Did Larry Summers Concede to the "Forces of Darkness"?

Larry Summers responds to charges from Devesh Kapur, Pradap Mehta, and Arvind Subramanianand that he is promoting protectionism, economic nationalism, and unilateralism (see "Is Larry Summers the canary in the mine?"):

Larry Summers: I am sorry but not terribly surprised to have provoked Devesh Kapur, Pradap Mehta and Arvind Subramanian (henceforth KMS) with my recent columns on globalization and appropriate American policy responses. Their recent response distorts what I wrote in important respects and much more importantly adopts a posture towards globalization that is analytically dubious and politically untenable.

My columns included the assertions that ..., after stating a number of standard economic arguments for free trade “all of these arguments have the very considerable virtue of being correct arguments…the United States will be better off with than without trade agreements and the world will be a richer and safer place with increasing economic integration”.

I am neither urging protection nor economic nationalism nor US unilateralism only suggesting a domestic stategy that emphasizes inclusive prosperity and an international strategy that calls for more global cooperation to assure that it is still possible to pursue the necessary objectives of social insurance and economic regulation. Why then have I set KMS off? There are at least two points that need clarification.

First, I drew a sharp distinction between the analysis of protectionist policy which is almost certain to hurt most people most of the time and the far more general phenomenon of globalization... By conceding that ... globalization ... may have adverse consequences for many workers, KMS seem to feel that I have made some kind of profoundly important concession to the forces of darkness.

I am not sure why. Surely the vast majority of international trade models would predict that a large increase in the effective supply of labor abroad along with the enhanced ability of complementary factors to locate abroad would have adverse effects on domestic labor. And surely the last 15 years have been difficult for unskilled and semiskilled workers in most industrial countries. There is room for argument about how large these effects are. I had not previously realized that there was room for argument about their sign.

Perhaps they feel that economists should stick with the mantra “freer trade is good” and not acknowledge in newspapers the implications of their models for fear of emboldening protectionists. This is a dangerous game. It is ethically problematic to withhold knowledge in fear of its misuse. It is likely over time to undermine the credibility of the experts who fail to share all that their science knows. And most importantly as demonstrated by recent debates the strategy of sweeping distributional issues under a rug and simply insisting on various kinds of dislocation assistance has been a political disaster for advocates of freer trade.

Second, KMS see something hypocritical in my arguing for managing globalization at a time when the developing world is doing well and US economic performance has deteriorated. Frankly I cannot really follow their argument. ... The issue of capital account liberalization is best debated another day... However, given their skeptical views about finance, I would have expected KMS to endorse my call for global cooperation to prevent races to the bottom in financial regulation.

There is certainly the risk that efforts to establish labor standards become efforts to insist that labor in other countries is priced out of the global market. This is valid concern but hardly a reason to ignore entirely issues around labor in seeking to establish an integrated global market. ... I am not sure what purpose is served by insisting on the absolute separation of trade and labor issues. The debate and the world have moved on.

The real problem with my columns is almost the opposite of what KMS suggest. The description of the globalization challenge is more convincing than my prescriptions. Continuing to assert that protection is bad and that globalization is invevitable and therefore governments should do more to help the losers while at the same time ignoring the challenge that globalization poses to progressive taxation and other policies to assure that economic progress is widely shared is I believe a prescription for failure. True friends of global integration and of the developing world will work to design more ways to insure that a more integrated and prosperous global economy is one from which all will benefit.

Comments

[hari]

Larry is not clear on what side of the issue he's placed. I don't think you can, first, promote free trade and deregulated globalization and then suddenly pretend you're in a qualitatively different ballgame - simply because the results don't fit you anymore.

Or is he arguing for globalization based on stringend (OECD defined) international labour standards and whatnots (ie. NTBs)?

If the latter, then goodbye to WTO/DohaRound for certain - back to square one.

[anne]

"Protectionism, economic nationalism, and unilateralism...."

The language alone is inflaming enough to make me wish to be a protection-pushing unilateral nationalist; just for spite. American economic policy is now unilaterally nationalist and protectionist whenever a few Senators decide it needs to be. So too India or France or Japan or Australia. The language then needs tempering. There is need to understand current policy and move helpfully to ever more multilateral policy.

[save_the_rustbelt]

Anyone who tries to put some balance into the discussion will be vilified.

Go Larry go.

[mikx]

Devesh Kapur, Pradap Mehta, and Arvind Subramanianand try to shut up a well-known economist because there is a very remote chance that Summers-type policies may hurt India among other third-worlders.

I'm sure that the fact that they are all indians is purely accidental to their positions.

to assert that protection is bad and that globalization is invevitable

I did not realized that globalization is an act of God, sorta like earthquake. Apparently nothing we can do about it, just lay back and enjoy.

[hari]

Listen! Indians like Chinese are spread all over the world.
Don't get *schritzo* just because you don't understand the ballgame started by Rubin/Summers....

[wjd123]

I think Summers is right to point out that his discription of the problems to globalization–which I thank him for–is more convincing than his prescriptions. Just how are the conflicts between national political economies and global competition to be resolved? What we are likely to get is more endless discussion while our political economy is undermined.

[2slugbaits]

wjd123,

"What we are likely to get is more endless discussion while our political economy is undermined."

You mentioned "political economy." Is the problem primarily economic, or is it a failure of the political system? If primarily the latter, then I don't think we want to adopt protectionist policies that ultimately weaken both the economy and the poltical system. In his book "The Moral Consequences of Economic Growth" the economist Benjamin Friedman makes the obvious be easily forgotten point that good economic times make good political decisions a lot easier, and bad economic times lead to a hunker down and protect what you've got kind of mentality. Free trade in the 90s was both politically easy and good policy because everyone was doing well. Free trade is still the right economic policy even now, but people aren't thinking about potential gains; they're only thinking about trying to hold onto what they've got. The good news is that our long national nightmare is almost over and Bush/Cheney will be put out to pasture soon enough. And good riddance too. I don't think there are any rational arguments that one can make to convince people that over the long run free trade is a winner all around. NAFTA bashing is not a position that people rationally argued themselves into, so it's unrealistic to argue them out of NAFTA bashing.

[wjd123]

You mentioned "political economy." Is the problem primarily economic, or is it a failure of the political system? If primarily the latter, then I don't think we want to adopt protectionist policies that ultimately weaken both the economy and the political system.

2slugbaits,

My position is that corporations have gained to much power in our political economy and they are using it under cover of globalization to undermine the rules and regulations of our political economy. Larry Summers has admitted the same. See my question to Mark Thoma in "Free Trade Paradox."

Any protectionist policies I've called for comes from my belief that international rules and regulations are inadequate to address the imbalance of this situation. I've called for the formation of international governments of countries with like political economies--such as the EU--to help bridge the weakness.

The EU has found a way to combine free trade and values. Members of the EU have their rights protected and expanded. Politically it's easier to get people to vote "yes" to something they can see the good in.

I see this as a way for globalization to be done right, and protect the gains made in ones political economy--such as labor rights--while expanding free trade.

Here is something I wrote on the Larry Summers series. I hope it helps explain why I worred about the gains we have made in our political economy being undermined by globalization.

Mr Summers is right to worry that US workers have not benefited as much from globalisation as US capital; stagnant median wages and rising inequality are proof enough. He is also right to assert that globalisation requires democratic legitimation.

But the argument would be more persuasive if he did not privilege the demands for political legitimation within the US. The terms of what constitutes just globalisation cannot be determined unilaterally from the standpoint of the gains and losses within the US. It has to be determined co-operatively, involving discussions over the costs and benefits to all, especially those least able to defend their interests in both rich and poor countries.--Kapur, Mehta, Subramanian

Just how is this compromise to be found when the rules and regulations we have in our political economy are used against us when competing globally. This attack on our political economy is intensified when our every effort to insist on standards in trade agreements is seen as an attack on poorer countries comparative advantage: cheap labor. And even if standards were part of trade agreements it's doubtful that poorer countries would have the wherewithal to enforce them if they wanted to. It's also doubtful that many governments would have the will to enforce standards in the first place.

The interests of the poor in developed countries and the interests of the poor in developing countries might be similar but an ethical gulf separates them. The simple fact that "ought implies can" makes combining their interests untenable. Poorer countries don't have the ability to enforce our standards, and many don't have governments that allow them to change policies with a vote.

I don't understand the authors call for shared legitimacy. I could understand it if they were speaking of the EU, but not countries where the gulf between values, wealth, and political economies is vast. Yes, we should take into account other countries interests, but we don't have to suspend credulity to do so.

Perhaps the authors believe that since India has the "democratic legitimacy required for globalisation" a "just globalisation" would require that India be given greater latitude in trade matters than non-democratic countries such as China. I don't know if this is what they meant, but if it is, I would agree.

The compatibility of different political economies is a problem. I for one hope that American voters won't keep allowing politicians to ignore it.

What these professors are asking us to do is to engage in discussions until global corporations in the name of competition hollow out the rules and regulations of our political economy. In time the actual protections of our political economy won't be much different from those of the poorest and most undemocratic countries we trade with. I vote no to endless discussion.