Talking Trade with Some Dudes
Tonight I had the wonderful opportunity to see three of the greatest living economists speak. The event was practically a showcase for the MIT economics department, as speakers Robert Solow, Jagdish Bhagwati, and Paul Krugman all spent much of their careers teaching there. The topic of the evening was “Coping with Globalization”. *
I don’t have the drive to summarize the whole event, and I doubt you all care anyway. I do want to convey a nice example that Dr. Solow brought up, because he used it to isolate the basic, perfectly legitimate problem that we have with trade. The example was a copper miner in Arizona who awoke to learn that vast copper deposits had been discovered in Indonesia. The copper miner would probably admit that this discovery made the world better off, and probably even made America better off, but he’d know for sure that it made him worse off. Switch copper with low-skill labor, and you have the problem with globalization in the US.
So far, so good. Solow’s is the standard parable economists use for trade: the gains are spread out (they accrue to anyone who’s not low-skill labor) and the losses are concentrated. The textbook rejoinder is that since trade makes the economic pie larger, the winners could compensate the losers such that everyone benefitted. Economists call this change a “Kaldor-Hicks improvement“.
People who have studied economics might be more familiar with the term “Pareto improvement” — a change which makes at least one person better off without making any others worse off. Pareto improvements are unambiguously good, practically by definition. But free trade without recompensation is not Pareto improving! Since it is Kaldor-Hicks improving, and this condition does not actually require that losers be compensated for their losses, free trade is not unambiguously good.
Solow noted that this appeal to ex post compensation rings a bit hollow given what has happened to the welfare state over the past few decades. Can we really be so gung ho about free trade when this compensation fails to materialize? Solow wasn’t so sure, and Krugman agreed with him. Bhagwati admitted that the welfare state ought to be doing more helping out, but questioned whether trade caused such a definite downward pressure on the wages of the unskilled.
I am not so sure where I stand. I value equality, and I think that the richer you are, the less better off an additional dollar makes you. My utilitarian analysis says that the country is worse off if the richest 10% gain $10,000 a year and the poorest 10% lose $5,000 a year. If the distribution of the gains from free trade looks like that, then any expansion of free trade would give me pause. **
According to the Stolper-Samuelson theorem, moving to free trade in a capital intensive country (e.g. the US) will tend to benefit capital and harm workers, although in a Kaldor-Hicks improving way. If we take this theorem as any guide, then alongside tariff reductions we would do well to expand our social support network, perhaps by increasing the Earned Income Tax Credit, providing universal healthcare, or improving public schools. Free trade on its own is good for some people and bad for others. With the right policies, we can make it good for nearly everyone.
** The situation is not so simple because the gains may go the opposite way for the trading partner
April 13th, 2006 at 3:04 pm
I may be influenced by a sort of crude bitterness that comes out of countries much poorer than the US, but one might take your last equality argument past the 50 states and find another policy indication, specifically that free trade is an equality-improver.
The unskilled worker in the united states is highly educated in comparison to the average third world person who will will take his job. The opportunities and capacities he has to find other work are far higher and themselves act as a cushion to his fall.
From a Rawlsian persective, I would say that the American factory worker is not our highest priority. I believe AS (Amartya Sen, not the author of this blog) would tend to agree with me. What is deplorable about poverty is not being capable of living a life you have reason to value, ie. a life where you won’t die prematurely, where you have access to education, health care and healthy food, potable water, etc. and where you can make independent decisions concerning your life. There is poverty in the United States by this definition, but the numbers of poor and the severity of poverty pale in comparison even with a well-off African nation like Senegal.
The brunt of this opinion is simple: is it not blindly egotistical to oppose free trade because you want to protect the poor?
April 14th, 2006 at 8:02 pm
I think in conjunction with Borjas-Katz (which Krugman relies on a lot), it is definitely worthwhile to check out David Card’s work over at Berkeley.
January 12th, 2008 at 1:45 am
Thanks your post is stunning.
I like your diary..
See ya