Re trade divide: economists taking note

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Just days after The invisible hand posted on the free trade divide, the conservative and influential Harvard economist Gregory Mankiw published on the subject in the New York Times, arguing essentially that:

  • All economists from Adam Smith to his own Harvard freshmen know that free trade is a no-brain win for all constituencies
  • Stupid Americans don’t understand free trade benefits because they prefer Lou Dobbs to economic literature
  • McCain is a sensible free-trade candidate while Democratic anti-trade rhetoric is pandering to aforementioned stupid Americans

The article is worth a read if you’re craving a healthy dose of:

  1. Elitism: Mankiw even refers to a caricature of working class Americans as “Joe Sixpack”
  2. Authoritative hand waving: within three paragraphs, Mankiw equates free trade with “greater overall prosperity”

It turns out that if blue collar workers did prefer economics literature, they would surely find some fuel for the anti-trade flame, although you’d never know it from glib public experts like Mankiw. Dani Rodrik, another very powerful Harvard economist has raised a flag. Rodrik argues that establishment economists’ public enthusiasm for trade ignores the nuanced economic literature and empirical evidence that show real disadvantages for some constituencies.

Professor Dean Baker’s recent trade paper provides an excellent and accessible review of existing studies. Specifically, we learn that American blue-collar workers have lost between $1,000 and $2,900 in yearly salary to free trade. Trade may be a large reason that blue collar wages have not kept pace with inflation for the past thirty years, despite high economic growth.

Of course there have also been winners from trade (note: this post treats costs and benefits in America, leaving important benefits to workers in developing countries for another discussion): specifically white collar workers and the owners of capital (rich people) have benefited. These are the “haves and the have-mores,” whom Bush famously addressed: “Some people call you the elite. I call you my base.” Mankiw has served as a top Bush adviser. As a consequence, Mankiw’s idea of “greater overall prosperity” may mean something different than it does for “Joe Sixpack.”

Ironically, this entire discussion supports a fundamental postulate of market ideologues like Mankiw: people act in their own self interest. Perhaps the majority of Americans are against free trade not because they are incapable of a lesson taught to Harvard freshman, but because it is against their self-interest. Perhaps some public economists ignore the disadvantages and nuances of empirical work on trade because of their position in society.

Personally, I tend to favor free trade, although I’m learning that there are many questions. We must challenge Mankiw and other econ 101 ideology. Most of all, economists need to speak up about mixed empirical evidence for the unfettered market fervor that has swept elite policy debate over the past twenty years.

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3 Responses to “Re trade divide: economists taking note”

  1. Santi Says:

    I must say I disagree with your interpretation of the Baker paper. I find there are three points worth discussing:

    1. The supposed “loss” of wages: Even if your real wages dropped by $1,000/year in trade, it is likely that externalities (e.g., better education, low-crime, higher life expectancy) make up for most of it. So even if you lost a bit (and I am sure we can make that bit positive or negative based on how we define “real” and the underlying CPI to calculate it), odds are, you are better overall.

    2. Notice that Baker mentions that we need more trade – not less. Currently, trade is a compilation of relatively free movement of goods, and unskilled labor. We are missing is a revolution that would allow qualified, and skilled professionals to move freely. The US remains very protective of its skilled labor market, limiting entry at the rate of 65,000 ppl/year (by comparison, the H2 visa for ag workers has no cap).

    3. Let’s also agree on the frame of reference. It may well be that the US worker loses $1,000 (though, per above, I am not sure). But, if at the same time we elevate countries out of poverty, then I am willing to pay the price.

  2. Sam Says:

    Santi, the purpose of the post was to explain the free trade divide (gap between economists and public opinion) and question Mankiw’s blaket statements published in NYT. You are correct that I did not present a full summary of the Baker Paper, which is composed of two arguments:

    a) Trade liberalization in manufacturing has reduced prevailing wages for low-skilled jobs in America by $1,000 to $2,900, broadly affecting working and middle classes. It is implied, although not empirically shown, that the decrease in wages is not offset by cheaper consumption opportunities of manufactured goods (Walmart effect).

    b) Liberalization has not occurred for white collar industries (accountants, lawyers, doctors). Liberalization in these sectors would be both efficient and redistributive, unlike the manufacturing liberalization, which is at best just efficient. However, white collar workers (which includes economists) have more political clout, and have been able to block liberalization.

    Obviously, I focused on the first argument, as I was not intending to summarize the Baker paper. Now on to your points of disagreement:

    1. How has trade liberalization in manufacturing improved education, crime rates, or life expectancy? Your argument hinges on the idea that people are better off than they were before, but we are trying to explain why most Americans are against trade, not whether they are better off (which they probably aren’t given that wages have NOT kept pace with inflation).

    2. I agree that Baker argues for a certain kind of liberalization–allowing more skilled workers to immigrate, compete and reduce white collar wages. However this liberalization has not been emphasized, and prospects don’t look good in medium or long term. Do you think this is an agenda item in American political debate? I do not. When people say they are against free trade, they are talking mostly about manufacturing.

    3. The effects on developing countries is an entirely different question. Again, the post intends to explain the free trade divide and challenge Mankiw’s blanket statements published in NYT.

    Have I misunderstood your disagreements?

  3. The olive branch « The Invisible Hand, in your pants Says:

    […] The Free Market has taken a bit of a beating at the hands of Sam. A jab here. A knee to the groin here. Eye gouging here. Kicking while down […]

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