't been (or even don't seem to be) especially obvious, and the loses rather more so, end up even more supportive of genuine protectionism? Isn't this the kind of thing one wants confident optimism for, rather than risk-adverse anxiety?
It seems worth pointing out that global inequality has been decreasing in recent decades and that liberalization, especially trade liberalization, has been the main cause of that.
So those who would shut down trade in the name of fighting inequality or helping the world's poor are either knaves or fools. Free trade has been enormously important in lifting people out of poverty by the hundreds of millions.
Yes, I thought Rodrik's post was a reasonable response, and that Landsburg's "bully" analogy was a bit wobbly.
But Rodrik doesn't contest the point that free trade is on balance a very good thing, and that workers it displaces don't necessarily deserve compensation any more than workers displaced by technological advances or domestic competition. There may be pragmatic reasons to compensate them anyway, but that's a different issue.
"and that Landsburg's "bully" analogy was a bit wobbly.
The more I look at it, the wobblier it seems:
Landsberg: "Once again, that argument does not mesh with our everyday instincts. For many decades, schoolyard bullying has been a profitable occupation. All across America, bullies have built up skills so they can take advantage of that opportunity. If we toughen the rules to make bullying unprofitable, must we compensate the bullies?"
A good bit of the impact seems to derive from the fact that bullying itself is, well, a bad thing, not from any general underlying moral instincts (one could present a counter-analogy based on, perhaps, Kelo or some other takings-related issue?) Meanwhile, working for American companies is presumably not the moral equivalent of shaking down smaller, weaker children for lunch money - indeed, it's often been considered a matter of pride. It's just so pointlessly hostile and insulting - why?
" and that workers it displaces don't necessarily deserve compensation any more than workers displaced by technological advances or domestic competition. "
I dunno - Dodrick seems to address that with:
" Trade is controversial because it involves exchanges of the type we routinely block at home (e.g., exchanges that involve unfair labor or environmentally harmful practices). This often makes trade look different from other instances of redistribution."
Beyond that, I'd have to say that free trade agreements and such come across as coordinated, intentional action - again, on the part of our elected representatives - in the way that the existence of innovation or domestic competition don't (at least not necessarily, or in a far more dispersed way?).
I basically agree with rwe that 1. free trade with countries that have sharp income disparities with the US may hurt some US workers but 2. it's not clear what one can do about this, apart from 3. improving the quality of US public schools (and making the US more competitive for high-end jobs in other ways, like better standards-setting in mobile telecom to help us catch up to Europe and E Asia; relaxing non-productive copyright laws; improving transit infrastructure; and so on).
As rwe says, far and away the single greatest driver of rising labor costs in 3rd world countries is precisely trade with 1st world countries. Nothing we could do in terms of labor/environmental standards in free trade agreements would have an effect that even comes close to that of the hundreds of billions of dollars per year pouring into China, Vietnam, India etc. in raising wages there.
That said, such standards are a good idea on their own merits. Many, even most, Chinese are grateful to the US for imposing quality standards on Chinese goods which help out Chinese consumers as well. (This is in sharp contrast to broad Chinese resentment of US denunciations of human rights violations, for instance.)
In certain semi-monopolistic industries dominated by a few huge producers, it may be important for the US government to bully foreign governments that do an equal amount of bullying themselves, to keep the playing field even. For instance, US government efforts to pressure foreign government-influenced airlines to buy Boeing rather than Airbus.
Also, China needs to let the yuan rise. But not before I go there for the Olympics! :)
Life has never been perfectly "fair" under any economic system ever. But a relatively open/free system has the advantage that people who are efficient (produce a greater quantity of economic good than the general population) will be well rewarded. A person in the lower quintile can rise to a higher quintile with skill, intellect or luck. In a more socialist system, they would require a friend in government. To me, this is more "fair."
One other thing, and this doesn't really change anything but I would like to know anyway, is how many of the lowest quintile actually *stay* in the lowest quintile? What are the numbers for mobility among the quintiles?
Rodrik's first paragraph is:
The rest of his post is a caveat to this basic point, not a retraction of it.
Also, I don't think it's clear that Rodrik is endorsing the "unfair labor or environmentally harmful practices" objection rather than just pointing out that it is a common one. I think the objection makes sense only when applied to trade between nations of comparable wealth and development. You can't reasonably expect poor, developing nations to apply the same level of labor and environmental protection as rich ones.
Clarification: When I said "this is more fair" in my previous post I meant our fairly open/free system.
Also, in order to make the most of one's wealth (or rise up without falling immediately back down from what little you have) requires some financial literacy or at least adherence to conservative principles so you can build your own "freedom safety net" (secure enough to live a few months/years without a job) such as get a good education, live within your means, save for a rainy day in a trustworthy bank, pay off your debts as soon as you can, etc...
I don't see this as "unfair", although I would promote better education programs such as school choice.
You can't reasonably expect poor, developing nations to apply the same level of labor and environmental protection as rich ones.
No, but you can expect them to apply some. And you can help ensure that the laws they have on the books are actually enforced, by demanding inspections, establishing and monitoring corporate codes of conduct, etc. Companies like Nike that have established corporate codes of conduct for their suppliers in Vietnam have had a strong positive impact on how Vietnamese workers are treated on the factory floor -- not being forced to work more than 10 hours a day 6 days a week, for example.
Similar efforts on the environmental side would be a great idea. I haven't seen them yet.
The problem with Rodrik in my opinion is that his contentions are not that drastic. They are quite specific and very subtle. If I were Rodrik, any time I wrote about some concern with free trade, I would be as overtly obvious as possible in agreeing with the 90-95% of agreement I had with free traders before writing at length about specific concerns and considerations.
By not doing this, Rodrik lends his name to people whose policy ideas he would generally not condone.
That's the problem with being a Democratic-leaning economist...they really don't share an overwhelming amount of policy ideas and views with the base beyond some general "feeling".
No, but you can expect them to apply some.
Sure, we can reasonably expect them not to use child labor, for example. Our expectations should be commensurate with basic human rights and the level of wealth and development of the trading partner, and that means our trade agreements should evolve over time. But I have little sympathy with an American worker who claims to have been unfairly displaced through trade with China or India on the grounds that they don't have the labor and environmental protections typical of rich western nations.
I have little sympathy with an American worker who claims to have been unfairly displaced through trade with China or India on the grounds that they don't have the labor and environmental protections typical of rich western nations.
Why? Rodrik has a very strong point here:
Sure, you can't "expect" them to have such protections. But it seems unobjectionably true to argue that if China or India had US labor and environmental protections standards, their products would cost a hell of a lot more. We trade with them because, on balance, it's better for everyone. But it's not better for the guy who loses his job, and he would be correct to say that he was unfairly displaced by a worker (or, more likely, five workers) who doesn't play by the same rules he does.
Why?
I thought I had already explained it. Poor, developing nations don't have the money, infrastructure, technology or political/legal institutions to support the kind of labor and environmental protections that are typical in rich western nations. You just seemed to agree with this. For trade to be "fair," each country should be expected to follow standards commensurate with its level of wealth and development, not a single standard that only wealthy developed nations can reasonably meet.
But it's not better for the guy who loses his job,
And it's not better for him if he loses his job through technological advances or domestic competition either. That doesn't mean it was "unfair."
and he would be correct to say that he was unfairly displaced by a worker (or, more likely, five workers) who doesn't play by the same rules he does.
No, what is "unfair" is expecting all countries to "play by the same rules" of environmental and labor protection regardless of their ability to do so.
It's especially ironic for you to be making this "play by the same rules" argument, brooksfoe, since in other economic contexts you seem to reject this notion so strongly. Or do you now believe in, say, a flat tax rate regardless of income, and the end of means-testing for government benefits?
Mixner, it's one thing to say that life isn't fair and not everything that happens to you in life needs to be compensated for, and another thing to say that fairness itself does not exist. I don't think we should stop trading with poor nations. But I also don't think it's wrong to describe the competition between American workers and 3rd world workers as "unfair" along the dimensions of labor and environmental standards. Some people are born pretty, and others are born ugly. I don't think we should make everyone wear sacks over their faces to eliminate the disparity, but it doesn't mean it's fair.
The textile and steel industries haven't come back. Why do you think that is?
Because you confuse high cost labor with the industry? The U.S. steel industry is fine. Production is as high as it has ever been. Just because it isn't being made in Pittsburgh with overpaid union workers doesn't mean it isn't being made in the U.S.
brooksfoe: I think you are confusing absolute and comparative advantage. Cheaper labour gives China and absolute advantage, but that doesn't matter for trade becase long run trade must balance, as described above. China gains a comparative advantage in labour intensive products, so those jobs will flow overseas (and new jobs will be created to replace them. But I don't see why this is so bad. Plus trade increases porductivity in both countries and that can only increase wages in the long run.
rwe: One thing the Wikipedia article fails to mention about the Stolper-Samuelson theorem is that it is highly sensitive to the 2 x 2 x 2 assumption. That means if there are more than 2 countries, 2 goods and 2 factors of production then it is far from certain that Stolper-Samuelson holds. In fact the best way of sharing the gains from trade liberalisation is to liberalise trade in as many goods as possible at once. That meas the losses each person may suffer from lower wages will be balanced by the gains from cheaper goods.
James, I'm not really sure what you're saying. As trade barriers drop and low-wage countries enter industries where they weren't present before, US workers in those industries are displaced. There are often no jobs available for those US workers displaced at wage levels similar to their old ones. Overall, the trade deal is generally to the advantage of most people in both countries, but it's not to the advantage of the workers who were displaced -- not in the short term, and sometimes not within their working lifetimes.
For instance, the entire US shrimp boat fleet was idled from about 2001 because of competition from East Asian shrimp farming. That meant cheaper shrimp for Americans and more productivity in the food and restaurant industries, and benefited the country as a whole; but for a Louisiana shrimp boat captain with a high-school degree, it may be decades before he recovers the kind of livelihood he had in the early '90s, not to mention the capital losses associated with his now useless shrimp boat. And he's competing against Vietnamese shrimp farmers or fishermen who are allowed to use shoddy, dangerous equipment; feed and antibiotics that would be banned in the US (until US inspectors stepped in to protect consumers); and so forth.
There's no way to save that guy's job. Wages and other costs are so much lower in Vietnam that it'd be impossible for him to compete, no matter what; once the BTA went through and Vietnamese discovered the US market for shrimp, it was over. But it's still accurate to note that at least on the dimension of labor standards (hours, occupational safety etc.) and environmental laws, the competition is unfair. And while things will gradually even out as Vietnamese wages rise, it will be decades before those even reach current South Korean levels, let alone American ones. So that guy is never going back to shrimp fishing, and if he doesn't have the education to get a different well-paying job, he's a net loser here.
brooksfoe,
I can understand the need to provide retraining (or, God help us, better education) to your laid off American shrimper, but I see his situation somewhat different than you do.
Say he transitions to a job in the service sector that pays 30% less.
At the same time, the forces of trade that moved the shrimping industry overseas are working to reduce the costs of most everything he consumes. (inflation adjusted, anyway) So his nominal wage has gone down, but the effect on his purchasing power is close to a wash, and may even be positive. (I realize you may disagree on this point, but I'm pretty sure that the current economic literature backs me up. Doesn't mean they're necessarily correct, and Krugman has been making contrarian noises, but for the moment that is what the consensus says)
I won't deny that he would be better off if we protected his old job with a shrimp tarif and allowed the rest of the trade liberalization to continue, but that is simply favoritism. It can't be replicated across any significant portion of the economy without destroying all those gains from trade.
Another way of looking at it is that the cost of shrimp declines much more sharply than the shrimpers' wages. Replicate this across the economy and we're all better off.
The days of high payed (middle class) unskilled/low skill labor are over. Barring another world war, thats the reality we have to deal with.
How should we deal with it?
Megan,
You and other free-traders miss the point. In the US, we impose OSHA and EPA and a 1000 other smaller expenses on manufacturing firms, and send them out to compete with Turkey and Vietnam and China, and they get their asses kicked. The comparative advantages you speak of are all biased against the US.
Even with Europe, since the VAT drops off exports, our companies face a 30 percent disadvantage, which perhaps explains how the Euro moved so quickly to a 1.5 to 1 ratio with the US dollar.
Level the playing field, and I mean LEVEL the damned playing field, and comparative advantage for a huge chunk of manufacturing moves right back to the US.
"Arby's doesn't sell burgers, they sell a variety of roast beef* sandwiches."
*Widely belied to be recycled shopping bags with chemical flavorings.
There is at least strong anecdotal evidence that the impact of globalization on standard of living has been net negative.
There is also strong anecdotal evidence that evil spirits cause diseases, and that witches are responsible for disease and bad harvests.
But it's not better for the guy who loses his job, and he would be correct to say that he was unfairly displaced by a worker (or, more likely, five workers) who doesn't play by the same rules he does.
Undoubtedly true, but consider the converse benefit to the U.S. worker: he enjoys OSHA standards, etc. in his own work environment, while still being able to buy foreign goods which are cheaper because they're made by someone who doesn't enjoy those workplace protections.
brooksfoe,
But I also don't think it's wrong to describe the competition between American workers and 3rd world workers as "unfair" along the dimensions of labor and environmental standards. Some people are born pretty, and others are born ugly. I don't think we should make everyone wear sacks over their faces to eliminate the disparity, but it doesn't mean it's fair.
But you were defending the position that international trade is "unfair" in ways or degrees that justify compensating the allegedly disadvantaged party, not just in some broad sense in which we might say that life in general is unfair. Are we also obligated to compensate workers in California who lose their jobs when their employer relocates to Alabama to take advantage of the lower wages and reduced regulation in that state? How about all the workers who have lost their jobs due to the rise of the internet (travel agents, bank tellers, retail workers, etc.)?
James, I'm not really sure what you're saying. As trade barriers drop and low-wage countries enter industries where they weren't present before, US workers in those industries are displaced. There are often no jobs available for those US workers displaced at wage levels similar to their old ones.
How often? How big a problem is this? Again, after decades of growing globalization, our unemployment rate is close to record lows and our standard of living at record highs. If trade causes massive, rapid economic disruption to a particular region or community, then there may be strong case for some kind of government intervention, but not at the level of individual workers.
Of course, that's probably small consolation to the U.S. worker who manufactures a widget that can made more cheaply somewhere else -- but of course he can move to the service sector, where most jobs can't be outsourced. You can't flip burgers in New Dehli and serve them in New York -- nor can you support an ERP system, argue a case before a judge, or audit a corporation from another country, generally speaking. This is probably a major reason why we've evolved into a service economy.
"Undoubtedly true, but consider the converse benefit to the U.S. worker: he enjoys OSHA standards, etc. in his own work environment,"
Notnecessarily, if they're the U.S. worker brooksfoe is talking about: that person might not enjoy OSHA standards in their work environment because they're unemployed(thanks to competition from firms which didn't have to follow such standards).
"while still being able to buy foreign goods which are cheaper because they're made by someone who doesn't enjoy those workplace protections"
Of course, that doesn't help much if their income's dropped enough so that such goods are in fact proportionately as expensive, or more. And that's not including decreases in purchasing power vis-a-vis anything that isn't being made by sufficiently non-protected workers - college for their kids, say - and hasn't gotten as relatively cheap as such foreign-made goods (let alone gone up in price).
I think many people do not realize what is going on in China and other countries.
China may not have OSHA, but they do have regulations and rules that you usually have to follow. For example, electroplating permits are very hard to come by in China - its not the wild wild east exactly.
China just implemented new laws with minimum wages pensions that is increasing their costs.
Many western companies buying in China require social audits where they only buy from companies that comply with western standards (and yet China still is cheaper for many things despite what people on this message board claim.)
The yuan has risen from 8.2 to 7.2 to the dollar.
Land prices are skyrocketing in parts of China.
Chinese factories are moving to Vietnam - after only being in operation in China for 8 years! Yes, ancedotal, but its empirical fact that labor wages have increased substantially in China.
And I have no sympathy whatsoever for IT work being outsourced. IT people in the US had no compunction against creating the ATM, e-mail, Autocad, etc., which has destroyed more jobs than trade ever has.
Next time you use an ATM, remember you just outsourced a human's job to a ROBOT.
$1500 to import a laptop -- this is exactly the duty we had to pay when we sent my daughter a laptop in Brazil, where she is studying. It cost us essentially double the price!
" but of course he can move to the service sector, where most jobs can't be outsourced. You can't flip burgers in New Dehli and serve them in New York -- nor can you support an ERP system, argue a case before a judge, or audit a corporation from another country, generally speaking."
Indeed. Of course, (going back to the Landsburg piece) for all the folks who weren't working in manufacturing as a way to relax after getting their software engineering, legal, or accounting degrees (or didn't happen to earn them on the job), what this means is that they go from work that may have provided a (ever-decreasingly) middle-class income and still some relatively good benefits to flipping burgers or greeting shoppers (or similar low-wage, low/no benny work traditionally often filled by kids, etc.) And then get told that temporary gov't retraining assistance is some sort of moral atrocity, and if they desire it they're ugly little monsters.
that person might not enjoy OSHA standards in their work environment because they're unemployed
Apparently not very often, given our unemployment rate. Most people apparently get educated and take a higher-paying service-sector job, where they both enjoy American workplace standards and generally cannot be outsourced to another country.
Next time you use an ATM, remember you just outsourced a human's job to a ROBOT.
But it became easier and cheaper to bank, and we replaced low-paying bank teller jobs with higher-paying jobs for the people who design, program and maintain ATMs.
they go from work that may have provided a (ever-decreasingly) middle-class income and still some relatively good benefits to flipping burgers
If they're unmotivated, maybe. Hardworking car mechanics, for instance, can make $100,000/year in this country, can't be outsourced (would you ship your car to China to be repaired?), and don't even need a high school diploma.
Sure!
Are you aware how Detroit came to be a major city in the first place? People moved there from other parts of the country to take part in the economic boom caused by the auto industry.
It's also worth noting that in enough time, this will start hitting the upper-middle class. When developing countries develop more robust education systems and higher standards of living, educated people in the US will start seeing more and more competition from foreign skilled workers. This is already happening to a degree, but it takes a fair amount of infrastructure and investment to make it work at a larger scale. So, in time, unskilled workers will benefit because the costs of skilled worker labor will go down.
Of course, this increase in productivity will also cause a surge in demand for the ultra-skilled (or ultra-lucky, probably a combination of the two). The more companies there are, the more the #1 business law firm can charge, for one small example. Combine this with market anomalies (guild systems, local monopolies, unavailable information, etc.) and the creation of a small group of ultra-rich is likely inevitable.
"Next time you use an ATM, remember you just outsourced a human's job to a ROBOT."
So? If Luddites like you had had their way in 1812, you'd own just two outfits because hand-spun, woven, and sewn clothes would be extremely expensive. You'd walk to work - none of those machine-turned car parts for you... Except that most of us wouldn't exist, because our ancestors would have continued to die young of what are minor medical problems to us, but develop into something fatal under conditions of privation or when medical care is unaffordable.
I am not sure where the idea that real wages are way up. According to this link, not:
http://www.epi.org/content.cfm/bp195
Household wages are up because of a higher percentage of multiple wage earners.
Average wages are the bogus way to look at the issue. The average of Bill Gates and any of us is not particularly illustrative. Use median wages.
And even median wages do not tell the entire story. In terms of net worth I believe the lowest quintile is actually down. Mobility between quintiles is down. A recent comparison had our mobility lower than those quiche-eating French. Sorry, no links.
A significant amount of our immigration issues are are result of resentment over the other half of this issue: wage pressures due to imported labor. Those service jobs so glowingly described above can be filled with an undocumented worker willing to work for less. The Ron Paul fans I know are very much against the presence of undocumented workers in this county.
The shrimp boat captain cited above could have lost the ability to pay for health care and his children's educations. Job loss affects more than just wages, more than just one one person and can be more than just a short term phenomenon.
Here in Texas the tuition for state colleges and universities is soaring. The new roads being built are toll roads. These trends favor those who are already better off. Fairness is obviously a difficult issue to negotiate, but, like art, people know it when they see it. Political instability, while remote, is not exactly impossible. And it is entirely possible that a large number of very unhappy people might vote for someone you really do not like.
Separate enough Americans from the American dream and you might not like the results. I think it is both the practical and right thing to do to provide displaced workers with the wherewithal to find decent employment.
liberalrob,
I suppose it depends on how you measure "standard of living." My first inclination would be to compare the increase in median income (which I still look sideways at; the upper end of the distribution has an inordinate effect on the median)
Actually, the magnitude of the "upper end" has no impact on the median. Median means middle, not average. If there are, say, three people in the sample and the middle one made 40K, he's the median. The top guy could have made a million or a billion - no difference.
...to the increase in the CPI (156 in 1996, 201.6 in 2006, a 23% increase as compared to a 5.8% increase in the median income), though the CPI may not be a completely accurate indicator of "standard of living" and I'm not a statistician.
Yeah, we noticed.
Also, the median income figures quoted were both in constant 2006 dollars. That means the effects of inflation are already included. You don't get to double-dip to make your bogus point.
There is at least strong anecdotal evidence that the impact of globalization on standard of living has been net negative.
There is a lot of anecdotal "evidence" that the Earth has been visited by aliens in spaceships, too. There just isn't any real evidence. Economically illiterate leftists will tell each other fairy stories from now until doomsday, but reality is a stubborn thing.
My feeling is we need to find some way to accommodate inevitable globalization while minimizing its negative impacts domestically.
Gee, I don't know, maybe they could try going to school and learning something useful. Americans all get 13 years of free public education, then community colleges are cheap and 4-year colleges are subsidized. If you have failed to take advantage of any of that to the point where the best job you can get can be done just as well by an illiterate third-worl peasant, (1) how is that the "fault" of free trade, and (2) why should I feel sorry for you?