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Tuesday, February 22, 2011

"Should Losers from Free Trade be Compensated?"

Kash is back. So is William Polley:

Should losers from free trade be compensated?, by William Polley: It's been a while... far too long. Suffice to say that my day job has been keeping me very busy this year and has made blogging difficult. I want to rectify that, but it may be tough going for a while yet.

This, however, was enough to bring me back.

In their work, economists are typically are not nationalistic. National boundaries mean little to them, other than that much data happen to be collected on a national basis. Whether a fellow American gains from a trade or someone in Shanghai does not make any difference to most economists, nor does it matter to them where the losers from global competition live, in America or elsewhere.

I say most economists, because here and there one can find some who do seem to worry about how fellow Americans fare in the matter of free trade.

In a widely noted column in The Washington Post, "Free Trade's Great, but Offshoring Rattles Me," for example, my Princeton colleague Alan Blinder wrote:

I'm a free trader down to my toes. Always have been. Yet lately, I'm being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation. When I say this, many of my fellow free traders react with a mixture of disbelief, pity and hostility. Blinder, have you lost your mind?

Professor Blinder has estimated that 30 million to 40 million jobs in the United States are potentially offshorable -- including those of scientists, mathematicians, radiologists and editors on the high end of the market, and those of telephone operators, clerks and typists on the low end. He says he is rattled by the question of how our country will cope with this phenomenon, especially in view of our tattered social safety net.

"That is why I am going public with my concerns now," he concludes. "If we economists stubbornly insist on chanting 'free trade is good for you' to people who know that it is not, we will quickly become irrelevant to the public debate. Compared with that, a little apostasy should be welcome."

What do you think?

This led Mark Thoma to wisely say:

Saying that everyone could be made better off with increased international trade is not the same as people actually being made better off. There are winners and losers from increased international trade, and while I agree that the gains exceed the losses in almost all cases, the gains haven't been distributed in a way that leaves everyone, or even most everyone, better off (see, e.g., widening inequality and where the costs of these kinds of adjustments fall). When some people are made better off and others made worse off at the same time, economists cannot say it is unambiguously better or worse. If we are going to make the argument that trade is good because everyone could potentially be made better off, we should do much more than we have to ensure that this potential is realized, i.e. that the gains from trade are distributed widely across the population rather than concentrated among a smaller set of winners.

Which in turn led Tim Worstall to reply:

But this argument then generally morphs into an insistence that we should not have free trade until that compensatory mechanism is put in place, so that, say, I, who will be gaining from that free trade will be compensating those who will lose from that free trade.

Hmm. But do you see what is implicit in that argument?

That there are gains that I am not getting, gains that are going to some other, as a result of our not currently having free trade.

This is obvious: if free trade benefits me and disbenefits you, then not free trade must disbenefit me and benefit you.

Which leads to the question: are you compensating me for those benefits you are getting and the disbenefits I am getting from the absence of free trade?

Where, in short, is my check from those benefitting from protectionism?

I'd like to see Worstall defend that one in front of a class of principles of econ students who have seen jobs in their towns go overseas or south of the border.

Seeing as how for the last 16 years I've been defending free trade to classes of principles students who have seen jobs in their hometowns disappear because of free trade, I feel like I can take a crack at this.

Blinder gets it absolutely spot-on. Print this one and post it on your wall.

If we economists stubbornly insist on chanting 'free trade is good for you' to people who know that it is not, we will quickly become irrelevant to the public debate.

That is exactly what 16 years of defending free trade to Midwestern college students has taught me. And since I have no desire to become irrelevant to my students, I have found it useful to focus their attention on what I was taught about free trade.

You see, it is the potential for a Pareto improvement that makes free trade desirable. There are winners and losers. But the winners gain more than the losers lose. So effect a transfer from the winners to the losers that still allows the winners to gain but compensates the losers for what they lost. Only then can you really say that free trade (with the compensating side payment) benefits everyone. If the compensation is not there, then I cannot unconditionally advocate free trade. I must call attention to the fact that some will lose. Call it professional ethics. ...[continue reading]...

    Posted by on Tuesday, February 22, 2011 at 01:08 AM in Economics, International Trade | Permalink  Comments (89)


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