Paul Krugman: Winners and Losers from Trade

Paul Krugman follows-up his column "Divided over Trade" (see the post below this one) with a discussion of the winners and losers from trade:

Notes on 5/14 Column, "Divided Over Trade", by Paul Krugman, Money Talks: A few notes on trade and wages.

Many people think that Economics 101 says that trade is good for everyone. Alas, it isn't so. Way back in 1941 Paul Samuelson and Wolfgang Stolper pointed out that even the most conventional economic analysis suggests that some group within a country - and possibly a large group - actually loses from trade. It's even in Wikipedia.

Intuitively, here's the logic. Imagine that America exports stuff that is produced mainly by college-educated workers, while those industries that compete with imports mainly employ less-educated workers. Now suppose the price of imports falls. Then in order for import-competing industries to cope, the wages of less-educated workers have to fall — in fact, they have to fall more than the price of imports, because other costs of import-competing production, namely the wages of highly educated workers, will actually rise. So if import prices fall, say, 10 percent, wages of less-educated workers will fall, say, 15 percent.

But don't these workers gain from cheaper imports? Yes, but not enough. Imports are only part of what people consume, so while wages fall more than import prices, the overall cost of living falls less than import prices — say, 15 percent fall in wages, only 5 percent fall in the cost of living. Trade reduces the real wages of low-education workers.

So why did people like me say in the '90s that globalization wasn't a big problem for U.S. workers? Because the numbers didn't look big enough. Bill Cline of the Institute for International Economics posted a pretty good overview of that discussion here.

Since then (Cline's numbers ran through 1993), however, the numbers have grown. You can get a sense of the changes from the World Trade Organization data. U.S. imports from China, Mexico and the "six Asian traders" went from about 3 percent of G.D.P. in 1995 to almost 5 percent in 2005. What's more, the center of gravity of those imports has shifted to the lower wage countries. Estimates of labor costs are calculated by the Bureau of Labor Statistics, Table 1 and p. 5 for China.

The growth of China's exports, in particular, has undermined one of the arguments I and others (including Cline) made for not worrying too much: we thought the low-wage manufacturing exporters would, as their own education levels increased, place less pressure on low-education workers here. Well, the original group of exporters did move "upscale" — but along came China (and to a lesser extent Mexico), taking their place and then some. The overall wage rate of U.S. trading partners relative to the U.S., calculated in that B.L.S. report, rose through 1990, but it has stagnated since then — and the index doesn't include China. Add that in, and our trade is increasingly with low-wage countries. So the problem has gotten bigger.

As I said in the article, however, the big problem is what to do about it. And a return to protectionism would just have too many negative effects.

Comments

[dissent]

From the FT today:

In China, the bottom 10 per cent of the income distribution has seen its income rise by 42 per cent in the past 10 years. The middle has grown by 115 per cent and the top 10 per cent by 168 per cent. Large numbers. Everyone has benefited but not equally. Similar patterns can be seen in other rapidly growing countries such as India.

Compare that with what has happened to the middle and bottom of the income distribution in the USA and you have an argument for protectionism. Yes, India and China are benefiting. American workers are not. Globalization needs to hit the pause button until this problem is addressed.

[save_the_rustbelt]

Academics and economists dis on "anecdotal evidence," with some real justification, but in this case there was plenty of both anecdotal evidence and statistical evidence showing up a long time ago.

Now...........

How do fix the mess? There is a lot of suffering.

The commander of the Salvation Army in Detroit says that hunger is no longer an inner city and rural problem, now it is a suburban problem.

[anne]

We can approach resolutions to problems even if only for a time while planning more:

http://www.nytimes.com/2007/05/13/opinion/13sun1.html?ex=1336708800&en=d16f14990a0d1b4e&ei=5090&partner=rssuserland&emc=rss

May 13, 2007

Hunger and Food Stamps

If you think people do not go hungry in America, you're wrong. At last count in 2005, 35 million low-income Americans — about a third of them children — lived in households that cannot consistently afford enough to eat. Since 2005, the situation has most likely become worse. Last year, real wages for low-income workers were still below 2001 levels. This year, job growth is slowing and prices are rising.

And each year, the federal food stamp program — the bulwark against hunger for 26 million Americans — does less to help. In large part, that is because a key component of the formula for computing most families' food stamps has not been adjusted for inflation since 1996. Over all, food stamps now average a meager $1.05 per person per meal.

Bolstering food stamps must be Congress's top priority in this year's farm bill, the mammoth legislation that covers the food stamp program.

Most important, lawmakers must stop the erosion in the purchasing power of food stamps, either by pegging the benefit formula to inflation or by making a big increase in the formula's standard deduction....

[David in NY]

Kevin Drum makes a good point in his blog Political Animal today. Trade deals keep getting made, everyone recognizes that they will hurt some workers, and the only answer anyone seems to have is that better support systems for the affected workers -- retraining, health care, etc. -- should be in place. But these support systems are never put in place, and trade deals keep getting made. "So," Kevin concludes, "free trade supporter or not, I'm increasingly of the view that I'd like to see us fulfill some of these promises first, and then pass the trade agreements afterward. We've tried it the other way around for a long time, and it doesn't seem to work out so well." I agree. And it's a reasonable political position for Democrats to take.

See http://www.washingtonmonthly.com/archives/individual/2007_05/011301.php

[Bruce Wilder]

Here's what puzzles me:

Why wouldn't we hope that in good Schumpeterian fashion, as wages fell in import-competing industries and rose in exporting industries, people and other resources would move from import-competing industries to exporting industries?

And, as productivity overall rose, why wouldn't we expect average wages to rise? That is, why wouldn't we hope that rising wages in exporting industries would drag up the overall wage level?

I think this excessively stylized story about "high-skilled" or "highly-educated" workers versus "low-skilled" or "low-education" workers is hiding the truth about depressed capital investment behind class prejudice.

Globalization in the presence of still rapid rates of technological development and innovation (the industrial revolution goes on and on!) is a highly dynamic process.

Economic growth that raises the median wage would seem to depend on both the happy accidents that create new industries (the Silicon Valleys) and high rates of capital accumulation/replacement.

One interpretation of the highly-stylized high-education v. low-education story is that the U.S. is going to suffer from globalization to the extent that savings and investment lags significantly. Is that an accurate interpretation?

And, if it is, shouldn't we worry more about low rates of U.S. savings and investment? (And, by extension, the fx rate?)

[anne]

As the minimum wage still has not been raised because of continual resistance in the Senate, so raising or even maintaining food stamp value has proven impossible though poverty has been increasing in these last years. Nonetheless, we might have had a President and Congress that would have acted and acted quickly. We might have had....

[maria]

What to do about it? The sensible thing would be to redistribute some income from the obscenely overpaid and over-rewarded to the present losers though the tax system.That would make a "protectionist" solution unnecessary. But to make the tax code fair and use it to help the unfortunate would require a different public morality, one of compassion instead of greed. And that change is probably a long way off. So maybe one faster method would be for the losers to begin to make some real trouble for the country. I am surprised they have not done so by now, but I suppose the police-state nature of the US deters them.

[RP]

Bruce says "...people and other resources would move from import-competing industries to exporting industries?"

Just what exporting industries did you have in mind?
Therein lies the answer to your query: there are no exporting industries
(except maybe Boeing, but I presume Boeing is already outsourcing
and offshoring everything that isn't nailed down....) when you combine the labor cost advantage with the lax-environmental standards advantage. MNCs are developing global work forces...what's happening is unavoidable. The resulting protectionism will be unavoidable as well, I suspect. I think we sometimes *presume* that the folks in the 1920s-30s were just too stupid to know what protectionism was going
to do.....instead of realizing that protectionism became politically *unavoidable* because mitigating efforts are never pursued until too late.

[Bruce Wilder]

RP: "there are no exporting industries"

That's just know-nothing-ism. Of course, there are exporting industries, and a lot of them. Financial services, movies & television, music, pharmaceuticals, aerospace, weapons, agricultural products, a whole lot of brand franchise management services. U.S. multinational corporations are still tremendously advantaged in investing abroad.

The weight of financial services, intellectual property and corporate brand franchising in the U.S. balance of trade might be genuine cause for concern. I think an argument can be made (by only better minds than mine, unfortunately) that tolerating an overvalued currency and a serious savings deficit is weighting U.S. trade unwisely toward financial and services, intellectual property and privileged foreign direct investment opportunities, and that unwise choice is part and parcel of the general Republican program of making the rich, richer at the expense of everyone else.

If you can make that argument, by all means, make it. I will cheer you on. But, don't introduce an oversimplified argument with false assertions.

[save_the_rustbelt]

Bruce W.

You are correct, but for the 50-something former manufacturing worker none of these offer much of an option.

Trade is creatinbg opportuntities, but not for the losers.

Oh, to be young again.........

[Bruce Wilder]

Here's an idea, save_the_rustbelt:

Maybe we could take up a collection and offer some 50-something economists a fellowship to study trade policy in Flint, Michigan, with a public lecture required on the subject and results of the research.

I have a pleasantly Darwinian expectation that only economists, who had had a populist epiphany during their time in the former Buicktown, would survive the lecture.

[maria]

What the US needs is a proletariat that is organized enough to threaten the establishment. One that can frighten it into action and material appeasement. Instead of Neocons we need some NeoMarxists.

[Bruce Wilder]

Completely off-topic, but Wolfgang Stolper advised me on my sadly inadequate senior thesis.

Although a very nice man, he had this sort of authoritarian mien, enhanced by a German accent and a brush cut. When some sophomoric students were gently ribbing him, as he was summarizing his masterwork, an elaborate and detailed comparison of the East and West German economies, he was very patient, but, finally, after they had played the joke too far, he turned and said, "Ah, but I am Sviss!"

It was very funny. Probably you had to be there.

[RP]

> That's just know-nothing-ism. Of course, there are exporting industries, and a lot of
> them. Financial services, movies & television, music, pharmaceuticals, aerospace,
> weapons, agricultural products, a whole lot of brand franchise management
> services. U.S. multinational corporations are still tremendously advantaged in
> investing abroad.

I never said there weren't lots of US MNCs that are tremendously advantaged.
But I think you will find they don't tend to export product out of the US for other markets;
they tend to build locally, and they tend to build with an increasingly globalized work force (which tends to mean a rebalancing of US to non-US labor). I don't have a
problem with it, but I don't see why you think this will produce a multitude of US
based jobs. Care to explain?

says...

really, anne-maria-lafayette

you should really wake up and read defense tech magazines:

"What the US needs is a proletariat that is organized enough to threaten the establishment."

Your days of protesting, are over:
http://www.engadget.com/2006/12/05/pain-gun-gets-air-force-green-light/

Your taxes paid for it, too.

The levers of bargaining have been removed by global wage arbitrage. Whoever doesn't understand that needs some exposure to globalization.

Free healthcare, free college, new roads? against Chinese wages as low as $0.40/hr full-burdened labor cost including an oncampus dormitory and 3 meals a day?

Are you kidding me? Competition?

Seeing how some of you think, I really am beginning to believe that the minimum wage needs to be abolished, since it REALLY WILL put people out of work, when all the other jobs disappear.

says...

you say free trade in its current implementation will ultimately benefit American workers?

Prove it. Walk me through your plan from today to when globalization will benefit them, point out the milestones you expect along the way.

We do not build a house without a solid foundation, or it crumbles. Yet we have economists, who claim that free trade would be good for the average american worker----if only unimplementable taxes were applied to the rich. Hey economists, try getting that solid foundation done first, then we'll gladly hear about your free trade theory.

If there is no lever to benefit the average american worker--THEN IT IS NOT GOOD FOR THE AVERAGE AMERICAN WORKER. Why is this a hard concept to understand? You cannot have a successful operation if the patient dies!

[maria]

How rewards are distributed in a society is ultimately always a political decision. "Letting the 'market' do it" is a political decision. And redistributing those rewards in a way different from what the 'market' does can also be a political decision. It is simply a question of organization, aims, and drive.

[Winslow R.]

Somehow the picture of Americans retooling for new opportunities doesn't mesh with the idea America is fully employed.

Either we are fully employed and have no need for retooling or we are less than fully employed and in need for increased deficit spending.

Economists need to give America and China a clear idea of what their choices are. China IS providing an opportunity to America. So far China has accepted the dollars printed to employ excess U.S. labor in Iraq, it is our fault for the blown trillion dollar opportunity. The American people are slowly awakening with a large hangover and only starting to realize their stupendous blunder.

The amazing thing to recognize is that the opportunity continues to exist and sadly continues to be squandered.

I agree government should first invest in its people through education, health care, and various forms of insurance (job, retirement, disability) etc. as these types of spending provide a solid foundation for governance.

Second government should foster an efficient market for domestic labor where none currently exists. Increase the opportunity for entrepreneurs to take risk by increasing access to financial assets at submarket rates if necessary - where is Krugman on this one? Give entrepreneurial citizens access to the same rates as bankers (or even lower). Increase alternatives to laborers to labor by providing domestic choices to the current private sector bent on moving offshore.

I'm quite sure there are thousands of things more rewarding than building cars on an assembly line. Too bad the only unimaginative government structured opportunity leads to Iraq.

[Outside the Box]

Paul...so while wages fall more than import prices, the overall cost of living falls less than import prices — say, 15 percent fall in wages, only 5 percent fall in the cost of living...

This is not true. The cost of living in the USA never falls, ever. That would be deflation, and Ben would start frantically dropping money out of helicopters long before the inflation rate even got close to zero.

All benefits from trade in the USA accrue solely to those whose wages rise faster than inflation. A worker who takes a 15% nominal pay cut loses far more than 15% in real terms.

Paul...the wages of highly educated workers, will actually rise.

These are the only people that gain from free trade in the USA. Constant inflation effectively transfers all trade gains from workers whose wages do not rise faster than inflation (and retirees) to workers in fields with real wage increases. Constant inflation has the effect of making free trade increase income inequality, since trade benefits cannot be evenly shared by all in the form of lower prices.

[reason]

OTB..
I think PK was talking in real terms.

[Outside the Box]

Reason...I think PK was talking in real terms.

A 5% real fall in the cost of living while the CPI is continuously rising? Is Paul really trying to say that the real cost of living is falling when nominal prices are rising?

[me]

"Of course, there are exporting industries, and a lot of them. Financial services, movies & television, music, pharmaceuticals, aerospace, weapons, agricultural products,"

Financial services, does that include Citi firing 17,000 and moving offshore. Perhaps you meant the financial services JOBS were the exports.

Movies, animators fired by Disney in California, Disney animation studio closed in Orlando.

Television, Again India.

Pharmaceuticals, again Pfizer closing research centers and moving them to China.

At least when asked Bruce was one of the few that offered specific suggestions but I would guess the bulk exports of what he listed are their jobs.

Even Boeing sent all 500 technical writing positions to India. Even the maintenance on the aircraft is now done offshore.

[Outside the Box]

Is Paul really trying to say that the real cost of living is falling when nominal prices are rising?

I suppose it is possible to come to this conclusion, if you define the increase in the real cost of living as excess increase of the money supply. (Inflation is always and everywhere a monetary phenomenon.) The money supply increases enough so that the CPI should increase by 8%, but imports limit the actual CPI rise to 3%. Ergo, the real cost of living is now 5% below the rate of monetary inflation.

Everyone whose income does not increase by a nominal 8% under this scenario would not receive a full share of the import benefits. Fixed income retirees would continue to lose purchasing power, despite the real drop in the cost of living. An interesting view point.

Of course, this implies that non import nominal prices have risen the full 8%, driven by the increase in the money supply. If the non import items were heavy on essential products/services, good luck fixed income retirees.

says...

Everyone whose income does not increase by a nominal 8% under this scenario would not receive a full share of the import benefits.

"Full share of the import benefits" is not a very meaningful concept. As long as nominal income rises more than the increase in costs of living (3%), you are gaining in real terms.

Of course, this implies that non import nominal prices have risen the full 8%, driven by the increase in the money supply.

Well yes, but in your example imports are making a significant dent in the cost-of-living index. As far as monetary policy is concerned, this is the only thing that matters.

[Outside the Box]

"Full share of the import benefits" is not a very meaningful concept. As long as nominal income rises more than the increase in costs of living (3%), you are gaining in real terms.

Yes, this is true. I was using monetary inflation as the baseline for calculating the magnitude of the import gain, but everything above CPI is potentially a real gain in wages.

Well yes, but in your example imports are making a significant dent in the cost-of-living index. As far as monetary policy is concerned, this is the only thing that matters.

Also true, with respect to how monetary policy is currently set. However, the price of essentials can potentially go up quite a bit faster than the CPI under this system. This could be a problem for those whose income is close to the survival level. The current system does not measure or adjust for this effect.

[voltaire]

Return to gold standard for international settlements, simple as that.

[Outside the Box]

Alternatively, the price of domestically produced items could be held constant. Import induced efficiencies would then drop the CPI, and give all consumers a more or less even share of import gains via lower prices. In the example above, the CPI would drop from 100 to 95, despite stability of domestically produced item prices. People could actually see and experience how imports help them to buy more. As it is now, import gains are invisible to the general public because of the money illusion, and some people (e.g., fixed income retirees) gain nothing at all from free trade.

There are a number of alternative ways to set monetary policy. Each with its own set of effects.