Alex Tabarrok nails the problem with Dani Rodrik's post on why people oppose globalization. Rodrik says:
Suppose that I am an experimental psychologist instead of an economist and the person Harvard hires in my place is someone who has accumulated a long vita by virtue of not having to abide by human subjects review standards. (You can find out a lot about human behavior through torture.) Would I not feel treated unfairly? You bet I would.The international trade counterpart of this hypothetical is the worker who loses his job because his company decides to move to a country where, say, labor rights are routinely violated. So the "us" and "them" characterization that Tyler attributes to irrational nativism perhaps has more to do with the absence of a common set of international rules on labor standards, environment, consumer safety, and so on.
By overlooking the problems created by trade in instances where regulatory arbitrage does play an important role, we miss the opportunity to celebrate the kind of globalization where such arbitrage doesn't play a role. The latter type of trade probably constitutes the bulk of world trade. But because economists do not make this important distinction, they have no language or ability with which they can respond appropriately to the uneasiness out there--except for calling it irrational.
Alex responds:
Rodrik has a very Ivory-tower view of what people care about. Rodrik may be upset that people in other countries have poor on-the-job safety but (for the most part) workers who lose their jobs to foreigners really don't give a damn. What U.S. workers are upset about is losing their job and if asked to name the problem the U.S. worker will almost certainly say it's the low wages of foreigners not their poor working conditions. Moreover, the worker's diagnosis of the problem (problem to him or her that is) is correct and Rodrik's diagnosis is wrong. Why? Because higher safety standards in foreign countries would cause foreign wages to fall and thus would not much reduce competition from abroad, which is what the worker cares about. I assume that Rodrik knows this even if the worker does not.Rodrik's deeper argument is also peculiar, especially for a liberal economist. A liberal economist should understand that for the most part labor, environmental and consumer safety standards are chosen not imposed (not always, of course, but for the most part in the long run). In the United States we have a lot of job safety because we are wealthy and are willing to pay for job safety with a reduction in our (already high) wages. In other words, Americans buy a lot of on-the-job safety for the same reasons we buy a lot of smoke alarms and DVD players. (OSHA has very little effect on job safety.) Job-safety is thus a choice Americans make about what to consume - we use some of our wealth to buy safety both at home and at work and some of our wealth to buy DVD players. Thus, to argue that we shouldn't trade with foreigners because they don't have the same job safety as Americans makes about as much sense as arguing that we shouldn't trade with foreigners because foreigners don't buy as many DVD players as Americans.
It is a vast, and pervasive, cognitive mistake to assume that people who agree with you (or disagree) do so on the same criteria that you care about. I have flirted with the idea that the World Bank should be abolished. But if so, I want it abolished because its institutional ossification has made it incapable of carrying out its mission, not because I believe, along with a certain class of right-wing extremists, that it is some sort of tool for the vast global conspiracy to destroy America. As Tyler points out, Americans were just as paranoid about Japanese competition. The problem is competition from foreigners, not embeddedness in an unfair system. Moreover, paranoia about globalization is growing, even though labor and environmental standards are getting better in most of those countries.
It is true that many people, especially labor unions, adopt the language of unfairness. But at least in my experience, they are more likely to complain about low wages than lack of union representation or local pollution. If the foreign workers got unions, OSHA, and stricter environmental standards, but wages fell to keep their work product competitive, how many people complaining about globalization would stop? Indeed, in the Rust Belt one does hear a fair amount of muttering about unfair competition from Alabama.
By overlooking the problems created by trade in instances where regulatory arbitrage does play an important role, ...
Like unilateral adoption of carbon credits/taxes would create?
If the US does adopt such a scheme, should we impose tarrifs equivalent to carbon costs on goods from countries that don't? (I'm looking at you India and China.)
"even though labor and environmental standards are getting better in most of those countries."
MM,
the next time you start cooing about iPhones, why not include some vids of the Manufacturing facilities in which they're made..and some general backgroud vids of the Environmental condition of the People's Rebuplic of China??
also, OT, this vid is worth watching:
http://www.youtube.com/watch?v=pLYrSfnsqb0
"If the foreign workers got unions, OSHA, and stricter environmental standards, but wages fell to keep their work product competitive, how many people complaining about globalization would stop?"
If foreign workers got unions, it's unlikely their wages would fall. The cost would be passed on to the consumer.
True Tel, but the point she was making is that the motivation of a lot of people who are anti-globalization isn't the welfare of the foreign workers; it's that they're sapping jobs from America. Equalizing the costs but changing the expenditures is a mind game to figure out what the motivation is, not a theory of what would actually happen.
"why not include some vids of the Manufacturing facilities in which they're made..and some general backgroud vids of the Environmental condition of the People's Rebuplic of China??"
I agree that working conditions should be better in China. When I lived in the region in the 1990s, I was shocked at how often dozens or even hundreds of workers would die in factory fires in China, because owners had padlocked most of the plant exits to prevent workers from stealing the inventory.
And the number of times that we heard about this was even more shocking, given that the news media was only allowed to cover such deaths if the factory was foreign owned. Once a mainland-Chinese-owned fireworks factory blew up and the explosion was so loud that it was heard across the border in Hong Kong (and perhaps even Macau). The authorities denied that anything had happened for several days but finally had to admit that there had been an 'incident' at a Chinese-owned factory, since so many outsiders had heard it.
But even so, Megan is right that conditions will get better as they become wealthier, and if business costs are forced up artificially, there may not be any development at all. When I lived in the region, I was surprised at the vehemence with which Asians denounced the anti-sweatshop movements by rich foreigners. They knew that the main effect of such movements would be more poverty and less safety in poor countries.
"If foreign workers got unions, it's unlikely their wages would fall. The cost would be passed on to the consumer."
And the consumer wouldn't be able to afford the higher costs, and there'd be fewer jobs. Unions form a power group to take a greater share at the expense of others, but until someone creates the wealth, there's just not much to take.
"If foreign workers got unions, it's unlikely their wages would fall. The cost would be passed on to the consumer."
And the consumer would balk, and the worker would be unemployed.
This commenter, like Rodrik, like most liberals, are arguing hypothetical versus actual choices. This remain the best antidotes to that type of thinking on this issue:
http://www.slate.com/id/1918
It's hard to believe Krugman was ever that good.
Alex makes several claims without backing them up.
... people in other countries have poor on-the-job safety but (for the most part) workers who lose their jobs to foreigners really don't give a damn.
No evidence is given to support this claim.
... higher safety standards in foreign countries would cause foreign wages to fall and thus would not much reduce competition from abroad
No evidence is given to support this claim, either.
What if a coordinated set of international safety standards were introduced (gradually, of course)?
Economic predictions aren't nearly as easy as they are sometimes portrayed to be. But the apalling working conditions in many parts of the world are simply unacceptable.
Gradualism is the last refuge of the anti-economic liberal.
- If we raised the minimum wage to $100/hour, of course that would be a disaster. But a $2/hour raise won't be any problem at all.
- If we put high tariff barriers around our country, the global economy (including ours) would surely suffer. But a tariff here or there is just fine.
- Soviet-style central planning would strangle any economy. A major expansion of regulatory power, however, will do wonders. De-regulation? Why that's crazy talk.
And why is it that people who argue contrary to economic logic demand that basing their argument on economic logic have the burden of proof?
that *persons* basing...
"Economic logic" means reasoning based on an economic model or models. The trouble is that the conclusions depend on the appropriateness of the model. And that's not always easy to determine. Even when models are quite good they're still just approximations (unless they're part of a computer simulation).
The essence of science is testing your models empirically. Until you do that, all the logic in the world doesn't get you anywhere.
Gradualism is the last refuge of the anti-economic liberal.
This is a strange statement since neo-classical economics is based precisely on "gradualism," that is, one examines effects at the margin.
Hodak's implied logic -- a big change is bad, therefore so is a small one -- would run, for instance, exactly against basing price changes on the idea of elsaticity.
From Bastiat's Economic Sophisms
"What if a coordinated set of international safety standards were introduced (gradually, of course)?"
They would raise costs and slow economic activity. Many countries might be priced out of the market completely, since their poor physical, legal and political infrastructure already leads to high costs. And so the people would go back to starving.
Why do you think that the countries are so poor to begin with? Because things are so messed up there that there's little incentive for foreign (or local) companies to create jobs. Would work safety standards somehow fix the political, legal or economic systems themselves? Some (but not enough) of these countries are finally starting to struggle out of the pit they're in, and you want to slap them back down again (but gradually, of course).
"But the apalling working conditions in many parts of the world are simply unacceptable."
And what about their housing? Shouldn't we impose rules that no one is allowed to live inside any structure unless it conforms to US safety and construction codes (and built by people paid US union wages)? That way much of the world could be homeless and you could be proud that they no longer have substandard housing.
Let them eat cake!
Gene,
I would never confuse "gradualism" with "marginalism." The point I was making wasn't about gradual changes in markets, but about increasing governmental constraints on markets.
Ann (and Bastiat) got it right.
BTW Nick, I completely agree with your characterization of economic models. I'm not saying that arguments that violate assumptions of price elasticity and product substitution are always wrong. I'm just saying that people making them have the burden of proof, not classical economists like Alex. (Rodrik, by the way, is the ultimate ivory tower intellectual who depends more on pure logic than evidence in making his claims that second-best is better.)
This is a strange statement since neo-classical economics is based precisely on "gradualism," that is, one examines effects at the margin.
Wow!!! This totally astounded me. Let me explain.
A few years ago, I got bogged down trying to explain, to a complete idiot, the difference between the *economic* principle that the marginal unit determines the observed economic variables (marginalism), and the concept of inferring conclusions from gradual modifications of cases where the answers are uncontroversial.
No matter how many times I explained this to him, he could not comprehend a single word I said, and accused me of "rejecting economics" when I tried to make the kinds of points M._Hodak is making.
I honestly believed that he was the only person capable of not distinguishing the two concepts. Then Gene came along.
Come on, Gene, is it that hard to understand?
"But even so, Megan is right that conditions will get better as they become wealthier, and if business costs are forced up artificially, there may not be any development at all."
Why is it that business costs can be forced up artificially, but the idea that they could possibly be held down artificially is liberal naivete? It is absurd.
Government suppression of information to labor, while it allows information to flow to industrialists, is government suppression of labor remuneration. Withholding information about safety from the labor force is a very effective means of reducing labor costs. You can easily lie to workers about the safety you provide for them, you can't easily lie about their pay. Governments like China which suppress the free flow of information artificially suppress labor costs in this way. Trade with China essentially acts as an incentive to suppress the free flow of information.
Now I doubt most American workers will bother to think of it like this. What they know is that foreign workers are being exploited, and it is costing them jobs. That they immediately think of wages is not that surprising.
It isn't that foreign workers are not buying safety and DVDs, it is that foreign workers are not allowed to know about safety, or even what their own labor is worth. Foreign workers are not allowed to make informed decisions, because information is illegal. If foreign labor were allowed to make informed decisions, I'm sure they would still undercut American labor to some degree, and work under more hazardous conditions, but not as egregiously as they do now. I'm sure American workers would still complain, but that's just human nature.
Letting workers in third world countries make informed decisions would improve working conditions and pay and cause less job loss here. True, it would certainly reduce growth in those countries, but only to the degree that workers in those countries desire it to be so.
The very thin US safety net has a lot to do with opposition to trade. Protectionism is a loss for the economy, but for someone who stands to lose livelihood and medical care, with not much prospect of replacing either, paying more for consumer goods appears to be a reasonable insurance cost.
Strengthen middle class security and opposition to free trade will decline.
"Government suppression of information to labor, while it allows information to flow to industrialists, is government suppression of labor remuneration."
You're saying that China allows the free flow of information to 'industrialists' within its borders? Most Party members don't even have free access to information within China. It has nothing to do specifically with worker's rights, as opposed to basic human rights.
When asked "What if a coordinated set of international safety standards were introduced (gradually, of course)?" Ann replies:
They would raise costs and slow economic activity.
I agree that prices would likely rise. We currently obtain a wide range of products from poorer countries at incredibly low cost in part because of terrible working conditions. The "race to the bottom" is spurred on by what is euphemistically termed "globalization", but may be more usefully characterized as trade and financial structures that form part of the neoliberal program.
We can choose to change these structures in favor of human dignity.
"We can choose to change these structures in favor of human dignity."
Where do you get this stuff? How much dignity is there in starvation? Calling this a "race to the bottom" implies that these countries had decent standards before. People in poor countries dream of working for the US-owned 'sweatshops', since they generally pay more and do a better job of taking care of workers than do locally-owned plants.
Doesn't dignity include being given a chance to build a future, to support one's children and work towards a better life for them? That's what you're trying to take away from them, in the name of 'protecting' them.
Perhaps your confusion is because you've simply never thought about what these countries are like and what is holding them back. Many, many countries have low wages yet can't attract foreign factories, because the other costs of doing business are too high. Those other costs are, after all, the most likely reason why wages are so low - there's no competition to hire workers in many countries because it's not profitable due to rampant corruption, bad infrastructure or perhaps antiquated, highly restrictive labor laws.
For example, a company could probably hire workers in Zimbabwe in exchange for a loaf of bread a day, with no safety regulations at all, yet how many companies do you think are planning to set up operations there?
Ann, for some discussion of the "race to the bottom" see this article (pdf) by Anita Chan of the Australian National University: A “Race To the Bottom”: Globalisation and China’s labour standards. Here's an excerpt:
Granted, factors other than the cost of labour, such as political stability, play a role in these economies. But the pressure to undercut the competition is inescapable."You're saying that China allows the free flow of information to 'industrialists' within its borders? Most Party members don't even have free access to information within China. It has nothing to do specifically with worker's rights, as opposed to basic human rights."
Posted by Ann | June 12, 2008 7:12 PM
Major industrialists in China tend to be party leaders and high ranking generals, not merely party members. While they don't have free access to information, they have much more of it than the workers they employ. The oppressive society is good for them, despite denying them some freedoms.
Haven't we been here before, Njorl? With Japan, with Taiwan, with Korea? Each time we heard the same complaints of exploited workers that we couldn't possibly compete with. Yet, in each of those countries the "exploitation" has resulted in tremendous increases in standard of living and creation of wealth. Globalization has done well by those countries; they are fortunate that the do-gooders didn't manage to mess it up. It's possible that China is different, but the weight of history (not to mention the explosion of Chinese consumption recently) is against it.
"Haven't we been here before, Njorl? With Japan, with Taiwan, with Korea? Each time we heard the same complaints of exploited workers that we couldn't possibly compete with."
For Japan, you are entirely wrong. People complained that the Japanese workers accepted wages that were too low, not that they were exploited, though I'm sure there were isolated examples who complained in ignorance. In later years, American workers complained about government subsidies to Japanese industries. For Taiwan and Korea, the exploitation was significantly less than what goes on in China. Also, their current success does not excuse previous exploitation. They could have given their workers more rights earlier and still grown robustly, as the example of Japan shows. Exploitation is not necessary for economic growth. Lower wages are pretty much a certainty, but those low wages should not be exacerbated by oppression.
Nick Barrowman -
Geographically, Mexico is located closer than any other low-wage country to one of the most open markets in the world. If they can't keep up with China when it comes to exporting to the US, it's because of serious structural problems, not because they're paying their workers too much or providing them with slightly higher safety standards than those in China.
Your example shows just how valuable and positive globalization is. Mexico has trapped its people in poverty for generations because it couldn't be bothered to modernize. Now, because of competition from China, it's finally paying attention to what it should be doing.
If your (or Ms. Chan's) description is correct and Mexico is messing even this up by thinking that they can get ahead by cutting wages as opposed to reducing corruption, then the global markets will show them how wrong they are, and eventually they'll get it right.
The fact that a severely mismanaged country is trying to use globalization as an excuse to adopt new forms of mismanagement doesn't prove your point that globalization is bad, it proves my point that these countries need to be pressured to modernize their legal, political, economic and financial systems. And globalization will provide that pressure, even if the countries initially screw up and do foolish things.