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Economists Just Don’t Understand!

May 16th, 2007 · 8 Comments

Mark Thoma has posted a imaginary dialog between a moderate pro-trade economist and a worker negatively affected by globalization. One segment of the exchange covers the familiar suggestion that, since trade creates more net winners than losers, it should be possible to compensate the losers with a portion of the winners’ gains—and equally familiar riposte that we tend not to actually get around to doing this so much. And Thoma concedes that this ends up being the case because the loss side of the ledger ends up being awfully diffuse, and narrowly targeted aid to specific sectors is politically easier to swing than a general beefing-up of the safety net for low-skilled workers.

Here’s a modest proposal, then: Let’s permit whatever restrictions on trade and globalization people like, but with the “winners” under those rules compensating the “losers” via some sort of special targeted tax. We’ll levy this on the workers and stockholders enriched by whatever form of protection from international competition they want to demand, and cut a check to workers, stockholders, and consumers in other sectors that would have benefited from lower prices or operating costs as a function of trade and outsourcing, in the amount of whatever the benefit to them would have been of less restricted trade. (We won’t even insist on their compensating the third world workers who remain in penury for the deprivation of their new higher salaries.) This is, if anything, far more intuitively fair than the reverse proposal, since the “winners” here are the ones proposing to impose actual legal restrictions on the freedom of the “losers” to interact in global markets.

This is, of course, crazy on several levels—most obviously that even if we’re limiting the compensation to domestic parties, the “winners” here are probably getting less benefit from the restrictions than they pay out in compensation. But additionally, even if this ended up being a wash, it presumably strikes people as perverse to redistribute from middle- and lower-middle-class workers to (among others) their already-affluent bosses.

Maybe it is, but if that’s the central objection, I think it underscores the extent to which trade and globalization are red herrings in… well… the debate about trade and globalization. The key thing to bear in mind here is that there’s nothing morally special about the level of globalization in 2007 or 1990 or 1970 as some kind of special baseline. We talk about “winners” and “losers” relative to some status quo ante where there happened to be a different level and pattern of globalization, but the point of comparison is—from the point of view of justice, if not realpolitik—arbitrary. Which is why compensations from the “winners” to “losers” under protectionism makes as much sense—probably more—than the parallel sort of compensation as globalization increases. The only reason to think otherwise is to suppose we’re specially and permanently entitled to the pattern of holdings we’d have at some particular but arbitrary level and kind of globalization. Which is stupid.

So the actual argument here has nothing to do with trade and everything to do with our underlying ideas about distributive justice. If you’re for compensation from winners to losers when the “losers” are less affluent, but against it when they’re richer, it pretty much has to be because “compensation” is beside the point: You think workers should have more, and CEOs less. And if that’s the case, which particular subsectors of these groups get their bread buttered over time by expanding or contracting globalization is pretty well beside the point. It’s framed as being about “compensation,” of course, because people get more politically agitated about changes in their position than about being badly off per se, and because (as Thoma notes) it’s politically easier to target help to some subgroup than to broadly expand safety nets. That’s as may be, but there’s still no actual, like, reason to frame this as being fundamentally motivated by a desire to compensate for deviations from an arbitrary baseline that have an arbitrarily selected cause.

Tags: Economics



8 responses so far ↓

  • 1 tom // May 16, 2007 at 12:52 pm

    So the actual argument here has nothing to do with trade and everything to do with our underlying ideas about distributive justice.

    It doesn’t have to be framed in terms of justice — it can be put more pragmatically than that. It’s fine to say that the differences in wealth distributions between a society with a strong middle class and, say, an post-colonial kleptocracy are arbitrary. But I think you could point to convincing reasons why the former society is preferable to the latter.

    Isn’t the only real reason for chasing globalization’s pie-increasing potential its presumed ability to decrease aggregate human suffering? It seems plausible to me that the marginal gains achieved by making the rich richer don’t offset the losses in utility experienced by the poor. If that’s the case then some redistributive mechanism is going to be necessary, or else the whole enterprise is subject to the same sorts of problems that make you find protectionism objectionable — namely, that it makes no sense in big-picture terms.

    It’s not about preserving an arbitrary status quo, it’s about making sure the species is, on average, living a better life.

  • 2 Brian Moore // May 16, 2007 at 12:53 pm

    Can we get another imaginary dialog between the “outsourced” worker and the person who received his job overseas? Where he tells him its okay his kids won’t get food, because MY kids are going to college!

    We’re always told its callous to tell the outsourced worker that “it’s really okay that he doesn’t have his job any more,” but isn’t it even more callous to tell the even more poor person in that foreign country “no job for you!” Everyone paints globalization as a fight between management and worker. But it’s not. It’s between worker and worker. Pro-globalization advocates don’t have to justify some diffuse gain to society, they just need to stand up the poor sap in India who won’t be getting a job because of your protectionist policies.

    No one ever buys the “diffuse losses to the economy” thing, which is why protectionist arguments are so compelling. So you need to counter that with a specific person. This is what passes for political discourse nowadays. Finding the most sympathetic person in the debate and framing your argument so it helps them. I guess this is why “do it for the children” arguments work so well.

  • 3 tom // May 16, 2007 at 12:58 pm

    Brian’s reminded me of the other worker — it was silly for me to ignore him/her, although the linked dialog largely does.

    But even if that make globalization already-justified, it doesn’t change the fact that it could be further justified through redistribution on the developed nation’s end. Presumably there’s a sweet spot where the inefficiencies of such a scheme make going any further a bad idea, but I’ve got a feeling we’re nowhere near it yet.

  • 4 Jadagul // May 16, 2007 at 5:57 pm

    Tom, I think you’re actually making Julian’s point for him. The point is that “generalized safety nets for the less-well-off increase overall welfare” is a sensible policy; “losers from globalization need to be compensated” isn’t, because it’s equally plausible to say “losers from protectionism need to be compensated.” Your argument still has very little to do with trade, except insofar as a further increase in inequality might trigger a further increase in redistribution. If you’re an egalitarian, which I’m not.

    Or, to put it another way: if it turned out that globalization helped the poor and middle class and hurt the rich, wouldn’t you then claim that protectionist policies required the rich to compensate the poor, too? At that point it’s not about the trade, it’s about the money.

  • 5 Matt Z // May 16, 2007 at 8:23 pm

    I think that when liberal economists like Krugman or DeLong talk about “compensating the losers by redistributing from the winners” they are, semi consciously, and often consciously, putting up a smokescreen. The reason they frame their arguments this way is that, as advocates from a set of policies (fewer trade barriers, more trade agreements etc) they realize that they have to frame these policies in a certain way to make them politically feasible.

    The most popular adage in these globalization debates is that the benefits are distributed diffusely (through lower prices for everyone) and the harms are distributed very specifically to a small amount of people (ie, textile workers losing their jobs). And since voters are for a variety of psychological and evolutionary reasons more likely to a. sympathize with these large, specifc losses, we must frame trade debates as being about winners and losers. Additionally, there is a pretty serious empirical argument that more open economies are riskier, and people are generally short sighted about risk and seek to minimize it immediately. This all adds up to a conundrum for the left of center economist, who know that freer trade and more open economies promote higher growth and greater well being not only in the US, but also in other countries (krugman almost justifies trying to push forward with doha and other trade agreements exclusively on the grounds that they benefit poor countries). Of course there are also positive political externalities to freer trade (the argument that NAFTA was key to Mexican stability is often used as an ex post facto justification for it by leftie policy wonks)

    The point is, for the leftie economist, whose trade battles are almost exclusively with other left of center types (the anti trade people in the GOP are nativists like Buchanon and even the GOP can get over its disdain for people from other countries for the sake of $$$ for its corporate overlords *snark alert*) needs to frame this debate as being about “winners and losers” and basically lie about their being some magical status quo ante that could be returned to, because this is how many democratic voters see it.

    Also, in the world of pro free trade lefties, you see the “social democratic” argument emerging as compromise between populist, EPI style trade bashing, and DLC like free trade boosterism. This is a synthesis of the empirical fact about free trade’s benefit to the economy vis a vis lower prices, comparative advantage etc etc and voters concern about the increasing perceived risk due to globalization. This is the argument that free trade is all well and good, assuming a stronger social safety net to account for the increased risk. The canonical example is that social democratic heaven Sweden as well as Denmark, both of which have open economies with strong safety nets. Of course, many lefties view these social nets as externally desirable, apart from their role as a political cover for free trade. The big question is whether leftie economists and generally intelligent leftie policy types can convince right wing trade boosters to create some kind of system to deal with the dislocation caused by a more open economy, if not, the short term perceived desirability of populist economics, ascendant on both the right and left, will win the day, much to the detriment of not only Americans, but also of billions trying to get out of poverty in the developing world.

    For better of for worse (Bryan Caplan surely thinks for worse) we aren’t ruled by a Supreme Council of Economists, (imagine that, you could have two right wingers like Mankiw and Bartlett, two lefties like Krugman and DeLong, and then Dani Rodrik and Tyler Cowen to spice things up, with Steven Leavitt as a tiebreaker…but alas, this isn’t happening). This means that economists must spice up policy proposals using the language that most people use in thinking about economic issues, I think that those of us who support more open economies can deal with a little oversimplification and obfuscation to prevent a populist uprising against trade.

    PS – I’m a 17 year old whose never had a real job, experienced economic insecurity and my brother’s work at one point consisted of moving IP jobs from the silicon valley to singapore, so take what I say with the requisite grain(s) of salt.

  • 6 Reality Man // May 17, 2007 at 2:38 am

    Matt Z, I’m impressed seeing that comment come from somebody who is 17 and never had a job. I might be just a little bit older and had only a couple more jobs, but I still found that interesting.

  • 7 matt z // May 17, 2007 at 1:09 pm

    Well, I take those hours which could be used for working or any type of productive behavior…and read blogs. So take that for what you will. I mean, you make the big bucks blogging, right Julian!

  • 8 Amileoj // May 19, 2007 at 1:44 pm

    Julian Sanchez is clearly right that the left/liberal concern with trade is primarily a concern with "underlying ideas about distributive justice" — namely, the worry that increased trade with less-developed nations (despite the admirable effects in those countries) makes for increased inequality in more-developed ones.

    But this doesn’t necessarily make the language of "winners" and "losers" jejune, or merely rhetorical, or what have you. That language still captures an important feature of the underlying moral case, namely that the losses can be too heavy to be justly born alone.

    Large scale job losses in particular sectors raise the specter of entire communities of wage workers falling from roughly middle-class incomes into something far more precarious. If this coincides (as a result of expanded trade in that sector) with huge increases of in incomes of already-better-off professionals and managers, then surely we can make a colorable case for the "winners" compensating the "losers"?

    That case would not then turn on the mere fact that one party won and the party other lost from trade (and so would not be reversible in principle). It would turn on the fact that one party suffered devastating losses, which no reasonable efforts of theirs could have averted, while the other party not only averted those losses, but profited from them.

    You might say: But this is just the underlying distributive argument come back in other clothes. In a way that is true. But my point is that that underlying distributive argument encompasses the moral intuition that economic losses are not dollar-for-dollar equivalent, that their scale and social concentration are morally relevant facts.