Wednesday, May 09, 2007

Why I Hate Economists: Postscript

Kevin Drum links to Dani Rodrik, who points out the well-understood but generally little-known fact that even in a world where there was zero tariffs, the economic benefit to the United States would be small -- 0.1% of GDP according to his figures. This is something that I've heard plenty of critical economists say before -- James Galbraith was practically shouting it from the rooftops for a while -- but it deserves to be said, over and over: the benefits of "globalization", while real, are also small. Certainly, there's any number of policies we could pursue that would add a marginal 0.1% of GDP every year. Hell, rapidly increasing gasoline mileage might do it. A policy of not freaking out about inflation at the Bank of Canada would definitely do it. Calming down about debt reduction could do it. We have options, is my point. And we've always had options.

But of course, that's not how this programme was sold to the public. Thatcher's mantra from the outset was, in fact, "there is no alternative." Reagan and Mulroney said pretty much the same, and Chretien/Martin made it in to a spending-cutting fetish. We had to pursue a programme of layoffs, deindustrialization, and union-busting (not to mention social program cuts) here in North America because it was the only way. And if it was the only way, then we didn't need to waste a lot of time on empathy for the people that got trampled. So instead of extending a helping hand, we did the opposite -- cutting what welfare programs existed in Canada and increasing the ranks of the homeless. Yay for us.

We could have done things a different way sine the mid-1970s. We didn't, fine. And a lot of the transition has been unquestionably good, no doubt. A world in which India and China have a better chance of getting, being, and staying rich is a world I want to live in. But the column by Alan Blinder that made me so angry has very little to do with any of that, and really has to do with a very simple question: who do we help when global trade threatens their livelihood? For Alan Blinder, the answer is: professionals, who already make up the wealthiest half of society and are best prepared to survive without any help whatsoever. The correct answer -- the humane answer -- I think is exactly the opposite: you help the people who can't help themselves: the poor, the working class, and the people who's lives didn't prepare them for the kind of new jobs they'd have to learn.

After decades of us refusing to help those in dire need, Blinder wants us to turn around and rush to the aid of people who don't need it, but who are pretty certain to get it because they're far more influential than the people who deserve it. It's basically the ugly class division of North American society laid bare.


Fag Fucker said...

A couple of things regarding the 0.1% figure. Rodrik takes it from a 2005 paper by Anderson et al: Market and Welfare Implications of Doha Reform Scenarios. I would not take this 0.1% figure as at all indicative of what the general or historical gains from liberalized trade are.

First, it’s talking about gains from the Doha round only. It does not calculate the benefits from historical gains. Future gains for the United States will understandably be smaller since much of the low hanging fruit have already been picked. Tariff levels have already been reduced precipitously over the decades. Further, U.S. gains are not at all representative and will generally be lower than smaller countries as they tend to be more dependent on foreign markets. Anderson et al’s figures show the gains for smaller countries and developing countries in particular will be much higher. Indeed, under key messages from their analysis the author’s first point is: “The potential gains from further global trade reform are large.” (p. 34)

Additionally, the analysis only deals with the merchandise trade. This is understandable since trade in services is very hard to model. However, nearly 80% of the U.S. economy is in services. Anderson et al cite evidence that “gains from services reform could well be enormous” (p. 11). Not only that, but their results do not include factor productivity gains which would increase benefits substantially. Consequently, they state that the figures they produce should be taken as “very much lower bound estimates” (p. 33).

As it stands the bulk of the evidence indicates that the gains from liberalization are large. There are real questions over possible specification error and the accuracy of the CGE models used to produce the results. But, they seem pretty robust in IMHO, and more importantly, to a lot of heavy-hitting economists. I agree wholeheartedly that concerns regarding job losses and equity are huge and can’t be waved away. These are the real issues for me. But the aggregate gains results are hard to ignore, though they may be overstated. A few recent comments by Paul Krugman and Brad DeLong come somewhat close to how I feel on the issue.

As for politicians “selling” us on free trade, I don’t dispute that some of them were unscrupulous or had ulterior motives. But, I don’t doubt that many of them believed that there were real gains from trade. There was a large and influential study by Harris and Cox (1984) stating that unilateral tariff reduction by Canada would lead to gains of 4 to 8% of GDP. It had a big impact on the Mulroney government. Furthermore, the argument that trade reforms are needed just to keep up with global competitors is at least reasonable. I think many if not most of the people making those arguments believed them. They thought that the stagnation and inevitable restructuring from uncompetitive industries would be worse in the long run.

I’m reminded a bit of Milton Friedman arguing forcefully against any minimum wage whatsoever. It probably seemed callous to some, but he was really concerned that wage floors created unemployment for the poorest strata especially minorities: “we regard the minimum wage law as one of the most, if not the most, anti-black laws on the statute books.” I don’t agree but I don’t think Milton’s a bad guy. Alan Blinder may be a big fucking hypocrite though.

john said...

First of all: Apologies, I ran this post off on my way out the door so it's poorly written. Of course, the difference between autarky/closed-economies and liberalized ones is an important and large one. Rather, the argument that I was making/attributing was that, at the time people began talking about
"free trade/globalization", we'd already been working at this stuff (through GATT) for decades, so by the 1988 "free trade election" tariff levels between the US and Canada were already, what, 1-3%?

I would say the Harris and Cox paper you mention is almost the exact opposite of Blinder's "30-40 million jobs off-shored to India" paper. One side is writing about the cornucopia of free trade, the other is writing about the horror of job loss. But in neither case are we going to see that kind of extreme result. (The vast majority of jobs that are outsourceable will not, in fact, be outsourced.)

Additionally, the Cox and Harris paper sort of proves my other point: instead of 8% growth, the FTA and NAFTA coincided with an anti-inflation zealotry at the Bank of Canada that quashed any of the growth those treaties were supposed to lead to. Free trade doesn't happen in isolation, and it's benefits can be swamped by far more important aspects of the economy.