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Making the Case for Globalization

Trapped in the Middle - WSJ.com

Source: Thomas Piketty and Emmanuel Saez, via Wall Street Journal

Mark Thoma reads Tyler Cowen:

Economist's View: "This Global Show Must Go On": Tyler Cowen on globalization:

This Global Show Must Go On, by Tyler Cowen, Economic View, NY Times: The last 20 years have brought the world more trade, more globalization and more economic growth than in any previous such period in history. ... More than 400 million Chinese climbed out of poverty between 1990 and 2004... India has become a rapidly growing economy, the middle class in Brazil and Mexico is flourishing, and recent successes of Ghana and Tanzania show that parts of Africa may be turning the corner as well.

Despite these enormous advances, however, there is a backlash against globalization... Ordinary people often question the benefits of international trade, and now many intellectuals are turning more skeptical.... The globalization process has had its bumps, of course, as reflected recently by rising commodity prices... Countries like China have become richer so fast that global production of energy and food have been unable to match the pace.... Trade advocates focus on the benefits of goods arriving from abroad, like luxury shoes from Italy or computer chips from Taiwan. But new ideas are the real prize. By 2010, China will have more Ph.D. scientists and engineers than the United States. These professionals are... are creators, whose ideas are likely to improve the lives of ordinary Americans, not just the business elites. ...

We urgently need new biotechnologies, a cure for AIDS and a cleaner energy infrastructure, to name just a few. Trade is part of the path toward achieving those ends. A wealthier China and India also mean higher potential rewards for Americans and others.... A product or idea that might have been marketed just to the United States and to Europe 20 years ago could be sold to billions more in the future....

Christian Broda and John Romalis... cheap imports from China have benefited the American poor disproportionately.... Despite all these gains, the prevailing intellectual tendency these days is to apologize for free trade. A common claim is that trade liberalization should proceed only if it is accompanied by new policies to retrain displaced workers or otherwise ameliorate the consequences of economic volatility. Yes, the benefits of a good safety net are well established, but globalization is not the primary source of trouble for most American workers....

What’s really happening is that many people, whether in the United States or abroad, are unduly suspicious about economic relations with foreigners. These complaints stem from basic human nature.... One approach is to appease these sentiments by backing away from trade just a bit, or by managing it, so as to limit the backlash.... It is wrong to play down the costs of globalization, but the reality is that we’ve been playing down its benefits for a long time. Politicians already pander to Americans’ suspicion of foreigners. There is no need for the rest of us to jump on this bandwagon. Instead, we need more awareness of the cosmopolitan benefits of trade and the often hidden — but no less real — gains for ordinary Americans....

Mark comments:

I agree on the benefits from trade. But I... [believe] the net impact on the welfare of middle and lower income households... is more negative than Tyler indicates... I am more convinced than he is that maintaining political support for increased openness will require that the gains from trade and technological change be shared more equitably, and that economic risk be dispersed... through... enhanced social insurance.

We can, as Tyler is doing, try to convince people they are wrong.... But I don't think they are going to be convinced by the Wal-Mart argument. Over the longer run... education... fix health care, and... "bad banking practices"... structural issues... but that will take time.... [Now] we also need to listen to what people are telling us and address their concerns, and they do not believe that the economy as it is currently functioning is working for them. Telling people they just don't understand how much trade benefits them is just as likely to produce a negative backlash as it is to convince people that their views are wrong.

But if their views are wrong, we are under an obligation to try to convince them that their views are wrong--that globalization is at most a bit player in the rise in inequality within the United States, if it is in fact true that it is at most a bit player. Tyler has three arguments that this is the case. First, the biggest benefits of globalization for the world as a whole come from bringing more minds up to speed at the technology research frontier and thus from faster global economic growth--something that is not a driver of increasing inequality in the world economy's post-industrial core but instead an all-boats-lifting rising tide. Second, that the distributional impact of globalization for the world as a whole is positive, not negative--it is poor people in China, India, Indonesia, and Mexico who gain the most. Third, that there is something wrong with the Stolper-Samuelson intuition--which Dani Rodrik put best, somewhere I cannot now find--that freeing up trade must create losers and that trade can have big benefits only if it creates big losers.

Let me pass over the first two (as I don't have anything terribly original to say right now) and focus on the third, which I have thought about before: http://www.j-bradford-delong.net/2008_pdf/20080530_stolper. Let me summarize:

In the neoclassical Heckscher-Ohlin-Vanek framework, freeing up trade is good for owners of "abundant" factors of production in the trading country and bad for owners of "scarce" factors. The efficiency gains from trade--the increase in the size of the pie--goes roughly with the square of the differences in factor proportions between countries, but the redistributive gains and losses go roughly linearly with the differences in factor productions. Thus for freeing up trade to be bad for the greater part of the citizens in the country, two things must all be true:

  • The bulk of the people must have little "ownership" of the abundant factors which reap the gains from freeing up trade--their income must depend overwhelmingly on the returns to the "scarce" factors of production.
  • The differences in factor proportions that generate the possibility of gains from trade must be small in order to make efficiency gains small relative to redistributional shifts.

The argument as applied to the United States cannot be that differences in factor proportions are small: differences in capital-labor ratios across the U.S. in China are on the order of 20-to-1. So the argument must be that the abundant factors of production are things like capital, organization, and technology, which have concentrated ownership. The scarce factor of production is labor. Hence free trade will be bad for the majority of voters because their incomes depend only on returns to the "scarce" factor--and those returns will drop with free trade. This goes against the likelihood that the trully scarce factors of production tend to be, well, scarce. and so not many potential voters will own a lot of them.

But in actual fact to argue that the incomes and living standards of the bulk of Americans depend on the real wages of raw labor and of raw labor alone seems to me to be equally implausible. A very large number of factors give Americans a substantial stake in the returns to--a degree of "ownership" of--the "scarce" factors. First there is the government, which is the property of all but which raises its money by disproportionately taxing the incomes of the "scarce" factors (for that is, after all, where the money is). Second, there are all the degree of formal and informal cross-ownership institutions like labor rent sharing, efficiency wages, local monopolies, and other deviations from perfect competition that give all stakeholders rather than formal equity owners alone a share in the value of the capital, the technology, and the organization: we are all stakeholders in Wal-Mart, if only through the pressure its competition exerts on other businesses' prices.

I suspect that we are, right now, seeing the peak of anti-globalization economic agitation in the United States. The fall in the real value of the dollar against European currencies and its coming real value fall against Asian currencies mean that export and import-competing sectors are likely to be expanding their employment rapidly over the next several years. It would be a pity if a look back deranged our policy going forward, especially if it is because trade is perceived to be a problem by politicians even though it has ceased to be perceived as a problem by voters.