Category Archive for: International Trade [Return to Main]

Friday, June 15, 2007

Trade and Inequality

If you haven't heard about it, Vox EU is a new blog from the Centre for Economic Policy Research and it has an impressive list of contributors. In this entry, Paul Krugman adds to his discussion in "Divided Over Trade" and "Winners and Losers from Trade" on the increasing role of trade as a source of inequality:

Trade and inequality, revisited, by Paul Krugman, VoxEU: Trade and inequality, revisited Paul Krugman 15 June 2007 Print Email Comment Republish

It’s no longer safe to assert that trade’s impact on the income distribution in wealthy countries is fairly minor. There’s a good case that it is big, and getting bigger. I’m not endorsing protectionism, but free-traders need better answers to the anxieties of globalisation’s losers.

During the 1980s and 1990s, there was considerable concern about the possible role of globalisation in contributing to rising income inequality, especially in the United States. This concern was based on standard economic theory: since the 1941 Stolper-Samuelson paper, we’ve known that growing trade can have large effects on income distribution, and can easily leave broad groups, such as less-skilled workers, worse off.

After economists looked hard at the numbers, however, the consensus was that the effect of trade on inequality was probably modest. Recently, Ben Bernanke cited these results – but he recognised a problem: “Unfortunately, much of the available empirical research on the influence of trade on earnings inequality dates from the 1980s and 1990s and thus does not address later developments. Whether studies of the more recent period will reveal effects of trade on the distribution of earnings that differ from those observed earlier is to some degree an open question.”

But the question isn’t really that open. It’s clear that applying the same models to current data that, for example, led William Cline of the Peterson Institute to conclude in 1997 that trade was responsible for a 6% widening in the college-high school gap would lead to a much larger estimate today. Furthermore, some of the considerations that once seemed to set limits on the possible inequality-promoting effects of trade now seem much less constraining.

There are really two key points here: the rise of China, and the growing fragmentation of production.

Continue reading "Trade and Inequality" »

Thursday, June 14, 2007

Progressive Taxation as a Political Shield for Globalization

David Wessel of the Wall Street Journal says there is increasing support for income redistribution policies to compensate the losers from globalization and prevent a backlash against trade liberalization:

The Case for Taxing Globalization's Big Winners, by David Wessel, Commentary, WSJ (free): A new argument is emerging among the pro-globalization crowd in the U.S...: Tax the rich more heavily to thwart an economically crippling political backlash against trade prompted by workers who see themselves -- with some justification -- as losers from globalization.

The sharpest articulation of this view comes not from one of the Democratic presidential campaigns, but from economist Matthew Slaughter, who recently left President Bush's Council of Economic Advisers to return to Dartmouth's Tuck School of Business.

"Policy has become more protectionist because the public is becoming more protectionist," Mr. Slaughter and ... Yale political scientist Kenneth Scheve, write in the new issue of Foreign Affairs magazine. "And the public is becoming more protectionist because incomes are stagnating or falling."

Globalization, the two academics argue with unswerving conviction, is good for the U.S. ... But the benefits ... have been distributed unevenly. ...

The conventional response from fans of globalization, including the Bush administration, is rhetorical support for more aid for workers hurt by imports ... and better education to equip the next generation of Americans with skills needed to command high wages in a global economy. Both are crucial. Progress on both is painfully inadequate.

But trade-adjustment assistance is traditionally targeted narrowly at workers hurt by imports. Today's angst about globalization is far more pervasive. ... And education takes generations to pay off.

What to do? ... "It is best not to address increasingly salient concerns about inequality by interfering with trade," Mr. Summers argued [recently]... His solution: use progressive taxation to offset some, but not all, of the increase in inequality. For starters, return tax rates for couples with incomes above $200,000 to the levels they were under President Clinton.

"Truly expanding the political support for open borders requires making a radical change in fiscal policy," Messrs. Slaughter and Scheve argue. Their particular proposal: eliminate the Social Security-Medicare payroll tax on the bottom half of workers -- roughly those earning less than $33,000 a year -- and make up the lost revenue by raising the payroll tax on others.

This, obviously, would be a sea change in fiscal policy. ... But all this talk is likely to influence any Democrat who takes the White House in 2008. He or she will almost surely move to raise taxes on the best-off Americans -- both to raise revenue to pay the bills and to resist the three-decade-old inequality trend.

There's a lot of argument about the extent and cause of widening inequality, and a lot about the damage higher tax rates can do to economic growth. That will go on. But the ... palpable resentment of the losers is producing growing resistance among politicians ... to further lowering barriers to trade and promoting globalization...

Expecting market forces to reverse the recent trend toward ever-bigger winnings for those at the top is unwise; the forces are too strong. Taxing winners isn't without risk; as Mr. Summers says, globalization makes it easier for them to "pick up their marbles and go somewhere else."

But using the tax code to slice the apple more evenly is far more palatable than trying to hold back globalization with policies that risk shrinking the economic apple.

Personally, I'm not much on redistribution simply to make outcomes more equal. But there are (at least) three reasons to depart from this. First, when there is change such that makes one group better off at the expense of another as has happened recently with globalization, and when redistribution can leave everyone better off, then redistribution is justified.

Second, I think everyone should have equal opportunity to be a CEO or a hedge fund manager, or whatever they want to be. However, the playing field is far from level and there is a lot more we could do on this side of the equation. Not everyone will be a CEO of course, or achieve their dream job whatever it might be, but everyone should have an equal chance to be one of the winners. In the meantime, until more has been done to level the playing field, progressive taxation is a means of making up for inequality in opportunity.

Third, for me at least, progressive taxation is justified by the equal marginal sacrifice principle (the last dollar paid should cause the same amount of disutility for everyone). Thus, even if opportunity is equal, and even if there were no winners and losers to worry about, justification for progressive taxation would remain. I think a more progressive tax structure than we currently have is needed to equalize the disutility of paying taxes.

We could list "preventing a political backlash" as a fourth reason for redistribution. But I'm not sure we need to invoke the political economy argument. If we use progressive taxation in accordance with the three principles above, then income will be more equally distributed and a backlash against globalization is less likely to occur.

Are the fears of a downward spiral of protectionism real? From China Daily, some evidence that congress has China's attention:

Continue reading "Progressive Taxation as a Political Shield for Globalization" »

Wednesday, June 13, 2007

Savings Glut or Money Glut?

Martin Wolf returns to the question of whether global imbalances and other features of the international economy are due to a “savings glut” or a “money glut”:

Villains and victims of global capital flows, by Martin Wolf, Commentary, Financial Times: Fast growth, huge current account “imbalances”, low real interest rates and risk spreads, subdued inflation and easy access to finance characterise the world economy. ...

The two interesting alternative explanations are the “savings glut” and the “money glut”. ... The “savings glut” hypothesis is associated with Ben Bernanke... A substantial excess of savings over investment  ... predominantly in China and Japan and the oil exporters ... has led to low global real interest rates and huge capital flows towards the world’s most creditworthy and willing borrowers, above all, US households. The short-term effect is an appreciation of real exchange rates and soaring current account deficits in destination countries. To sustain output in line with potential, domestic demand in those countries must also be substantially higher than gross domestic product. A country must choose fiscal and monetary policies that bring this result about.

Not only has the US absorbed 70 per cent of the rest of the world’s surplus capital, but consumption has accounted for 91 per cent of the increase in gross domestic product in this decade. Thus excess saving in one part of the world has driven excess consumption in another. ...

In the savings-glut world, governments are responsible for much of the capital outflow. This is either because domestic residents are not allowed to hold foreign assets (as in China) or because most of the export revenue accrues to governments (as in the oil exporters). Either way, governments end up with vast foreign currency assets as the counterpart of domestic excess savings.

In this world, the US is passive victim, excess savers are the villains and the Federal Reserve is the hero. In the money-glut world, however, the world’s savers are passive victims, profligate Americans are villains and the Federal Reserve is an anti-hero. In this world the US central bank is a serial bubble-blower...

The argument is that US monetary excess causes low nominal and, given subdued inflationary expectations, real interest rates. This causes rapid credit growth to consumers and a collapse in household savings. The excess spending floods across the frontiers, generating a huge trade deficit and a corresponding outflow of dollars.

The outflow weakens the dollar. Floating currencies are forced up to uncompetitive levels. But pegged currencies are kept down by open-ended foreign currency intervention. This leads to a massive accumulation of foreign currency reserves... It also creates difficulties with sterilising the impact on money supply and inflation.

In this view of the world economy, savings are not a driving force, as in the savings-glut hypothesis, but a passive result of excess money creation by the system’s hegemonic power. ... Governments of countries that possess the huge trade surpluses ... follow the fiscal and monetary policies that sustain the excess savings needed to curb excessive demand and inflation.

It is no surprise that the Federal Reserve is a believer in the savings-glut hypothesis. But many Asians blame their present predicament on “dollar hegemony”, which is the core of the “money-glut” hypothesis. The big questions, however, are which is true and whether it matters.

My answer ... is that the savings-glut hypothesis is truer, [and]... it does matter. If we live in the savings-glut world, the US current account deficit is protecting the world from deep recession. If we live in the money-glut world, that very same deficit is threatening the world with a dollar collapse and, ultimately, even a return of worldwide inflation.

The savings-glut view is far more comforting. Excess savers will learn to spend, in the end – sooner rather than later, if US spending were to weaken dramatically. But if we live in the money-glut world, the great gains in monetary stability of the past quarter century are at risk. Either way, the present world cannot continue indefinitely...

I will just add that it's possible to have both a high level of savings and a high level of liquidity growth at the same time.

Thursday, June 07, 2007

Globalization and the Power of the State

Dan Drezner says people who expect globalization to reduce the power and autonomy of individual governments are going to be disappointed, "the global political economy of this century will look only slightly different from that of the 20th century." Here's a condensed version of his argument from Cato Unbound:

The Persistent Power of the State in the Global Economy, by Daniel W. Drezner, Cato Unbound: The 20th century witnessed the inexorable rise of the state as the pre-eminent player in economic life. By standard metrics — state spending as a percentage of GDP, regulation of economic activity — governments exercised increasing influence over their national markets as the century progressed. ...

For many scholars and commentators, the 21st century was supposed to be different, because of ... globalization... For good or ill, the globalization of markets was expected to constrain state power in a variety of ways. Indeed, the dominant strands of globalization research share a common assumption – the decline of state autonomy...

A particular fear — or hope, depending on one’s ideological proclivities — was that globalization would encourage a “race to the bottom.” According to this model, capital has become increasingly footloose... In such a world, capital will seek the location where it can earn the highest rate of return. High rates of corporate taxation, strict labor laws, or rigorous environmental protection lower profit rates by raising the costs of production. Capital will therefore engage in regulatory arbitrage, moving to (or importing from) countries with the fewest and lowest regulatory standards. Nation-states eager to attract capital – and fearful of losing their tax base – lower their regulatory standards... The end result is a world where regulatory standards are at the lowest common denominator. ...

For others, the rising power of voluntary associations is even more important in constraining the state’s role in the global economy. Enthusiasts and scholars who study global civil society posit that globalization empowers a new set of nonstate actors — particularly nongovernmental organizations (NGOs). The growth of NGOs, epistemic communities, public policy networks, transnational social movements, and even private orders amounts to the creation of a global civic society that is too ideationally powerful for states to ignore. In an Internet age, these groups have agenda-setting powers that compel states to take (or cease) action...

These are not the only arguments put forward about how globalization affects the state. Lawyers and sociologists look at the ever-increasing web of laws, rules, treaties, and international institutions, and see the state cosseted by global norms. Some theorists go so far as to assert that globalization requires a wholesale rejection of existing theoretical paradigms in international relations. Indeed, if there is a recurring theme that runs through the literature..., it is that economic globalization attenuates state power.

It was this kind of ideational environment that prompted me to write All Politics Is Global: Explaining International Regulatory Regimes. In the book, I conclude that globalization has been responsible for a lot of bad predictions about international relations. ...

Continue reading "Globalization and the Power of the State" »

Tuesday, June 05, 2007

Thomas Palley: The Profit vs. Country Dilemma

Thomas Palley, fresh from his battles for heterodox points of view in economics, sends along his latest. Thomas and I don't always see eye to eye on matters of international trade, and as he notes in his email, this is a "very different take from that of Brad DeLong regarding the significance of China's investment in the Blackstone Group":

The Profit vs. Country Dilemma, by Thomas I. Palley: Vladimir Ilyich Ulyanov, alias Lenin, was the leader of the 1917 Bolshevik revolution in Russia. One of his best known quotes is “The capitalists will sell us the rope with which we will hang them.” Today, Lenin must be chuckling in his Moscow mausoleum as he watches US business dealings with China.

Lenin’s sarcastic quip identified how desire for profit can sometimes undermine class interest. In today’s era of globalization a similar logic can hold for the national interest. Thus, with corporations looking to maximize their global profits, what is good for profit can sometimes be bad for country.

US – China relations provide a case study of the “profit vs. country” dilemma. Current US – China economic relations are marked by huge trade deficits and a steady migration of manufacturing to China. This structure was established in the 1990s at the behest of multi-national corporations and big retailers such as Wal-Mart. The former saw China as providing an unequaled low cost production platform from which to export to the US, while the latter saw China as a source of low cost imports.

Together, these business interests pushed permanent normal trading relations for China, and they also explain the US Treasury’s willingness to accept China’s under-valued exchange rate. That is because an under-valued yuan holds down the cost of goods sourced from China and increases profits on production exported from China.

Continue reading "Thomas Palley: The Profit vs. Country Dilemma" »

Monday, June 04, 2007

"Buying up the US, Chinese-style"

Brad DeLong continues with the discussion on foreigners acquiring ownership of U.S. assets. How long before congress and the media realize what they should know already, that our "yawning external gap is inevitably financed only by selling off assets, which means that foreigners with money acquire ownership and control of US-based businesses," and what will happen when they figure it out?:

Buying up the US, Chinese-style, by J. Bradford DeLong, Project Syndicate: When China National Offshore Oil Company tried to buy ... UNOCAL two years ago, it set off a political firestorm in the US. When Dubai Ports World bought Britain's P&O Steam Navigation Company, the fact that P&O operated ports inside the US led to more controversy.

One would think that a country like the US, with a current account deficit of roughly $800 billion a year, would realize that such a yawning external gap is inevitably financed only by selling off assets, which means that foreigners with money acquire ownership and control of US-based businesses.

But the US -- or at least Congress and the media -- doesn't get it. Americans evidently hope for a world in which they have feckless deficit-generating fiscal policies, a very low private savings rate and a moderate rate of investment, all financed by foreign capital whose owners are happy to bear the risks yet have no control over their assets.

One might think that foreign investors would quake in terror at these terms... But this has not been the case. ...

Someday, of course, this will come to an end. Perhaps Asian real currency values will rise sharply as a result of a burst of inflation in Asia. Perhaps the dollar will collapse and there will be a burst of inflation in the US as the Federal Reserve Board decides that temporarily abandoning its price-level peg is a lesser evil than the unemployment fallout that will result from a dollar collapse and interest rate spike.

A government that buys political risk insurance by placing an ever-growing stock of reserve assets in dollar securities guards against some dangers. But ... US Treasury and high-grade corporate bonds ... that US politicians are comfortable having foreigners own ... are not well hedged against inflation.... Prudent foreign government and private investors would find some way to diversify.

But how? Buying other countries' bonds would mean abandoning the goal of keeping real currency values low against the dollar. Buying up whole enterprises triggers angry speeches in the US Congress. What are needed are intermediary organizations that will grant a measure of control to foreigners, allow diversification across a wider range of US-located assets, and yet still appear 100 percent American to US politicians.

Enter the Blackstone Group.

China's $3 billion investment in Blackstone, while insignificant relative to China's $1.3 trillion in reserve assets -- a sum ... likely to hit $2 trillion sometime in 2009 -- is but a toe dipped in the water, a test run. At the start..., China will have small and indirect ownership stakes in a great many US enterprises, and the odds are that the usual objections will be absent. China will gain a measure of risk diversification ... and avoid running into political trouble. ...

Some observers think that the US political backlash against foreigners "buying up America" is what will bring the current configuration of global imbalances to an end. Deals like China's investment in Blackstone postpone that backlash, but not for long: $3 billion is equivalent to what China accumulates in reserve in less than three working days.

The question following China's Blackstone investment is this: How far can this process go? And how much control will US investors ultimately realize they have given up?

[Discussion of related issues at: "The Right Way to Respond to China's Exploding Surpluses."]

Sunday, June 03, 2007

Martin Wolf's Economists' Forum: The Right Way to Respond to China's Exploding Surpluses

In a recent column, "The right way to respond to China's exploding surpluses," Martin Wolf argues that:

...[T]he most important high-level dialogue in international economics ... is the “strategic dialogue” between China and the US. ... This, to his credit, Hank Paulson, the US Treasury secretary, has recognised. But his bilateral approach will fail. ..

He also notes China's saving rate, argues it is too high, and asks:

So what is to be done? The answer seems simple: save less and let the nominal exchange rate appreciate faster, to eliminate possible inflationary consequences of such a policy shift. The Chinese government can easily afford to spend more on health and education ... [and] a modest pension system for those now alive. Moreover, the bulk of Chinese savings are not by households but by the government and corporations, many of which are owned by the government itself... Savings then are a policy choice, not a given. At 50 per cent of GDP, they also look far too high. ...

Mr Paulson is quite right to approach this question as a discussion of mutual interests. But it is almost inconceivable that the Chinese will grant what will appear to be one-sided concessions to demands from the “sole superpower”. That would be far too humiliating. The Chinese will need, instead, to participate as equals in a wider global dialogue... The obvious move is to replace the G7 with a group of four – the US, eurozone, Japan and China. ...

Jagdish Bhagwati comments (comments are open links):

Jagdish Bhagwati: Martin Wolf may well be right. Bilateral talks rarely work with big players, especially when the US wants the big players to do something they do not want to do. This was the lesson the US learnt, and now seems to have forgotten, in trying to impose managed trade targets on Japan, using Section 301, during the years of Japan-bashing.

But I also wonder what sense it makes for secretary Paulson, an enormous improvement over his predecessor, to keep asking China for financial reforms. That is something the Chinese must decide for themselves, in their evaluation of their own interest. Why is Secretary Paulson so interested in this? One might cynically think that it is part of what I have called the Treasury-Wall Street complex: is what is good for Goldman Sachs also good for the US and, what is more pertinent, for the world economy? I wonder.

Martin Wolf agrees:

Martin Wolf: Jagdish is right: too many US Treasury secretaries think they are secretary for Wall Street. It is a mistake, I think, even politically. It is certainly a narrow view of the US, let alone the global, interest.

Charles Wyplosz:

Charles Wyplosz: Martin makes two important points: China’s current surplus is driven by very high savings and the US cannot give orders ...

If savings is the problem, and it is, what good would a renminbi appreciation do? There are some theories that exchange rate appreciation can reduce saving, but the magnitude of the effect is, at best, minute. The inescapable conclusion is that we should stop pestering the Chinese with calls for appreciation and threats of designating them as currency manipulators... There is no doubt that the renminbi is not a free floating currency, but there is no international obligation to let all currencies float. Maybe the renminbi is somewhat undervalued, but that cannot be the ground for aggressive diplomacy. If it is undervalued..., all that will happen is real revaluation through inflation. Not a great idea, I agree, but that is China’s problem. Let them make that choice as an independent nation. ...

Much of this huge saving is invested locally, which largely explains one of the most spectacular growth performances mankind ever witnessed... Not all of it can be invested. ... So calling for Chinese firms to invest their savings is a bit disingenuous. Sure, the government could spend more, especially on infrastructure, health and social programmes. It is good to pass this sound advice to the Chinese authorities, but then it is for them to decide.

In the meantime, what can they do with this mass of savings that cannot be absorbed domestically? Invest abroad. Not in US Treasuries, but in profitable corporations. This is what they just set out to do with the creation of the State Investment Company...

Roland Vaubel adds:

Roland Vaubel: I agree with Martin that the Chinese are making a mistake. We do not know whether China is saving too much. But we do know that China is not investing its savings efficiently. The problem is not just that foreign exchange reserves are low yielding assets. The Chinese central bank prevents the country from importing capital on a net basis... However, an emerging economy like China ought to be a net capital importer. In particular, it should not export capital to capital-abundant countries like the US. It is this misallocation of the world capital stock which economists should be concerned about.

China’s policy of offsetting private capital imports with official capital exports may be viewed as an attempt to import foreign technology without importing foreign capital on a net basis. Is China’s accumulation of foreign exchange reserves merely the unwanted by-product of an export-oriented exchange rate policy? Is it not also the deliberate but misguided strategy of a proud but economically backward people to get hold of the technological achievements of the West without becoming indebted to and dependent on it? The Chinese, or more precisely their political leaders, want our technology but not our capital.

A small part of Andrew Smithers' comment:

Andrew Smithers: I agree with Martin that China is unlikely to accelerate the rise in its nominal exchange rate because of external pressure. I suspect, however, that this applies whether the forum for that pressure is bilateral discussions with the US or multilateral ones including the EU. ...

Ronald McKinnon:

Ronald McKinnon: Martin is wrong to emphasise one-sided saving adjustment by China - or, I would add, other high-saving Asian economies... Attempts at one-sided adjustment by East Asia will be frustrated unless American absorption falls relative to income, ie, net saving increases. This is not a theoretical proposition but comes from the balance of payments identity linking the national income accounts on both sides. ...

To be effective, any international agreement must be two-sided. The US agrees to reduce absorption by, say, raising taxes while the Asian countries do the reverse. Such an agreement may seem fanciful and unlikely, but it is the only way the global imbalance can be eliminated.

It would be a huge mistake to reach for the wrong variable, the exchange rate, to solve the saving imbalance. Exchange rate changes have no predictable effect on saving behaviour on either side. But exchange rate changes can still be very destabilising in a macroeconomic sense. ...

And, Brad Setser:

Brad Setser: I agree with the core of Martin Wolf’s policy recommendation: rather than holding the renminbi down and using policy to restrain domestic demand, China should allow the RMB to appreciate and take policy stems to stimulate domestic demand. ... So long as net exports are contributing so strongly to growth, stimulating domestic demand risks true overheating, so exchange rate adjustment seems to be a necessary part of the broader adjustment. ...

The argument that exchange rate changes won’t have an impact on savings/ investment gaps and thus won’t generate adjustment is an important one. However, my read of the recent evidence suggests a bit more grounds for optimism that Dr McKinnon's assessment. There do seem to be potential links between changes in exchange rates and changes in the savings and investment balance. ...

Given the scale of China’s direct financing of the US (...Chinese purchases of the US assets will finance about one-third of the United States savings deficit), there also seems to be a rather direct channel through which changes in China’s savings surplus would put pressure on the US to reduce its own savings deficit.

Saturday, June 02, 2007

Buying America

Daniel Gross discusses the potential for an increase in foreign ownership of U.S. firms, in particular, the potential for foreign governments to gain control of U.S. based corporations:

Now It's Their Turn to Buy U.S., by Daniel Gross, Commentary, Washington Post: ...In countries that are resource-rich or export powerhouses, governments and government-controlled entities have amassed huge pools of capital. A report issued last month by Morgan Stanley economist Stephen Jen estimated that funds such as the United Arab Emirates ADIA ($875 billion), Russia's stabilization fund ($32 billion) and Singapore's Temasek Holdings ($100 billion) collectively hold $2.5 trillion in assets -- a sum equal to about 18 percent of the value of the S&P 500.

The funds' managers have generally been content to invest in safe assets such as bonds. But in recent weeks, ... General Electric ... sold its plastics unit to Saudi Basic Industries Corp. (SABIC), which is 70 percent government owned... On May 20, the private equity firm Blackstone Group announced that China's State Investment Co. is buying a 10 percent stake for $3 billion.

This phenomenon isn't entirely new. In 1996, Norway's government, planning for a day when its North Sea petroleum bounty would slow to a trickle, began plowing oil revenue into a mutual fund, which is now worth about $311 billion -- or about $67,000 per Norwegian.

China, which has a whopping $1.2 trillion burning a hole in its coffers, has thus far been content to invest in U.S. government bonds and bonds issued by quasi-government agencies such as Fannie Mae. But like any smart investor, it is looking to diversify...

Continue reading "Buying America" »

Tuesday, May 29, 2007

Thomas Palley: R.I.P. Trade Promotion Authority

Thomas Palley, one of the people interviewed in Chris Hayes' recent Nation article "Hip Heterodoxy," and "a dissident economist who received his PhD from Yale and once worked for the AFL-CIO, " sends along his latest on fast-track authority for trade agreements. [On the subject of heterodoxy, there is currently a nice discussion at TPM about heterodoxy in economics and I hope to contribute something to the discussion tonight or tomorrow, time permitting.]

Here's Thomas Palley expressing dissidence over trade promotion authority:

R.I.P. Trade Promotion Authority, by Thomas I. Palley: Trade promotion authority (TPA) - formerly known as fast-track negotiating authority - is set to expire on June 30, 2007. As a result, the Bush Administration and business interests are now lobbying Congress for its renewal. However, there are strong reasons to not just let TPA temporarily lapse, but also to permanently bury it.

After the November 2006 elections giving Democrats control of Congress, renewal of TPA appeared unlikely owing to the high degree of distrust and animosity toward the Bush Administration. Now, with Democrats and the Administration agreeing to include formal language on labor and environmental standards in the Peru and Panama free trade agreements, some are arguing for extending this newfound cooperation to renewal of TPA. That would be a serious mistake.

Not only would TPA renewal betray voters who no longer support the Administration, it would also miss a major opportunity to begin correcting course on globalization. Behind today’s flawed globalization lies a profoundly flawed policy process, and TPA is at the heart of that process.

The constitution gives Congress the right to decide upon trade relations with other countries. TPA has Congress ceding part of those rights by giving the President power to negotiate trade agreements that Congress can approve or disapprove but cannot amend or filibuster.

Opponents of TPA renewal have focused on two arguments. One argument is that such ceding of constitutional power is inappropriate, and Congress should reclaim this power as part of restoring a more balanced relationship between the legislative and executive branches.

A second argument is that absence of TPA would make it more difficult to sign new “free trade” agreements. This is because absent an up or down vote, agreements would get bogged down in Congressional special interest horse-trading. This is probably true, but it also constitutes a purely tactical argument for opposing TPA rather than an argument of principle.

An alternative argument for burying TPA concerns its distorting effect on trade policy. Over the last two decades the power of corporations has increased dramatically while that of labor has fallen. That power shift is reflected in the increased numbers of Washington K Street lobbyists working on behalf of corporations, which has increased corporate influence over policy and legislation. TPA plays into and amplifies this power shift.

Trade deals are negotiated by the office of the US Trade Representative (USTR), and then sent to Congress for approval. This negotiating process is stacked in favor of business. First, corporations get front seats at the negotiating table through regular detailed consultations, ensuring their interests are fully represented. Second, the trade bureaucrats who do the negotiating are subject to corrupting influences that bias negotiations.

One problem is that negotiators’ metric of success too easily becomes the number of deals signed, rather than getting good deals done. A second problem is that, as with other branches of government such as the Pentagon, there is a revolving door between USTR and business. Thus, trade negotiators who do good work for business are rewarded with plum K Street lobbying jobs, and Washington’s trade scene is crammed with persons who have followed this route. Furthermore, these lobbyists then have insider access to their former colleagues, thereby amplifying corporations’ representation advantage. The net result is business interests almost always trump those of workers.

TPA reinforces this jaundiced structure by reducing Congressional over-sight of trade, thereby short-changing the electorate’s interest. Bad agreements pass because the political costs of voting them down on account of specific problems are perceived as too high. Moreover, TPA provides individual congressmen with political cover, enabling them to retain favor with corporate sponsors without having to explain to constituents their lack of action.

The bottom line is that the balance of power and process of trade negotiation already favors corporate interests over those of ordinary people. TPA aggravates this pattern, which speaks for burying it and letting TPA rest in peace.

Tuesday, May 22, 2007

Krugman: But For, As If, and So What: Thought Experiments on Trade and Factor Prices

In a recent column, Paul Krugman said that while trade may not have had much impact on wages in the past, that may have changed due to the increased volume of trade from developing countries:

[I]mports from the third world, although they make the United States as a whole richer, make tens of millions of Americans poorer. How much poorer? In the mid-1990s ... economists, myself included, crunched the numbers and concluded that the ... effects ... on the wages of less-educated Americans were modest, not more than a few percent.

But... We’re buying a lot more from third-world countries today... Trade still isn’t the main source of rising economic inequality, but it’s a bigger factor than it was. So there is a dark side to globalization. The question, however, is what to do about it.

However, in this commentary opposing the inclusion of labor standards in the recent trade agreement, Jagdish Bhagwati responds to Paul Krugman with:

But this fear [that trade will lower wages] is not justified by facts. Most empirical studies of the effect on US wages of trade with poor countries have found little impact. My distinguished student, Paul Krugman, recently admitted in his New York Times column that he was among those who did this research. He then, unconvincingly, retreated into the assertion that “that may have changed” because the US is importing more from the poor countries now. However, increased imports need not have any effect on wages.

After reading the following paper Paul Krugman wrote in 1996, I would guess the "distinguished student" is puzzled why Jagdish finds it "unconvincing" that the effect of trade on wages should be larger now that trade with NIEs is about 2 1/2 times as large a share of GDP as it was in 1990. This simple analysis of why imports should affect wages explains Krugman's contention that the effects of trade on wages may be larger now than in the past, and it also explains why the estimate of the effects should be more or less proportional to the volume of trade.

Here are the thought experiments explaining why the effects of trade on wages should be larger as trade volume increases:

But For, As If, and So What: Thought Experiments On Trade And Factor Prices, by Paul Krugman, November 1996: In the last few years the impact of international trade on advanced-country wages has been hotly debated. Unusually, serious economists have not by and large argued about theory: with few exceptions they have agreed that a more or less classical Heckscher-Ohlin-Samuelson model is the best framework to use. Nor have they argued very much about the evidence. Instead, the major disputes have been philosophical: what does it mean to say that technology or trade has "caused" a given change in factor prices?

In this note I attempt to clarify and explain my own position in this debate. My view is that the most natural interpretation of an assertion that, say, international trade has "caused" wages for unskilled workers in advanced countries to decline by 2 percent is to view it as a "but-for" statement: but for the opportunities to import labor-intensive products offered by greater world integration, those wages would be 2 percent higher than they actually are. This interpretation leads, in turn, to the conclusion that the volume of trade must play a crucial role in any attempt to assess the effects of that trade; and it also leads to the conclusion that it is useful to calculate the factor content of trade - the net trade in factor services embodied in trade in goods.

To justify these claims, I present a sequence of three thought experiments on a simple trade model. There is nothing profound or difficult about these experiments - in fact, no algebra is necessary. The point, however, is that making sense of this debate is mainly a matter of asking the right questions; once you do so, the answers follow easily.

Continue reading "Krugman: But For, As If, and So What: Thought Experiments on Trade and Factor Prices" »

Monday, May 21, 2007

Jagdish Bhagwati on Trade Deals and Labor Standards

Jagdish Bhagwati argues against the inclusion of labor standards in the recent free trade agreement:

Free trade’s foes get a foot in the door, by Jagdish Bhagwati, Commentary, Financial Times: The agreement on trade between the Bush administration and the Democrats ... takes the demand for the integration of labour standards in trade treaties up a further notch. The display of bipartisanship, with Nancy Pelosi, Democratic Speaker, appearing with Hank Paulson, Treasury secretary, and Susan Schwab, US trade representative, has been the cause of widespread celebration. Yet the compromise consensus ... has dangerous implications for the world trading system.

Bipartisanship is no guarantor of virtue. The proponents of the compromise also make a serious mistake when they assume that domestic consensus ... is a sufficient condition for further trade liberalisation. Trade needs at least two parties. Unless your trading partners agree with what you propose, your own consensus is ... useless. The problem is that, except for bilateral agreements with small countries ... with little political power or with over­riding security interests, the developing-country trading partners of the US are generally opposed to the inclusion of labour (and other non-trade-related) requirements in trade treaties, agreements and institutions. ...

Many Democrats believe that the developing countries and the Republicans are morally wrong to voice objections to the labour requirements. Thus, I recently heard my congressman, Charles Rangel, Democratic chairman of the House Ways and Means Committee, argue that US trade policy had been run by the Republicans for corporate interests and that under the Democrats it would be run for the people.

The fact is that huge numbers of economists who belong to the Democratic party also oppose the inclusion of labour standards in trade treaties. So do distinguished Democratic politicians. ...

While this position follows from the principles of efficient policy design, it is also reinforced by the fact that the pursuit of labour standards in the American political landscape today reflects not altruism and empathy, but fear and self-interest. The Democrats who swept into Congress on anti-trade platforms typically fought their campaigns by arguing that competition with countries with lower standards was harmful to the working and middle classes in the US.

But this fear is not justified by facts. Most empirical studies of the effect on US wages of trade with poor countries have found little impact. My distinguished student, Paul Krugman, recently admitted in his New York Times column that he was among those who did this research. He then, unconvincingly, retreated into the assertion that “that may have changed” because the US is importing more from the poor countries now. However, increased imports need not have any effect on wages.

Those who are complacent and think ... this ... a minor concession in order to get on with trade forget that the strategy followed by labour lobbies has been to get a toe in the door, then another and another. ... The ploy is clever: it is an indirect way for some unions to try to get the US itself to be pressured to make concessions to labour at home, on the backs of foreign nations.

Was this compromise necessary for the renewal of the president’s fast-track trade authority? I doubt it. Think hard: if fast-track were not renewed by Congress, the US would find it impossible to pursue even bilateral agreements... But every other nation would be free to pursue these bilateral deals. So, the US would be increasingly handicapped in world trade. But if the administration stood firm, rejecting the compromise over labour standards, it is surely possible that a few responsible Democrats could be found who would vote for new fast-track authority, purely in America’s interest. Surely, it is not beyond the capacity of Mr Paulson to play this card with success?

Wednesday, May 16, 2007

Robert Samuelson: What Offshoring Wave?

Robert Samuelson says the number of jobs moved offshore is smaller than you think:

What Offshoring Wave?, by Robert J. Samuelson, Commentary, Washington Post: Remember the great "offshoring" debate? It was all the rage a few years ago. Modern communications allowed white-collar work to be zapped around the world. We faced a terrifying future of hordes of well-educated and poorly paid Indians and Chinese stealing the jobs of middle-class engineers, accountants and software programmers in the United States and other wealthy nations. Merciless multinational companies would find the cheapest labor and to heck with all the lives ruined in the process.

What happened? Well, not much. ... In a recent paper, Jacob Funk Kirkegaard of the Peterson Institute for International Economics ... reviewed many studies. His conclusion: "The heated public and political debate . . . has been vastly overblown."

For the United States, Kirkegaard examined a survey on "mass layoffs" from the Bureau of Labor Statistics to see how many stemmed from offshoring. The answer: 4 percent. That included both manufacturing and service jobs.

In 2004 and 2005, the BLS counted almost 1 million workers fired in layoffs of 50 or more. ... Only about 12 percent of layoffs stemmed from "movement of work" -- a category that would include offshoring. But two-thirds of those moves were domestic...

It's true that offshoring doesn't measure the full impact of globalization on U.S. labor markets. That effect would also include trade and investment by multinational firms. Still, with the unemployment rate at 4.5 percent, it's clear that globalization hasn't crippled the U.S. job machine.

One reason for modest offshoring is that it's not so easy to do.... A survey by the consulting firm A.T. Kearney found the following problems: cross-border differences of culture and language...; lack of skills offshore...; customer complaints....

As communications technology improves -- and companies gain experience -- offshoring may increase. Some economists still expect it to explode. ... Alan S. Blinder of Princeton said "offshoring may be..." threatening "tens of millions of American workers." Indeed, some studies examined by Kirkegaard estimated that roughly one-fifth of all U.S. jobs could theoretically be moved abroad. But just because a job can theoretically be relocated doesn't mean that it will be.

Adjustments occur. Developing countries need skilled workers for their own economies, not just exports. ... As the global demand for services -- engineering, programming -- rises, so will the wages of foreign service workers (engineers, programmers, accountants). That will make offshoring less cost competitive. Finally, if countries run big trade surpluses from offshoring, their currencies should rise. That, too, would reduce their cost advantage (and explains why changing China's artificially undervalued exchange rate is important).

Losing a job is a wrenching experience for anyone, but the lesson here is that most job loss has local causes. The offshoring obsession reflects its novelty and the potential threat to white-collar jobs that seemed inherently safe from foreign competition. In our mind's eye, globalization is so powerful that it's sweeping everything before it. The reality is that, though globalization is increasingly important, it's still a weakling compared with the domestic economy...

While the exact numbers of jobs moved offshore can be debated - even the limited description of the study given above raises lots of questions - the point is that most job displacements have been due to technology rather than offshoring. I don't dispute that, though it can be hard to tell one from the other and the general equilibrium effects of such changes are hard to capture and classify correctly. But I think there are some additional points to mention, some of which (the first two) repeat arguments made here recently.

First, Samuelson focuses on white-collar workers being displaced by "well-educated and poorly paid Indians and Chinese". The jobs he is talking about, "engineers, accountants and software programmers," mostly require college degrees. But that is not where most of the costs have fallen so far. As a group, college educated workers have probably gained from globalization. It's lower income workers that have not fared as well and by ignoring this group Samuelson makes the losses sound smaller than they actually are.

Second, he focuses on displacements but that misses a large part of the costs. Job loss is present, but the main cost to low income workers is a degradation in wages and benefits generally. These costs are across the board rather than concentrated within specific groups or sectors.

Third, he claims that China's undervalued currency is important. I'm going to let Paul Krugman answer this one:

Fixing Our Economy By Fixing Up Our Workers, by Paul Krugman, Money Talks: ...A. Aneesh, Santa Fe, N.M.: All your analysis seems to assume that there is no exchange rate effect i.e., currency speculation as well as other more direct measures at currency controls, including petro-dollars. The reason why goods from the so-called third world are cheaper may relate more to this currency differential, which also leads to a higher than necessary wage differential and labor standards will not have much effect there. ... What are you thoughts about it?

Paul Krugman: I blame 700-word limitations. The pressure from China is greater because of the undervalued yuan. However, even with a big rise in China's currency, wages there would still be only 4 percent of U.S. levels, so currency issues are only a small part of the story.

Finally, what will happen to white-collar jobs in the future as digital information technology progresses? After reading Charlie Stross's "Tomorrow's Future Today!," it's clear that no matter what we think might happen ten, twenty, fifty years or more into the future with digital information technology, we are probably wrong. So let's do our best to be ready no matter how it turns out. Fixing health care, which helps workers under most any globalization scenario, would be a good place to start.

Tuesday, May 15, 2007

You Economists Don't Get It, Do You?

"Economists suck."

"I hear that a lot. What'd we do to you?"

"Globalization. Outsourcing. Immigration. You guys don't get it. You told us go to college, get a good education, do something technical, computer science, engineering, become an accountant, go to law school..."

"I think that might have been your mom telling you that . . . sorry, go ahead"

"Well I did all that and more and you were right - for awhile it worked out great. Then one day it all changed. My job was outsourced. One day I had a job, the next day I didn't. I did everything I was supposed to do and it didn't help, not one bit. Sure, there are people out there getting rich of this but it's the same old fat cats who have always profited forever."

"But, economists ..."

"And it's not just me, it's all the people I worked with too, same thing. You economists tell us it helps end world poverty and all that, and that's great, but why should we care about people in some foreign country when we're struggling to make ends meet here? My concern right now is with one thing, and one thing only, and that's my family. I really don't want to hear about how we need to be concerned with the poor in some other country, how I'm selfish if I want to do more for my own kids. I mean I'm concerned and care and all that, but why does the money to help the poor in other countries have to come out of my pocket and not the pockets of the people getting rich off this?"

"Can I ask you a question?"

"You're supposed to be the one with the answers, but yeah, what?"

"Overall, have we gained or lost from globalization?"

"If I say anything but gained you'll disagree since economists always support globalization."

"You're right, I and almost all other economists think there have been gains. We debate the size of the gains, but not their existence. So it turns out that globalization has, overall, increased the amount of goods and services that we have. If we distribute the gains right, then everybody, every single person, could have more today than they had in in the past."

"Who cares what everyone could have. I could have a yacht if Bill Gates gives me one, but that ain't gonna happen. I don't live in your imaginary world."

"But here's the point, the costs of globalization that have fallen on you and others don't have to be so large, but somehow we have to redistribute..."

"Yeah, yeah, whatever, I've heard all that before. Take from the winners, give to the losers. You guys ever actually look at who owns the politicians? What were economists thinking in the 1990s when they were pushing this stuff?"

"When we looked forward with our crystal balls using theory and empirical evidence in the 1990s, we didn't anticipate the kinds of costs and adjustments that actually occurred. We knew there would be winners and losers, but our very best estimates said the costs wouldn't be that high - we didn't think there would be huge adjustment costs for workers to absorb. We understood we'd need to help some workers through transitions, but it could be a targeted approach where workers in those industries that were harmed could be helped as needed. That's what economists advocated, open the doors and reap the benefits of globalization, then use some of the benefits to help displaced workers in the specific industries that were harmed."

"But your stupid models were wrong. Thanks for that."

"It wasn't the models so much, though they aren't perfect, instead it was the assumptions that went into them. We missed at least two things. The rise of China and India is the first, and the extent of the growth in digital technology is the second. And those were big things to miss - both had large impacts on labor markets."

"Yeah, but that stuff's been going on for a long time now. Ya blind or what?"

"True, and economists have been saying these things for several years, but it did take economists a few years to start seeing what was happening, and then to realize and understand the consequences. By the time that happened, by the time we started to figure out that these changes were bigger than anticipated, the political landscape was far different than during the Clinton years of the 1990s. That made changes in the social safety net in response to the larger than expected changes difficult to implement."

"But even after it became clear that things might not turn out the way you thought, economists were still pushing globalization."

"Yes, and we probably always will. But if you listen closely, we've always said that there are winners and losers from trade, and that it's possible to compensate the losers and still leave the winners better off. Whether that happens or not is a political choice. In the 1990s we didn't think the compensation would need to be all that large, and it also appeared that it could be targeted at very specific classes of workers. But as globalization progressed we began to realize that the costs were going to be much larger and broader based than we thought. At the same time, however, the political landscape had changed as I just noted. Pushing through broad based programs to enhance the social safety net wasn't going to happen with conservatives firmly in control of government."

"So you just gave up, left those hurt by globalization to fend for themselves? Why weren't you guys standing up for workers who were being harmed?"

"We could have been more vocal, and I suppose we could have caught on faster, but we didn't and that wouldn't have changed the politics much anyway. Besides, there were other pressing issues - Iraq, Social Security, tax cuts, that sort of thing - where economists could be more productive. Many economists, rationally I think, turned their efforts to those issues instead."

"Way to let economists off the hook."

"I don't think I have. But look at what's happening now that Democrats back in power and we finally have a chance to do something - the inclusion of a labor standards provision in the recent trade agreement in congress is a good example - economists are speaking out. Just yesterday, there were articles on this very issue in the New York Times, The Financial Times, Project Syndicate, on blogs, and elsewhere, and that's just a small part of the recent contributions on this issue. There's a fairly unified call to strengthen the social safety net, even from those with a more conservative disposition."

"If you say so, but so what. Call for whatever you want. Talk is cheap."

"Well, the labor standards deal I just mentioned is a sign it may be more than talk for once, but let me save you the trouble and admit that we are a bit murky on this point."

"Murky? How about clueless?"

"Here's what I mean. We say we need to use some of the gains from trade to help workers hurt by globalization, but beyond the broad acknowledgment of that point, we don't have much specific to offer. There's the usual list, unemployment insurance, wage insurance, job retraining, help with relocation, food stamps, minimum wage, EITC, etc., etc., but most of these have been around for awhile and don't generate much excitement or interest."

"That's because things like job retraining don't work, though they seem to make people who still have jobs feel better, and the rest of the things on the list just help you put off taking a worse job than you had before."

"Most of the ways we've dealt with this in the past have, as I talked about before, been targeted at groups of people demonstrably hurt by globalization. That has two advantages. First, when you can point your finger at a particular person it draws sympathy and support. Help is easier to get when there's an identifiable victim. But when the effect is, say, to lower the wages of low-skilled workers generally by, say, 5% or 10%, it's harder to find that particular group or person to single out as an example of the harm from globalization. The politics behind the problem are very different. In addition, there is a second advantage to targeted help. When help is given to specific groups of individuals, those getting the help understand what the help is for and those giving the help can see that it is going to the affected parties. This is different from, say, increasing taxes to transfer money from higher to lower income individuals. The reason for the income transfer may be to compensate the losers from globalization, but the disconnection between the income transfer policy and the reasons for it - compensation for the costs of globalization - will make such a policy difficult to implement and sustain."

"Let's get to the bottom line since I have to get going, so what do we do?

"I don't have the answer. As I said, when costs were concentrated on small groups of individuals it was easier to help. Now, with the costs so widespread and the benefits so concentrated at the top of the income distribution, there will be more resistance."

"So that's it? The rich will be unhappy so we can't do it? Figures."

"We have to keep articulating to politicians and the public that the costs are different now, they are widespread, and that the gains are concentrated at the top. We're used to thinking of the costs in terms of worker displacement, not in terms of generally lower wages, loss of health benefits, etc., though that message seems to be finally getting through. From there Democrats will have to do what they've done in the past, find a way to implement progressive reform and to strengthen the social safety net. I think the details matter, and matter a lot, but I also think that doing something, anything, that is clearly and demonstrably a response to the problem of compensating the losers from globalization will have large political advantages no matter what the policy is, within reason anyway.  It seems to me that many workers feel that politicians have lost sight of them, that they've been focused on other things while globalization has been pulling the rug out from under them, and they feel abandoned. I also think there's an impression that economists don't care, or don't really understand, and haven't tried all that hard to help (I think we have tried hard to help, we do care, etc., but perceptions matter). Implementing a policy designed to help workers would also help them to believe that both groups are finally starting to get it, and are trying to help. That would at least give workers the feeling that somebody finally cares. The inclusion of labor standards in the trade deal between Democrats and the White House had this effect. It's unlikely to make a huge difference for U.S. workers, but it's  strong signal that somebody is finally paying attention."

"Economists still suck."

Monday, May 14, 2007

Helping the Losers from Globalization

This continues with the theme of the day, the winners and losers from international trade (and continues a more general discussion on this issue). This is Nobel laureate in economics Michael Spence along with vice-president of the World Bank Danny Leipziger writing in the Financial Times:

Globalisation’s losers need support, by Danny Leipziger and Michael Spence, Commentary, Financial Times: The modern globalisation debate deals with many important issues... None is more important, however, than who benefits and who loses, absolutely and relatively, in both advanced and developing countries.

Sustained high growth is expanding in the developing world ... and is made possible by the ... growing integration of the global economy. So there is a lot at stake. Income inequality often rises in the growth process, however, and domestic policy is needed to mitigate the negative impacts on those who lose.

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. ... Everyone has benefited but not equally. Similar patterns can be seen in other rapidly growing countries such as India.

A slightly different but related income distribution phenomenon can be seen in the US. In the past 20 years, productivity and real incomes have risen in the US, but the middle of the distribution has gained less than the lower tail and especially the upper tail. The middle grew at 0.4 per cent annually while the upper end grew at 1.25 per cent; small numbers that add up to large changes over a decade or two.

In the case of the US and other advanced economies, not all of this is due to globalisation. There is a shift in the industrial mix ... enabled by the global economy. But there are other drivers. Tax policy is one. Information technology is another. Some aspects of IT are labour saving – a domestic phenomenon that has little to do with outsourcing..., but which hurts some wage earners. A more recent phenomenon is ... services, where labour can be supplied without geographic proximity...

In developing and advanced countries there are growing protectionist voices. They must be controlled because the cost of disengaging..., especially among the poorer countries of the world, is simply too high. It is far better policy to capture the benefits of global markets and to look for domestic policies that reduce the costs in these distributional dimensions...

If we are to continue to have a highly efficient, flexible and innovative economy, there will be creative destruction and churn. That kind of dynamism needs to be underpinned by two legs: programmes that help individuals make employment transitions, and solid safety nets and assured access to basic services such as education and healthcare.

This access must not vary with the ebb and flow of economic activity and personal circumstances. To have an open economy we may need a more protective one than we have had in the recent past. It is a trade-off. The art in policy-making is to design these protections with minimal adverse impacts on mobility and efficiency, the underpinning of the job-creation engine. ...

We need to accommodate a rapidly changing economic mix as a result of technology and global market forces and to balance that with policies that make the growth and distribution of the benefits inclusive.


Dani Rodrik comments on Paul Krugman's NY Times article:

The point that trade policy cannot substitute for an adequate social policy is perfectly sensible. So is the argument that the need for social policy becomes greater when globalization exerts downward pressure on wages and creates new risks and anxieties. ...

Krugman's argument leaves unclear what the right trade policy should be. The questions of the day are not whether the U.S. should increase tariffs against Bangladesh, India, or Mexico (the three countries cited by Krugman), but whether it is a good idea for the U.S. to enter into new free trade agreements (with countries such as Panama and Peru), and whether Doha, with its current agenda, is worth the trouble.

Kevin Drum has a suggestion:

Trade Agreements....Jared Bernstein writes today about global trade deals that hurt (some) workers and tries to answer the $64,000 question: "What would you tell some guy who just lost his good, middle-class, union, high-wage and benefits job? What's your program to help him?"

Here's what I'd say to the guy in the question:

"We can't stop globalization, but we can take its benefits and plough them back into repairing the damage it has done to you. That includes access to quality health care for you and your family, expanding and keeping your pension safe, and some serious retraining.

This will mean letting the Bush high-end tax cuts sunset ... and using that revenue to help you. It will also mean major health care reform.

We'll also work to behind the scenes to pushback on the downsides of trade. We'll push the Fed to maintain truly tight labor markets, we'll put enforceable labor standards in our trade deals, and we'll pushback against countries that manage their currencies to keep our exports out."

Roughly speaking, this sounds great. I don't want to stop trade, which is fundamentally a good thing. I'd just like to make sure that we don't have one group that gets all the benefits while another group pays all the price.

My only problem with Bernstein's answer, then, is this: It's more or less the same answer we've been hearing for the past 15 years. Unfortunately, in case after case, after we end up voting for trade agreements based on promises of relocation assistance, retraining, etc., everyone somehow loses interest in the promises. ...

So, 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.

Update: One more on this topic from today. From Project Syndicate, "Helping the Free-Trade Losers" by Etienne Wasmer and Jakob von Weizsacker discusses these issues in the context of the EU.

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.

Paul Krugman: Divided Over Trade

Paul Krugman discusses the recent trade deal and whether the inclusion of provisions such as labor standards will prove to be a substantial benefit to U.S. workers:

Divided Over Trade, by Paul Krugman, Commentary, NY Times: Nothing divides Democrats like international trade policy. That became clear last week, when the announcement of a deal on trade between Democratic leaders and the Bush administration caused many party activists to accuse the leadership of selling out.

The furor subsided a bit as details ... emerged... But the Democrats remain sharply divided between those who believe that globalization is driving down ... wages..., and those who believe that ... international  is ... essential... What makes this divide so agonizing is that both sides are right.

Fears that low-wage competition is driving down U.S. wages have a real basis in both theory and fact. When we import labor-intensive manufactured goods..., the result is reduced demand for less-educated American workers, which leads ... to lower wages... And no, cheap consumer goods at Wal-Mart aren’t adequate compensation.

So imports from the third world, although they make the United States as a whole richer, make tens of millions of Americans poorer. How much poorer? In the mid-1990s ... economists, myself included, crunched the numbers and concluded that the ... effects ... on the wages of less-educated Americans were modest, not more than a few percent.

But... We’re buying a lot more from third-world countries today... Trade still isn’t the main source of rising economic inequality, but it’s a bigger factor than it was. So there is a dark side to globalization. The question, however, is what to do about it.

Should we go back to old-fashioned protectionism? That would have ugly consequences:... other wealthy countries would follow suit, closing off poor nations’ access to world markets.

Where would that leave Bangladesh, which is able to survive ... only because it can export clothing and other labor-intensive products? Where would it leave India ... if barriers to trade ... went back up?

And where would it leave Mexico? Whatever you think of Nafta, undoing the agreement could ... have disastrous economic and political consequences south of the border.

Because of these concerns, even trade skeptics tend to shy away from ... outright protectionism, and to look for softer measures, which mainly come down to trying to push up foreign wages. The key element of the new trade deal is its inclusion of “labor standards”: countries ... will have to allow union organizing, while abolishing child and slave labor.

The Bush administration, by the way, opposed labor standards, not ... to keep imports cheap, ... it was afraid that America would end up being forced to improve its own labor policies. So the inclusion of these standards ... represents a real victory for workers.

Realistically, however, labor standards won’t do all that much for American workers. No matter how free third-world workers are to organize, they’re still going to be paid very little, and trade will continue to place pressure on U.S. wages.

So what’s the answer? I don’t think there is one, as long as the discussion is restricted to trade policy: all-out protectionism isn’t acceptable, and labor standards in trade agreements will help only a little.

By all means, let’s have strong labor standards in our pending trade agreements... But if Democrats really want to help American workers, they’ll have to do it with a pro-labor policy that relies on better tools than trade policy. Universal health care, paid for by taxing the economy’s winners, would be a good place to start.

Previous (4/30) column: Paul Krugman: Another Economic Disconnect
Next (5/18) column: Paul Krugman: Don’t Blame Bush

Thursday, May 10, 2007

Populists and Globalization

Looking for more debate about globalization, issues like whether to insist on environmental and labor standards as part of trade negotiations? Then you'll want to go read:

With the exception of a few quarrels here and there, I'm with Jamie. [Note: You may have to register at American Prospect, but it's a very short form and doesn't take long and all three articles are free.]

Replaying the "Globalization Numbers Game"

Not too long ago, I posted Dani Rodrik's response to my challenge to tell us what was wrong with estimates of the gains from trade, and I used a 2006 paper by Scott Bradford, Paul Grieco, and Gary Hufbauer, "The Payoff to America from Globalisation," cited in a recent Ben Bernanke speech as an example. Dani claimed that the gains the authors estimate overstate the true gains due to some of the modeling choices the authors make.

In the paper, the authors estimate the gains from trade raise incomes anywhere from $4,000 to $12,000 per household, but Rodrik raised several points challenging these estimates as too high.

At the end of the post, I promised to follow-up soon and as part of that I sent an email to the authors of the study offering them a chance to respond. Paul Grieco has has taken me up on the offer and his remarks are below. As he notes, an additional follow-up is expected from the other authors and I will post that when it becomes available:

Paul Grieco: First, let me say that I find Dani Rodrik's work interesting and compelling and I thank him for taking the time to comment on our paper. I also want to be very clear that these are my remarks alone, they do not necessarily represent the views of my coauthors or the IIE (now the Peterson Institute). They will be giving a more complete response on the Peterson website in a few days.

Rodrik makes the very good point that the results that come out of any empirical research are heavily dependent on the assumptions that go in. In producing the numbers in the papers we make lots of assumptions. We relied heavily on the work of others in pulling together estimates from a variety of sources. We tried to document our sources and our assumptions as carefully as possible. Many of the points which Rodrik brings up are actually explicitly addressed in the text. We believe the assumptions that we made were reasonable, although clearly others can disagree, I hope your readers will look at the paper and see for themselves.

I think Rodrik's critique fails to consider his own assumptions. Namely, he argues our numbers are too large, but fails to mention that his alternatives assume (rather than show) that a lot of the effects we try to capture don't exist (such as improved product variety, technological spillovers, and import competition, see box 2.1, page 66-67 of our paper). For example let's look at the back of the envelope number. He calculates the gains to be 0.25% of GDP compared to our lowest estimate of 3.4% of GDP.

Rodrik presents this as a ballpark estimate, but what does it assume? Among other things, it assumes that foreign and domestic goods are perfect substitutes, and that the US charges uniform tariffs on all imports. We all know that the US tariff schedule is far from uniform, instead some goods are have prohibitive tariffs, while others are tariff-free. This in and of itself can generate distortions that are much worse than what an "equivalent" uniform average tariff would produce. Perfect substitutability assumes away any gains from variety (among other things) and removes the possibility of meaningful import competition (since all goods are the same from the start). Neither of these assumptions seem very likely to me, and I feel fairly confident in saying they bias Rodrik's estimate downward. Given this, Rodrik's ballpark number is best understood as a lower bound on the gains from liberalization. As such, I'm not sure how it can serve as a reasonable reality check. In our paper, we explicitly say we are trying to account for gains which this number rules out by it's not much of a surprise that we get a bigger number.

Next there is the issue of CGE models. In our paper we do cite several CGE models (including one based on the GTAP model from Purdue), not just the one from the University of Michigan. Of course all of these models are built on a large number of assumptions. Having read the work, it is my belief that all of these researches take a lot of care in creating and documenting their models. The real learning comes from understanding how estimates change with changing assumptions. Rodrick seems to imply that a constant returns to scale model is a more realistic assumption, but I'm not sure why, since the world is full of examples of increasing returns to scale. For the record, Rodrick's preferred model omits services liberalization. Services are a huge part of the US economy today, so ignoring this sector must cause a downward bias.

My last comment is really just a technical issue. Rodrick states that, "Rose says 'belonging to a regional trade agreement raises bilateral trade by (exp(1.17)-1»)222%,' whereas Bradford et al. use 118%, without explanation."

Our paper is online here:, the sentence Rodrick is referring to is footnoted (footnote 60, page93):

The dependent variable was the natural log of bilateral trade, the regional FTA coefficient controlling for fixed country-pair effects is 0.78, 100*(exp(0.78)-1)= 118 percent. This is the smallest regional FTA coefficient of the three reported benchmark regressions.

I assume that Rodrick was looking at a different version of the paper where this footnote does not appear for some reason. Nonetheless I wanted to set the record straight.

If you look at table 1 of Rose (2003,, the .78 estimate is right in the table, just next to the 1.17 coefficient. The reasons we use .78 over 1.17 are pretty simple. It seems reasonable to us that country-pairings that naturally trade a lot will be more likely to form an FTA, and this would imply that the OLS and random effects estimators will be biased upwards, while the fixed effects estimator won't have this problem. Therefore, it's best to use the fixed effects estimator. It seems a little odd that here Rodrick, who says we are trying to inflate numbers, is now criticizing us for not using one we believe is biased upwards.

Update: Dani Rodrik responds (briefly).

Wednesday, May 09, 2007

"We Need Alan Blinder to Pull His Weight"

More blowback from the Alan Blinder article in the Washington Post. This is Clive Crook in the Financial Times:

Unfounded new fears on free trade, by Clive Crook, Commentary, Financial Times: ...Princeton’s Alan Blinder ... has changed his mind about liberal trade – kind of. He now finds that it is not always such a good thing. ...[I]n The Washington Post last weekend ... Mr Blinder says he is shocked, shocked, by the vigorous reaction he has aroused. He is being accused of apostasy. “Who, me? What did I say?” he asks.

However disingenuous the posture may be, Mr Blinder is right to be puzzled because, in one way, he is saying nothing new. His main point is that technological change is broadening and strengthening the disruptive effects of trade. ... Over the next few decades, millions of jobs will be offshorable. ...

Yet offshoring is just another kind of trade, as he notes. And trade is still good, he insists, for all the traditional reasons. ... Lately, though, Mr Blinder has been emphasising the downside. ... “These forces,” he points out, “don’t look so benign from the point of view of an American computer programmer or accountant”, whose job might be at risk from foreign competition for the first time.

That is true, but how benign did those forces look to factory workers 20 years ago? Do accountants have larger claims on our sympathies than steel workers? Mr Blinder used to argue that trade creates jobs as well as destroying them and raises living standards in the process. ... Those arguments were correct then and, in Mr Blinder’s view, still are. So, again, what has changed?

“There’s something new about the coming transition to service offshoring ...[it] will be large, lengthy and painful.” Very well, but what is wrong with “large”? If the effects of trade are advantageous, it is better if they are large. Why prefer small gains to big gains? “Lengthy” also seems fine. If ... the shift is stretched over several decades, as Mr Blinder expects, it may not be all that “painful”. The changes will merge into the ordinary rate of job churn...

Mr Blinder is right to draw attention to the potential scale of offshoring (and onshoring, ... this goes both ways). He has opened people’s eyes to how far-reaching a shift this may be. He is also right, in my view, to call for an array of policies aimed at maximising the benefits and minimising the adjustment costs of this Third Industrial Revolution, as he calls it. He wants better education and opportunities for retraining, “more science and engineering, more spending on R&D, keeping our capital markets big and vibrant, and not letting ourselves get locked into ‘sunset’ industries”. Amen to all that. But weren’t these policies sensible before? I recall Mr Blinder saying they were. ...

He says he wants to save free trade from itself. “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.” Yes, that is always a risk. But is it really going to be more effective to chant “you’re right, free trade is bad for you”?

Let me suggest another approach. Keep on patiently explaining why, implausible as it seems to non-economists, liberal trade in goods and services really is good... Explain why, odd as it may seem, offshoring really is no different. Keep arguing for policies that widen the gains and help the victims, to be sure, but never concede those main points, or suppose they do not need defending. No question, it is thankless and repetitive work, but until it can be offshored, we need Alan Blinder to pull his weight.

Robert Samuelson: China's Trade Time Bomb

I'm weary of the free-trade argument today. If you're so inclined, have at it - I'm going to sit this one out:

China's Trade Time Bomb by Robert J. Samuelson, Commentary, Washington Post: It sometimes seems as if almost everything we buy comes from China: DVD players, computers, shoes, toys, socks. This is, of course, a myth. In 2006, imports from China totaled $288 billion, about 16 percent of all U.S. imports and equal to only 2 percent of America's $13.2 trillion economic output (gross domestic product). Does that mean we don't have a trade problem with China? Not exactly.

China is already the world's third-largest trading nation and seems destined to become the largest. On its present course, it threatens to wreck the entire post-World War II trading system. Constructed largely by the United States, that system has flourished because its benefits are widely shared. Since 1950, global trade has expanded by a factor of 25. By contrast, China's trade is mercantilist: It's designed to benefit China even if it harms its trading partners.

There's a huge gap in philosophy. By accident or design, China has embraced export-led economic growth. The centerpiece is a wildly undervalued exchange rate. ... The resulting competitive advantage props up exports, production and jobs. ...

Despite popular impressions, China's trade offensive hasn't yet seriously harmed most other economies. For example, ... that hasn't stymied job creation; the U.S. unemployment rate is 4.5 percent. And world economic growth has accelerated.

But what's been true in the past may not be true in the future. The huge U.S. trade deficits, fed by Americans' ravenous appetite for consumer goods and heavy borrowing against rising home values, stimulated economies elsewhere, including China's. Now that stimulus is fading as U.S. home prices weaken and consumers grow more cautious. For China to expand production, demand must come from its own consumers or other nations... There's the rub.

Update: PGL has lots more to say about this. As he says in an email, "OK, you outsourced that one to this Angrybear."

Continue reading "Robert Samuelson: China's Trade Time Bomb" »

Monday, May 07, 2007

Rodrik: The Globalization Numbers Game

Dani Rodrik responds to my challenge. This is how it's done:

The globalization numbers game, by Dani Rodrik: Many many years ago ..., I heard Gary Hufbauer tell an anecdote at a conference on international trade. A government economist is called in by his superior, who tells him "Look, I have to make a case for this policy in front of Congress, and I need a number real bad." The economist responds, "well, I haven't done a proper analysis, so I can give you a real bad number." Perhaps it was a true story based on Gary's own government experience.

I am reminded of this story by Mark Thoma's post, which focuses on the magnitude of the gains from globalization. He says "there's something important that's generally missing from the attacks on globalization's supporters, actual evidence." He refers to a Bernanke speech and at length to a paper which Bernanke cites by Bradford, Grieco, and Hufbauer (yes, the same Hufbauer). The Bradford et al. study argues that removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household (or 3.4-10.1% of GDP). That is a whole chunk of change! Thoma writes:

Continue reading "Rodrik: The Globalization Numbers Game" »

Sunday, May 06, 2007

knzn: The Blinder Approach

knzn has questions for Alan Blinder:

The Blinder Approach, by knzn: OK, Alan Blinder, there’s something here I don’t understand. I get the point that things may get tough for a lot of American workers over the next 30 years. I get the point that this makes the case for providing better social insurance stronger than it used to be. I get the point that it makes the case for encouraging more research and development stronger than it used to be. I get the point that it makes the general case for facilitating more and better education and training stronger than it used to be. But here’s what I don’t get:

…we need to rethink our education system so that it turns out more people who are trained for the jobs that will remain in the United States. … many electronic service jobs will move offshore, whereas personal service jobs will not. Here are a few examples. Tax accounting is easily offshorable; onsite auditing is not. Computer programming is offshorable; computer repair is not. Architects could be endangered, but builders aren't. Were it not for stiff regulations, radiology would be offshorable; but pediatrics and geriatrics aren't. Lawyers who write contracts can do so at a distance and deliver them electronically; litigators who argue cases in court cannot.

So apparently we want to train people for onsite auditing, computer repair, building, pediatrics, geriatrics, litigation, and similar occupations. But why? Don’t we already have enough – or at least almost enough – auditors, computer repair people, builders, pediatricians, geriatricians, and litigators? Is there any reason to expect that offshoring will increase demand for those occupations? What model do you have in mind wherein foreign competition increases the demand for non-tradable services?

In my crass Mundell-Fleming conception, here’s what happens when offshoring occurs. Suppose a lot of people from India learn to do American tax accounting, computer programming, architecture, and so on, undercutting American service producers. A bunch of American accountants, programmers, architects, and such will lose their jobs. The Fed will notice the slack labor markets and cut interest rates. As a result, the dollar will depreciate, causing an increase in demand for some other American products. Which products, exactly, we don’t know, but they have to be products that are exportable – not auditing, computer repair, and building, and pediatrics. There will be excess demand for certain kinds of workers, but not, ultimately, for the categories of workers whose jobs can’t move offshore.

I grant you that we do not live in a small country with perfectly substitutable assets, so things won’t happen exactly the way I suggested. There will be a temporary demand for certain non-tradable services – specifically the ones that are interest-rate sensitive, like building. That, in fact, is already happening, or perhaps has just finished happening. But today I think one might be rather glad to have passed up the opportunity to train for a job in the construction industry. In the longer run, surely we cannot expect that foreigners will be willing to finance ever higher amounts of non-tradable services for Americans. Perhaps we can maintain a large trade deficit, but surely we can’t keep running ever larger trade deficits, to create ever greater demand for domestic non-tradable services.

So do we need to rethink our educational system? Perhaps, but as to how, exactly, I have no idea. I don’t understand why we would want to restructure it to turn out more people trained for non-tradable service jobs.

Saturday, May 05, 2007

Blinder: Free Trade's Great, but Offshoring Rattles Me

Continuing our discussion of globalization, this is Alan Blinder who made quite a splash when he predicted in a Foreign Affairs article that offshoring would cause major problems for American workers. Here he summarizes his concerns and discusses how to minimize the costs of to workers as globalization continues to alter the global distribution of jobs:

Free Trade's Great, but Offshoring Rattles Me, by Alan S. Blinder, Commentary, Washington Post: I'm a free trader down to my toes. ... 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 ... 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? (Answer: I think not.) Have you forgotten about the basic economic gains from international trade? (Answer: No.) Are you advocating some form of protectionism? (Answer: No !) Aren't you giving aid and comfort to the enemies of free trade? (Answer: No, I'm trying to save free trade from itself.)

The reason for my alleged apostasy is that the nature of international trade is changing before our eyes. We used to think, roughly, that an item was tradable only if it could be put in a box and shipped. That's no longer true. ... It's electrons that move, not boxes. We're all familiar with call centers, but electronic service delivery has already extended to computer programming, a variety of engineering services, accounting, security analysis and a lot else. And much more is on the way.

Why do I say much more? Because two powerful, historical forces are driving these changes, and both are virtually certain to grow stronger over time.

Continue reading "Blinder: Free Trade's Great, but Offshoring Rattles Me" »

Friday, May 04, 2007

The Benefits from International Trade

Lately, the usual crowd has surfaced to cast aspersions at those who support enhanced globalization. But while there's no shortage of shrill attacks in much of the writing, there's something important that's generally missing from the attacks on globalization's supporters, actual evidence.

In a recent speech, Federal Reserve Chairman Ben Bernanke said:

How important is [international trade] for the health of our economy to trade actively with other countries? As best we can measure, it is critically important. According to one recent study that used four approaches to measuring the gains from trade, the increase in trade since World War II has boosted U.S. annual incomes on the order of $10,000 per household (Bradford, Grieco, and Hufbauer, 2006). The same study found that removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household. Other research has found similar results. Our willingness to trade freely with the world is indeed an essential source of our prosperity--and I think it is safe to say that the importance of trade for us will continue to grow.

I was going to summarize the paper by Bradford, Grieco, and Hufbauer, "The Payoff to America from Globalisation," but I came across this op-ed from the Washington Post from June, 2005 from two of the three authors that explains the results in the paper very well, so there's no reason for me to do it again. Here's what they have to say:

The Payoff From Globalization, by Gary Clyde Hufbauer and Paul L.E. Grieco Washington Post, June 7, 2005: ...The "modern" debate over trade barriers can be traced to the 19th century. Then as now, the debate has been dominated by special interests (land barons vs. merchants in the 19th century; the AFL-CIO vs. the Chamber of Commerce today). There is no question that trade liberalization creates winners and losers. Affected citizens and companies have every right to plead their case.

But Congress should consider how freer trade affects the nation as a whole. Since World War II the United States has led the international quest to liberalize world trade and investment. With leadership from the White House, Congress has slashed the simple average tariff rate from 40 percent in 1946 to 4 percent today, and other industrial nations have done much the same. After a half-century of steady liberalization it is fair to ask, what do Americans have to show?

As it turns out, quite a lot. Using four different methods, we estimate that the combination of shrinking distances -- thanks to container ships, telecommunications and other new technologies -- and lower political barriers to international trade and investment have generated an increase in U.S. income of roughly $1 trillion a year (measured in 2003 dollars), or about 10 percent of gross domestic product. This translates to a gain in annual income of about $10,000 per household.

Unfortunately for the cause of continued liberalization, Americans do not receive this money as a check marked "payoff from globalization." Instead, the payoff is hidden within familiar channels: fatter paychecks, lower prices and better product choices (compare the telephones available now with the standard black model of 1980).

Nevertheless, each of our four methods uncovers a large payoff. First, we parse international data that correlate the expansion of international trade with economic growth. This shows that the increase in U.S. income sparked by more intense trade equates to 13.2 percent of GDP. In the second method, we calculate how lower tariffs stimulate U.S. productivity through competitive forces and bring greater product choices to U.S. producers and consumers. The estimate for these benefits comes to 8.6 percent of GDP. Third, we draw on a computable general equilibrium model to suggest how today's economy would react to the restrictive Smoot-Hawley trading environment of the 1930s. That exercise indicates an estimate of 7.3 percent more in GDP from liberal trade. Finally, we calculate the productivity benefits arising from use of imported components and find a benefit of 9.6 percent of GDP. While none of the four estimates is perfect, the broad result is clear: The benefits of trade and investment liberalization are positive and large.

Continue reading "The Benefits from International Trade" »

Tuesday, May 01, 2007

The China Syndrome

Paul Krugman responds to comments claiming that low U.S. investment is caused by money going overseas, to China in particular:

Paul Krugman, via email: Well, that's weird. I've gotten a lot of comment alleging that the reason for low investment in the US is that all the money is going overseas, especially to China - and quite a lot of the comment was vituperative: I'm an idiot, I don't anything about the real world, etc. etc. I've gotten accustomed to that sort of thing from the right - in fact, I feel like a failure if I don't get accused of being a liar and a traitor after each column - but what's going on here? Anyway, a note on the numbers. As I already pointed out at the Times, almost as much direct foreign investment is coming into the US as is going out. But what really amazes me is the China obsession. China is a huge export machine, and I take the impact of Chinese exports on US workers quite seriously. But it is not, repeat not, a major destination of US corporate investment. Look at the BEA numbers: China is only about 1 percent of the total stock of US direct investment abroad, less than $20 billion. Oh, and one fallacy I've seen confidently asserted is that FDI doesn't count retained earnings. Sorry, but it does. There are some real questions about mismeasurement of the overall investment position - dark matter and all that - but there's no way you can make the case that corporations are taking all their profits and putting it into China.

A summary of his comments from the Times is here: Globalization is Not the Cause of Low Business Investment.

Ben Bernanke: Embracing the Challenge of Free Trade: Competing and Prospering in a Global Economy

Ben Bernanke on the benefits and challenges of free trade. The speech covers:

Here's the speech itself. I expect this will convert all you doubters into enthusiastic supporters of the free trade agenda:

Embracing the Challenge of Free Trade: Competing and Prospering in a Global Economy, by Ben S. Bernanke, Chair, Federal Reserve Board: Trade is as old as humanity, or nearly so. Archaeological sites demonstrate that ancient peoples traded objects such as rare stones and shells across fairly long distances even in prehistoric times (Guisepi, 2000). Over the centuries, with stops and starts, the volume of trade has expanded exponentially, driven in large part by advances in transportation and communication technologies. Steamships replaced sailing ships; railroads succeeded canal barges; the telegraph supplanted the Pony Express. Today, in a world of container ships, jumbo jets, and the Internet, goods and many services are delivered faster and more cheaply (in inflation-adjusted terms) than ever before.1

Continue reading "Ben Bernanke: Embracing the Challenge of Free Trade: Competing and Prospering in a Global Economy" »

Sunday, April 29, 2007

Krugman: Distribution and Trade Policy

Paul Krugman adds a few more thoughts via email related to the recent trade policy discussion (fully covered here):

Paul Krugman: Another thought or two on distribution and trade policy:

The problem of losers from trade isn't new, obviously, either as a fact or concept. But if you look at the history of trade policy - say, in Matt Destler's book it's hard to avoid the sense that the issue has gotten bigger and harder. His final chapters have a definite sense both of nostalgia for the good old days and foreboding.

I'd put it like this: in the old days, when GATT negotiations were mainly with other advanced countries, the groups hurt tended to be highly specific and local - the left-handed widget makers of Northern South Dakota, worried about competition from their counterparts in Upper Lower Swabia. Economists could in good conscience argue that while individual groups were hurt by trade liberalization in their specific sector, the great majority of Americans benefitted from general trade liberalization. And politicians made trade deals by packaging together the interests of exporters, to offset the parochial interests of import-competing industries

But now we're talking about broad swaths of the population hurt by trade. It's a good bet that almost all US workers with a high school degree or less are hurt by Chinese manufactured exports, at least slightly. You could in principle put together win-win packages - say, trade liberalization together with an increase in the EITC paid for with higher taxes on high-income Americans, who come out winners from trade. But the reality is that we don't make those deals.

For those who like their jargon, by the way, I'm basically saying that the right model for thinking about this has gone from many-good specific factors to Heckscher-Ohlin.

I don't have answers to this. The moral case for open markets is their importance to poor countries: America would do OK even in a highly protectionist world, but Bangladesh wouldn't. The domestic politics of trade, however, are now very hard, and getting harder.

Update: Brad DeLong follows up with his solutions to this problem.

Was It All in Ohlin?

Given the recent interest in trade models, let me add this from Paul Krugman who knows a thing or two about this area of economics (I should note that it's a bit theoretical in spots, e.g. see figures 1 and 2, this is not the Krugman you read on the pages of the New York Times. However, even if the details of the graphs and other theoretical points are not completely clear to you, the larger points come through):

Was It All in Ohlin?, by Paul Krugman, October 1999: Let me begin with an embarrassing admission: until I began working on this paper, I had never actually read Ohlin's Interregional and International Trade. I suppose that my case was not that unusual: modern economists, trained to think in terms of crisp formal models, typically have little patience with the sprawling verbal expositions of a more leisurely epoch. To the extent that we care about intellectual history at all, we tend to rely on translators - on transitional figures like Paul Samuelson, who extracted models from the literary efforts of their predecessors. And let me also admit that reading Ohlin in the original is still not much fun: the MIT-trained economist in me keeps fidgeting impatiently, wondering when he will get to the point - that is, to the kernel of insight that ended up being grist for the mills of later modelers.

Continue reading "Was It All in Ohlin?" »

Saturday, April 28, 2007

On the Other Hand . . . . Rodrik versus Mankiw (Others Also Weigh In)

Dani Rodrik and Greg Mankiw are debating a couple of issues. (Update: Paul Krugman also comments on this debate, see the first update at the end of the post. Update: See the response from Greg Mankiw and and his follow-up. Update: Tyler Cowen and Kash Mansori add their thoughts. Update: David Altig too. Update: Paul Krugman adds more thoughts. Update: Two more from Dani Rodrik. Update: PGL at Angry Bear follows up. Update: Two more from Alex Tabarrok and Brad Setser)

The first is the effect, if any, of globalization of the aggregate price level versus its effects on relative prices (PGL at Angry Bear comments on this as well), and the second is how to present economic results to the public and policymakers. e.g. how much to qualify results when advocating for policies such as free trade. I want to focus more on the second issue, but I'll include both:

The debate started with this post by Daniel Drezner:

The greatest threat this blog has ever faced, by Daniel Drezner: ...I have to take issue with the central argument of this Rodrik post:

Imagine some change in the economy leaves Tom $3 richer and Jerry $2 poorer, and I ask you whether you approve of this change. Few economists, regardless of their political and philosophical orientation, would be able to give a straight answer without asking for more information.... In other words, most of us would care about the manner in which the distributional change occurred--i.e., about procedural fairness....

Yet when we teach comparative advantage and explain the gains from trade, we typically overlook this important conclusion. We expect our students to focus on the net gain triangles and disregard the rectangles of redistribution. ...

Continue reading "On the Other Hand . . . . Rodrik versus Mankiw (Others Also Weigh In)" »

Tuesday, April 24, 2007

Robert Shiller: The Taming of 'Speculative Capitalism'

Robert Shiller says Nicolas Sarkozy has wrong-headed ideas about how to insulate workers from the consequences of globalization:

The taming of 'speculative capitalism', by Robert Shiller, Project Syndicate: Nicolas Sarkozy, ...[a] contender in the French presidential election, recently lashed out against what he called "speculative capitalism," and says he wants to "moralize the financial zone" created by the euro. What does Sarkozy mean by "speculative capitalism?" Something immoral, apparently, but what? The term has rarely been used before, and seems to be redundant. After all, capitalism is practically a synonym for speculation, isn't it?

Sarkozy is expressing a wave of sentiment that is neither unique to his party nor to France. At stake with his comments are emerging ideas and attitudes that will inform the 21st century economy. So we should think hard about what "speculative capitalism" means.

Sarkozy has called free trade "a policy of naivete," and wants to take ... steps that would stand in the way of economic globalization. ... Protecting France from speculative capitalism seems to mean interfering with free trade to protect local jobs.

To be sure, Sarkozy is right to note the enormous risks that workers and their communities face in this rapidly globalizing world. But ... this ... should not mean protecting existing jobs come what may. ...

Concerns about free trade similar to Sarkozy's are gaining strength around the world. In an article last year in ... Foreign Affairs, Alan Blinder, a former adviser to President Bill Clinton and vice chair of the U.S. Federal Reserve Board, argued that the process of globalization has the potential to cause massive job loss in the future. Given that electronic communications technology has a powerful potential to replace employees with others who are thousands of miles away, we may now be seeing only the beginning of this process.

Blinder is absolutely right that the problem could get worse. Deniers of the problem -- such as economist Jagdish Baghwati -- cannot prove that the worst will not happen. We ought to prepare for the possibility of massive turmoil in our economies in coming years, even if we cannot prove that it will happen, just as we should take steps against global warming, even if some scientists doubt that it is a problem.

According to Blinder, governments should encourage education for jobs that are harder to outsource overseas. He wants the government to subsidize ... jobs ... which cannot be delivered over the Internet...

Subsidies, of course, interfere with free trade. But Blinder's solution appears to be a creative new idea, and one may think of legitimate justifications for the government to interfere with free markets this way. His idea certainly is more focused and theoretically sound than Sarkozy's plans to protect existing jobs. In fact, Blinder's proposal is only one of many possible government policies aimed at dealing with the Internet-age turmoil in the market for jobs and livelihoods.

Capitalist institutions include risk-management schemes that provide insurance, hedging and diversification. Government can promote the democratization of such institutions so that they protect people from the very risks that they are worrying most about. Such possibilities include livelihood insurance, home equity insurance, income-linked loans, and GDP-linked and home-price-linked securities.

Moreover, government can make our social insurance ... more incentive-compatible and better at managing risks -- and not just the risks of the extreme losers -- by, say, launching inequality-indexation of the tax system. And governments should improve our information infrastructure, so that financial contracts can better capture the outcomes of economic risks.

So Sarkozy shouldn't be lashing out against "speculative capitalism." On the contrary, he should be asking how capitalism can be developed even further, with new institutions in finance and insurance to deal with the very important problem that his campaign has highlighted.

Thursday, April 19, 2007

Kenneth Rogoff: Time for Change at the World Bank

Kenneth Rogoff wants changes in the selection process for the leadership at the World Bank and the International Monetary Fund:

The World Bank at bay, by Kenneth Rogoff, Commentary, Project Syndicate: Will World Bank president Paul Wolfowitz's troubles finally catalyse real change at the World Bank? Will there finally be an end to the archaic practice by which the president of the United States unilaterally appoints the head of the world's most important development agency?

Facing an extraordinary rebuke from the Bank's ministerial oversight committee and open revolt from his professional staff, Wolfowitz has faint hope of limping through the last three years of his term. ... At a time when the Bank has been emphasising high governance standards as the key to development, the recent revelation[s] ... have dealt a serious blow to the Bank's credibility.

Continue reading "Kenneth Rogoff: Time for Change at the World Bank" »

Wednesday, April 18, 2007

New Data Cause Economists to Reconsider Globalization

See here.

Sunday, April 15, 2007

Thomas Palley: Real IMF Reform

Thomas Palley sends along his thoughts on reform of the International Monetary Fund, something, as he notes in the email, "you have not yet posted anything on":

Real IMF Reform: Carpe Diem, by Thomas I. Palley: The International Monetary Fund (IMF) has been the focus of extended debate and criticism, yet reform has been hard to come by. Now, owing to changes in the global economy, the issue of reform has forced itself onto the official agenda. The Fund’s management has responded with its own reform proposals, but they are too narrow. Instead, the IMF should be pressured to adopt bolder reform that incorporates missing social concerns into its mission.

IMF critics have long charged its policies prejudice equitable global growth. Despite the seriousness of these charges, IMF reform has been near impossible. In times of economic crisis reform is viewed as too risky, while in good times the case for reform melts away on the grounds of why rock the boat. However, very occasionally an institution’s business model breaks down, creating an internally generated case for reform. This has now happened to the IMF.

Previously, developing countries had limited access to financial markets and had to pay high interest rates. That created an opportunity for the IMF, which borrowed low and lent to needy developing countries at favorable rates, thereby providing an income for the Fund and cheaper loans for countries. For Fund critics, the big drawback was the IMF required countries to adopt neo-liberal economic policies to qualify for loans.

This business model has now collapsed. Growth of global capital markets means countries can access private capital at reasonable interest rates and without IMF policy strictures. Additionally, huge U.S. trade deficits have enabled developing countries to run trade surpluses, obviating need for funding. Consequently, demand for IMF loans has fallen, thereby undermining the Fund’s purpose and financial viability.

The IMF is now trying to redesign its business model by proposing reform. However, its proposals do not go deep enough. In particular, they continue with the “silo” model of global governance whereby institutions act alone. A better model is the “matrix” model whereby institutions reinforce each other, which is what globalization needs.

The IMF has proposed two reforms. One is to increase developing country quota holdings and perhaps also representation rights in recognition of these countries’ increased contribution to global economic activity. The second is to transform the IMF into something akin to a global financial umpire. International economic integration means there can be adverse spillovers from country economic policies, particularly regarding exchange rates. Consequently, an arbiter is needed to help resolve policy disputes.

Both of these proposals deserve support. Politically, they recognize the new realities of the global economy. At the policy level, they seek to tackle the problem of strategic exchange rate under-valuation, whereby countries try to grow by draining demand from other countries.

However, the Fund refuses to recognize that globalization also creates adverse labor market spillovers. With the world increasingly one labor market owing to trade and outsourcing, labor conditions in one country can spillover and affect labor outcomes in another: hence, need for international labor standards also overseen by a global arbiter.

This is where the matrix model of governance enters. The International Labor Organization (ILO) oversees international labor standards, but the IMF (and the World Bank too) also has an important role to play by officially and actively supporting the ILO’s work. That means Fund policy advice should be obligated to encourage countries to comply with labor standards; Fund loan programs should not promote economic reforms that undermine labor standards; and Fund Article IV country reviews should spotlight failures to meet labor standards. Furthermore, countries borrowing from the Fund could be screened for compliance with labor standards. Those failing the screen might still be allowed to borrow, but they would require special approval and they would have to develop a strategy for future compliance.

Globalization is suffering from lack of attention to the social dimension. The IMF has resisted any responsibility for remedying this weakness, claiming it is not part of its mission. The reforms proposed by IMF management do nothing to change this stance. That should not be allowed.

Today’s global economic system was stitched together in the last quarter of the 20th century, a period of labor weakness and laissez-faire revival. Consequently, labor and social issues were left off the table. It is time to remedy that omission, and the reform process underway at the IMF provides a good place to start.

Tuesday, April 10, 2007

Martin Wolf: How to Promote Employment while Protecting the Low-Paid

Martin Wolf is worried that if we don't do a better job of protecting workers displaced by globalization and of sharing the gains from globalization more broadly, the global trading system will fail to live up to its potential:

How to promote employment while protecting the low-paid, by Martin Wolf, Commentary, Financial Times: There are two particularly significant facts about labour markets of the high-income countries over the past two to three decades: globalisation and declining shares of labour income in gross domestic product.

How are these phenomena related? What are the policy implications? The answers to these questions may well determine whether the backlash against globalisation...

The subject is the focus of a background chapter to the latest World Economic Outlook from the International Monetary Fund. It reaches four chief conclusions.

First, the globally engaged labour force has quadrupled over the past two decades, with the greatest impact coming from trade, not immigration.

Second, the shares of labour income in GDP have declined markedly across the high-income countries over this period.

Third, globalisation is among the causes of the declining share of labour income in GDP. But technology has been more important.

Finally, countries that have lowered the cost of labour to business and improved labour-market flexibility have generally experienced smaller declines in labour-income shares. ...

[W]hat are the policy conclusions? The ... most striking conclusion of this analysis has been the benefits of policies that promote employment. Insisting on high real wages for what, in consequence, become non-existent jobs is counter-productive. While incomes can be sustained through transfers, subsidised idleness is soul- destroying. French voters, please note.

The right policy, then, is to promote employment while augmenting the incomes of the low-paid or at least sharply reducing the taxation of labour. It is also to promote the highest quality of basic education across the labour force and provide good opportunities for motivated workers to upgrade their skills.

The right policy is to combine openness to trade with a politically acceptable sharing of the gains in high-income countries. The challenge is huge. But it is one at which we cannot afford to fail.

Thursday, April 05, 2007

Costs and Benefits of Preferential Trade Agreements

In this comment on Martin Wolf's column on the costs of preferential trading agreements (PTAs), Robert Wade notes that there is an additional cost imposed on undeveloped countries in many of these agreements, constraints on their development path that are built into the agreements.

Why would developing countries accept constraints on development as a condition of these agreements? One reason, of course, is to enhance trade but another is that trading agreements with the U.S. come with a large positive insurance externality, military protection from the U.S.:

Robert Wade: A comment on Martin’s general assessment of bilateral-regional trade agreements as compared with WTO agreements...

Like most economists assessing bilateral-regional trade agreements, Martin assesses them on the assumption that the objective of trade policy is to maximize trade... Hence the central issue is “trade creation vs. trade diversion”.... Martin rightly extends this standard framework of efficiency costs and benefits to include also the effects on inter-state competition and conflict.

But one should also assess trade agreements in terms of their impact on ... the diversification and upgrading of production over time, especially in the case of the “southern” partners. Different rules ... governing tariffs, foreign direct investment, intellectual property, the mobility of financial capital, public procurement, and the like - have different impacts on a country’s development trajectory, some being more constraining, more “locking in to existing comparative advantage”, than others.

As Kenneth Shadlen shows in an important article (“Exchanging development for market access?...”, Rev. Int. Pol. Econ. 12 (5), 2005, 750-75), preferential trade agreements involve the southern partner receiving better market access for existing exports, in return for “reforms” deep within its borders ... “Reforms” mean putting the government under new constraints not to use industrial policy instruments to accelerate production diversification and upgrading – instruments of the kind that most of the now developed countries used during their rapid development phase. Hence the risk of freezing the existing division of labour between the trade partners.

On the other hand [under] the WTO’s multilateral rules ... ... the powerful northern countries are a bit less able to close down this policy space and neutralize the competition from southern producers than they are in bilateral or regional agreements. This is one very good reason for supporting the WTO and discouraging the proliferation of PTAs. ...

If PTAs typically shrink policy space even more than the WTO agreements why are many governments rushing to sign such agreements with the US? In the case of the Singapore-US PTA the negotiations almost broke down over ... the US’s insistence that Singapore commit to never applying restrictions on the mobility of financial capital. In the end the Singapore government more or less acceded to the US demand, for the reason (so I was told by a leading Singapore participant) that Singapore’s prime concern was less with the economics ... than with the military-security impact: the government calculated that the agreement would help to tie the US into the region militarily. Presumably the South Korean government has been making a similar calculation ... as North Korea could explode on its doorstep and China-Taiwan could explode to the south. Also, of course, Korea ... has built up a highly competitive set of industries and world-spanning firms, with a huge R&D capability; so is much less likely to experience a freezing of existing comparative advantage than most developing countries.

A final point. Arguably the single biggest threat to the stability of the world trade system comes not from within the trade system (e.g. proliferation of preferential trade agreements) but from the lack of multilateral disciplines over the exchange rates and macroeconomic policies of the major economic states (G3)... I’ll elaborate at a later time.

Tuesday, April 03, 2007

Insider-Outsider Distortions and Trading Blocs

I think Martin Wolf has this right. What appears on the surface to be a series of free trade agreements betweent the U.S. and other countries is really a system of insider-outsider trade with all the distortions such preferential treatment brings about:

A Korean-American strand enters trade’s spaghetti bowl, by Martin Wolf, Commentary, Financial Times: ...This month marks the 60th anniversary of the General Agreement on Tariffs and Trade... It also sees the announcement of a “free trade agreement” between [the U.S.] and South Korea. The core of the Gatt was non-discrimination. The core of the new agreement is its opposite. ...

At a first glance, the new FTA does deliver a substantial opening between the world’s largest economy and its 11th largest: nearly 95 per cent of bilateral trade in consumer and industrial products is to become duty free within three years, with most remaining tariffs abolished within 10...

Why do I object? Is such trade liberalisation not precisely what most economists interested in trade believe in? The answer to this question is “yes and no”: yes, because liberal trade is desirable, but no, because this form of liberalisation is not necessarily a move towards liberal trade. As Jagdish Bhagwati of Columbia University has argued, “free trade agreements” should, instead, be called “preferential trade agreements”. I would prefer “discriminatory trade agreements”.

In this case, the US and South Korea agree to discriminate in favour of exporters or investors based in each other’s territory. The obvious potential economic cost of such an agreement is what Jacob Viner, the great inter-war trade economist, called “trade diversion”. In other words, the partners might shift from more competitive to less competitive suppliers. In this case, however, trade diversion may be modest, since these two countries are among the world’s most competitive suppliers of a wide range of goods and services.

A more significant economic cost, however, is systemic. The number of preferential trade agreements has exploded upwards in recent years... Other countries will be desperate to avoid the adverse effects upon them. This makes probable yet another jump in the prevalence of such agreements.

That will have at least two further economic consequences. First, an increasing proportion of the world’s trade is sure to be governed by the diverse rules of origins and special procedures of a host of discriminatory bilateral and plurilateral agreements. That guarantees an explosion in administrative complexity. Second, every further bilateral agreement will alter the degree of preference enjoyed by existing suppliers. That guarantees an explosion of business uncertainty. ...

The political consequences of this development are, however, at least as important. First, a company’s market access will depend increasingly on the power of its own government to lever open other markets rather than its competitiveness. Second, big powers will compete with one another to wrest more favourable terms for their own producers. The emergence of such power-driven trading blocs is a world away from the hopes of the founding fathers of the Gatt system. ... If the US, as the dominant economic player, makes discrimination a central principle of its own policy, how can it fail to become a global model, with predictable and disturbing results? ...

I am a long-run optimist on this. As the number of agreements explodes upwards some wise policymaker will surely ask why his or her country conducts trade policy through a hundred or more bilateral agreements. Why, he will ask, do we not have a single multilateral agreement, instead? He may even want a name for this new agreement. I know. Why not call it the “World Trade Organisation”?

Paul Krugman talked about this in 1992:

A Global Economy Is Not the Wave of the Future, by Paul Krugman, 1992: Where is our global economy headed...? The most fashionable script says that we are moving into an age of unprecedented international economic integration, that market technology, telecommunications, and faster transportation have shrunk the world, that borders are dissolving, and that We are about to see a globalization of business.

I'm reminded of an old South American joke that says Brazil is the country of the future, and always will be. ... What I would argue is that we're heading for regionalization, a breaking up of the world economy into blocs. ... [W]hile technology can integrate the world, whether it does so depends on politics. ... Political obstacles to economic integration beat technology every time. ...

Why are the political reasons for an integrated world economy so much weaker than the technological reasons? In an ideal world, most economists would agree, the free movement of goods, of services, of capital, of multinational enterprises, and probably of people is in the best interests of both the world economy and individual countries. But there is usually little connection between actual trade policy and what's good for a country. Trade policy is made in the real world of politics. And in that world, national welfare doesn't vote. Only interest groups vote.

Thus, well-organized interest groups, like producers, have more influence than disorganized groups like consumers. One example is our import quota on sugar. For the 250 million Americans who eat it, sugar is hidden in a variety of processed foods. Only the producers understand the importance of the quota. ...

So what will the next few years bring? I don't visualize a great trade war, nothing that dramatic. But I do see ... an inward turning of the world into trading blocs. They already exist in North America and the European Community, and, more obscurely, in the investment ties between Japan and some Pacific Rim countries.

Members of these trading blocs will claim that what they have done is not at the expense of their relations with the outside world. The Europeans say they are not creating Fortress Europe. We say that the North American Free Trade Area will not turn into Fortress NAFTA. Nor will the Japanese concede any emerging trade bloc.

But all that is nonsense. For the next 10 to 15 years, those on the inside of these blocs are going to have a stronger voice than those on the outside. ... It is inevitable that we will become more restrictive against trade from the outside. In fact, just by providing preferences for our neighbors, we will divert world trade from trade between blocs to trade inside blocs... 

One saving grace is we're not talking of a balkanization of the world. These trading blocs will be huge entities. The importance of free trade and the evils of protectionism are both usually overstated. Protectionism, for example, did not cause the Great Depression of the 1930s. And so we should not be swept up by the romance of mega trends, thinking that integration of the world's economy is inevitable. It isn't. A world without borders is a possibility, yes, but it is a possibility that depends on politics. ...

Update: See Ben Muse for quite a bit more on potential trade diversion and third party impacts arising from the trade agreement between the U.S. and Korea.

FRBSF: The U.S. Productivity Acceleration and the Current Account Deficit

Diego Valderrama of the San Francisco Fed looks at the relationship between productivity and the current account deficit. According to this Economic Letter, explanations of changes in the current account have generally omitted changes in productivity as a potential explanatory factor. However, this is "another factor to consider, which so far has received relatively little attention in the press and in policy circles." The paper argues the the doubling of productivity since 1996 "can potentially account for a large fraction of the current account increase through its impact on saving and investment":

The U.S. Productivity Acceleration and the Current Account Deficit, by Diego Valderrama, FRBSF Economic Letter: On March 14, the Bureau of Economic Analysis reported that the U.S. current account deficit for 2006 increased from the previous year to over 6% of GDP. This deficit reflects the difference between U.S. income and expenditures, and the additional indebtedness that the country needs to take on to cover this difference. As Figure 1 illustrates, the current account consists mainly of the trade balance, but it also includes the payments on returns from foreign U.S.-owned assets, net of the payments made to foreigners for returns on assets they own in the United States.

Figure 1: Current account deficit and trade balance

Though many economists and policymakers agree that a persistently high current account deficit, or worse, a growing one, could prove worrisome, there is much debate about what the likely path back toward balance will look like. Some argue that foreign investors' willingness to finance the deficit may shift abruptly, which would disrupt the U.S. economy (Valderrama 2006). Others think that the current situation is simply a result of market forces and that the return to balance will be gradual and orderly.

To disentangle the two points of view, it is important to consider the factors that may explain the current elevated level of the current account deficit. These include: the "saving glut," which characterizes the high saving rates observed in developing countries (particularly in Asia) that have pushed international interest rates lower, depressed U.S. saving, increased expenditures, and fueled borrowing from abroad; the depressed values of some foreign currencies relative to the dollar that have made U.S. imports relatively cheap, encouraged domestic expenditures, and thereby increased the trade and current account deficits; and the "twin deficits" story, wherein the current account deficit is a result of the growing U.S. budget deficit, which has reduced public saving and increased borrowing from abroad.

There is, however, another factor to consider, which so far has received relatively little attention in the press and in policy circles--the increase in the rate of growth in U.S. labor productivity since 1996, when the current account deficit was only about 1% of GDP. This Letter reviews the current facts about the current account deficit and its determinants, and describes the channels through which it is affected by an increase in trend labor productivity growth.

Continue reading "FRBSF: The U.S. Productivity Acceleration and the Current Account Deficit" »

Wednesday, March 28, 2007

Removing the Blinders on International Trade

David Wessel and Bob Davis of the Wall Street Journal give an update on Alan Blinder's views on globalization and his estimate that trade will put tens of millions of jobs at risk [Update: free link to article plus related data on jobs at risk and offshoring]:

Pain From Free Trade Spurs Second Thoughts, by David Wessel and Bob Davis, WSJ: For decades, Alan S. Blinder ... argued, along with most economists, that free trade enriches the U.S. and its trading partners, despite the harm it does to some workers. "Like 99% of economists since the days of Adam Smith, I am a free trader down to my toes," he wrote back in 2001. ...

Yet today Mr. Blinder has changed his message... Mr. Blinder ... remains an implacable opponent of tariffs and trade barriers. But now he is saying loudly that a new industrial revolution -- communication technology that allows services to be delivered electronically from afar -- will put as many as 40 million American jobs at risk ... in the next decade or two. .... The job insecurity those workers face today is "only the tip of a very big iceberg," Mr. Blinder says.

The critique comes as .... skepticism about allowing an unfettered flow of goods, services, people and money across borders is intensifying... Some critics are going public with reservations they've long harbored quietly. Nobel laureate Paul Samuelson ... damns "economists' over-simple complacencies about globalization" and says rich-country workers aren't always winners from trade. He made that point in a 2004 essay that stunned colleagues...

Mr. Blinder's answer is not protectionism, a word he utters with ... contempt... Rather, Mr. Blinder still believes ... [n]ations prosper by focusing on things they do best -- their "comparative advantage" -- and trading with other nations with different strengths. He accepts the economic logic that U.S. trade with large low-wage countries like India and China will make all of them richer -- eventually. He acknowledges that trade can create jobs in the U.S. ... But he says the harm done when some lose jobs and others get them will be far more painful and disruptive than trade advocates acknowledge. ...

His critique puts Mr. Blinder in a minority among economists, most of whom emphasize the enormous gains from trade. "He's dead wrong," says Columbia University economist Jagdish Bhagwati... Mr. Bhagwati says that in highly skilled fields such as medicine, law and accounting, "If we do a real balance sheet, I have no doubt we're creating far more jobs than we're losing."

Mr. Blinder says that misses his point. The original Industrial Revolution, the move from farm to factory, unquestionably boosted living standards, but triggered an enormous change in "how and where people lived, how they educated their children, the organization of businesses, the form and practices of governments." He says today's trickle of jobs overseas, where they are tethered to the U.S. by fiber-optic cables, is the beginning of a change of similar dimensions, and American society needs similarly far-reaching changes to cope. "I'm trying to convince a bunch of economists who are deeply skeptical and hard to convince," he says. ...

When he talked about trade in the past, Mr. Blinder emphasized its great benefits. ... As a Clinton aide, he helped sell the North American Free Trade Agreement... He was silent when his former Princeton student, N. Gregory Mankiw, then chairman of President Bush's Council of Economic Advisers, unleashed a political firestorm by ... appearing indifferent to pain caused to those whose jobs go overseas. "Does it matter from an economic standpoint whether items produced abroad come on planes and ships or over fiber optic cables?" Mr. Mankiw said at a February 2004 briefing. "Well, no, the economics is basically the same....More things are tradable the past, and that's a good thing."

Mr. Blinder says he agreed with Mr. Mankiw's point that the economics of trade are the same however imports are delivered. But he'd begun to wonder if the technology that allowed English-speaking workers in India to do the jobs of American workers at lower wages was "a good thing" for many Americans...

Mr. Blinder began to muse about this in public. ... At the urging of former Clinton Treasury Secretary Robert Rubin, Mr. Blinder wrote an essay, "Offshoring: The Next Industrial Revolution?" published last year in Foreign Policy. ...

Offshore32907In that paper, he made a "guesstimate" that between 42 million and 56 million jobs were "potentially offshorable." Since then he has been refining those estimates, by painstakingly ranking 817 occupations ... to identify how likely each is to go overseas. From that, he derives his latest estimate that between 30 million and 40 million jobs are vulnerable. 

He says the most important divide is not, as commonly argued, between jobs that require a lot of education and those that don't. It's not simply that skilled jobs stay in the US and lesser-skilled jobs go to India or China. The important distinction is between services that must be done in the U.S. and those that can -- or will someday -- be delivered electronically with little degradation in quality. The more personal work of divorce lawyers isn't likely to go overseas, for instance, while some of the work of tax lawyers could be. Civil engineers, who have to be on site, could be in great demand in the U.S.; computer engineers might not be. ...

Mr. Blinder says there's an urgent need to retool America's education system so it trains young people for jobs likely to remain in the U.S. Just telling them to go to college to compete in the global economy is insufficient. ... It isn't how many years one spends in school that will matter, he says, it's choosing to learn the skills for jobs that cannot easily be delivered electronically from afar.

Similarly, he says any changes to the tax code should encourage employers to create jobs that are harder to perform overseas. ... Mr. Blinder says the focus should be on jobs with person-to-person contact, regardless of pay and skill levels -- from child day-care providers to physicians.

Mostly he wants to shock politicians, policy makers and other economists into realizing how big a change is coming and what new sectors it will reach. "This is something factory workers have understood for a generation," he says. "It's now coming down on the heads of highly educated, politically vocal people, and they're not going to take it."

Here's the Foreign Affairs article by Alan Blinder, "Offshoring: The Next Industrial Revolution?," (draft version in case link is blocked), and a summary of some of its contents is in "What Jobs are Safe from Offshoring?." Also, "The New Globalization" looks at the work of Blinder, Grossman, and others.

Friday, March 02, 2007

Bernanke: Globalization May Have Increased Inflation

Continuing with the post below this one... Recently, it was reported that the relationship between changes in the real economy and changes in the inflation rate is lower than it used to be, something discussed here. Below, Federal Reserve Chairman Ben Bernanke is reported as saying he agrees with these findings:

The relationship between slack in the economy and lower inflation is ''clearly lower'' than it used to be.

Another aspect of the recent debate over monetary policy concerns how globalization has affected inflation, and the Fed's ability to affect inflation through monetary policy. Here's Chairman Bernanke's view, a view that agrees with what I've been arguing:

Bernanke Says Globalization May Boost U.S. Inflation, Reuters: Global factors may on balance have boosted U.S. inflation, but globalization has not affected the ability of the Federal Reserve to influence U.S. financial conditions, Fed Chairman Ben Bernanke said on Friday.

''When the offsetting effects of globalization on the prices of manufactured imports and on energy and commodity prices are considered together, there seems to be little basis for concluding that globalization overall has significantly reduced inflation in the United States in recent years; indeed the opposite may be true,'' he said in a speech at Stanford University. ...

The central bank chief said the Fed finds it difficult to pin down a fixed number for any natural rate of unemployment. ''There are a couple of problems that have emerged with using a fixed number like that for analyzing the macro-economy,'' he said.

The relationship between slack in the economy and lower inflation is ''clearly lower'' than it used to be, Bernanke said.

Bernanke said that globalization has not ''materially affected the ability'' of the Fed to influence U.S. financial conditions, ''nor has it led to significant changes in the process which determines the U.S. inflation rate.''

Overall, globalization has probably spurred inflation in the United States rather than lowered it because recent increases in energy and commodity use in developing countries such as China and India have pushed up prices for such goods, Bernanke said.

He noted a study that found that if the share of world trade and economic growth of non-industrial countries remained at its 2000 level, oil prices would have been as much as 40 percent lower in 2005 and metals prices as much as 10 percent lower.

''Accordingly, in the past several years, the effect of growth in developing economies on commodity prices has been a source of upward pressure on inflation in the United States and other industrial economies,'' he said.

At the same time, increased trade with China and other developing countries has led to slower growth in the prices of imported manufactured goods, Bernanke said.

He cited a study concluding that trade with China alone reduced annual import price inflation in the United States by about 1 percentage point over 1993-2002.

The Fed is devoting more resources and time to trying to understand the effect of increased global integration on inflation and the central bank's ability to maintain price stability and ensure low unemployment, Bernanke said. ...

Update: Here is the speech, "Globalization and Monetary Policy."

Update 2: Here are a few quotes from the speech at Stanford with some of the discussion of the supporting research, e.g. the work on the "global output gap hypothesis" that is part of the recent discussion about the changing relationship between domestic real activity and inflation. One reason we ,ight see a declining relationship between the output gap and inflation is that the relevant concept of the output gap has changed while our measurement of the gap - domestic output minus domestic potential output (which is shaky in any case) - has not. Thus, it is not that the output gap and inflation are unrelated, i.e. that the Phillips curve is dead, but rather the appropriate definition of the gap to use in assessing the relationship has changed. There are quite a few more references and a lot more discussion in the speech itself:

The empirical literature supports the view that U.S. monetary policy retains its ability to influence longer-term rates and other asset prices. Indeed, research on U.S. bond yields across the whole spectrum of maturities finds that all yields respond significantly to unanticipated changes in the Fed’s short-term interest-rate target and that the size and pattern of these responses has not changed much over time (Kuttner, 2001; Andersen and others, 2005; and Faust and others, 2006). Empirical studies also find that U.S. monetary policy actions retain a powerful effect on domestic stock prices.


I draw two conclusions... First, the globalization of financial markets has not materially reduced the ability of the Federal Reserve to influence financial conditions in the United States. But, second, globalization has added a dimension of complexity to the analysis of financial conditions and their determinants, which monetary policy makers must take into account.


International factors might affect domestic inflation through several related channels. First, the expansion of trade may cause domestic inflation to depend to a greater extent on the prices of imported goods--not only because imported goods enter the consumer basket or (in the case of imported intermediate goods) affect the costs of domestic production, but because competition with imports affects the pricing power of domestic producers. Second, competitive pressures engendered by globalization could affect the inflation process by increasing productivity growth, thereby reducing costs, or by reducing markups. Third, to the extent that some prices are set in internationally integrated markets, pressures on resource utilization in foreign economies could be relevant to domestic inflation.

Some analysts might object to the proposition that globalization affects the inflation process at all on the grounds that the structural changes that globalization engenders can affect only the relative prices of goods and services; in contrast, inflation--the rate of change of the overall price level--must ultimately be determined solely by monetary policy (Ball, 2006). Certainly, monetary policy determines inflation in the long run, and the central bank must take responsibility for the inflation outcomes generated by its policies. ...

However, the conclusion that inflation is determined only by monetary policy choices need not hold in the short-to-medium run.


In a globalized economy, the level of resource utilization in the world economy is another potential influence on domestic inflation. Standard analyses of inflation based on the concept of a Phillips curve assign a role in inflation determination to the domestic output gap--the difference between the economy’s potential output and its actual production. According to this theory, the existence of slack in the economy makes it more difficult for producers to raise prices and for workers to win higher wages, with the result that inflation slows. These conventional analyses have considered only the possible link between domestic inflation and the domestic output gap. But in an increasingly integrated world economy, one may well ask whether a global output gap can be meaningfully defined and measured and, if it can, whether it affects domestic inflation. In other words, all else being equal, would a booming world economy increase the potential for inflationary pressures within the United States?

In principle, with the domestic determinants of inflation held constant, reduced slack in the global economy could increase domestic inflation for a time if it led to higher prices for some traded goods and services relative to the prices of goods and services that are not usually traded. For example, suppose that the United States produces personal computers both for export and for domestic use, and that more-rapid growth abroad increases the world demand for computers. Stronger global demand for computers raises the prices that U.S. producers can charge their foreign customers. Moreover, because all computer producers are facing a stronger global market, U.S. producers can charge more for their output at home as well. If producers of many goods face increases in worldwide demand, the net effect could be higher inflation in the United States, even though there may be no measurable effect on the prices of U.S. imports.

The idea is intriguing but again, unfortunately, the evidence is so far inconclusive. Early work, including some done at the Federal Reserve Bank of Boston, found no effect of global demand conditions on U.S. inflation, as did most of the subsequent research. Recently, however, several researchers affiliated with the Bank for International Settlements (BIS) have reported results favorable to the global output gap hypothesis (Borio and Filardo, 2006).

Thursday, March 01, 2007

Holes in the Safety Net

The "curity" part of flexicurity needs improvement:

Federal Aid Does Little For Free Trade's Losers, by Deborah Solomon, WSJ: For more than 80 years, the people of Webb Furniture crafted wooden ... furniture... In January, under pressure from Chinese imports, Webb shuttered its Galax plant and fired all 309 employees.

Tonya Graber lost more than her job... The single mother also lost health insurance for herself and her 12-year-old son. Under a government program aimed at helping workers harmed by trade, Ms. Graber was eligible for federally subsidized health insurance, but she couldn't afford it.

She isn't alone. The Health Coverage Tax Credit, tucked into a 2002 trade bill to win support in Congress, is supposed to cushion the blow to factory workers hurt by imports by paying 65% of the cost of health insurance. ... More than four years after the program began, just 11% of those potentially eligible for the subsidy are taking it...

"It's just not realistic to say that a laid-off worker who's uninsured is going to come up with 35% of the premium," says Stan Dorn, who has studied the program at the Urban Institute...

A common political compromise in Washington involves keeping trade barriers low in exchange for programs compensating those hurt by imports. Free-trade advocates are generally happy to make such a compromise. They figure the winners from trade ... can afford, through the government, to help compensate the losers.

The problem is that compensation programs often add bureaucracy without helping many people. Even if the health-insurance assistance program were working well, it would aid only a fraction of those who lose their jobs. The Labor Department must certify that workers have lost their jobs to imports from certain countries or to a shift in production there. Most workers in ... service industries whose jobs are sent overseas don't qualify.

Another struggling program is wage insurance, designed for workers over 50 who lose their jobs because of trade and then take a lower-paying job. The government makes up half the difference in wages, up to $10,000 a year, but it requires that workers prove they don't have "easily transferable skills." Some can't do that.

The issue: Should Washington give up on such programs, or should it expand them and try to make them work better? For the moment, people on both sides on Capitol Hill say President Bush will need to beef up programs for those hurt by imports if he wants congressional backing for new trade legislation. ...

"There has to be more cushioning for people caught in the maws of free trade," says Sen. Charles Schumer, a New York Democrat who has criticized China's trade policy. "The fact that TAA has not done the job gives those who want to build walls around the U.S. greater currency." ...

On average, according to the Internal Revenue Service, [health] insurance costs $720 a month, with the federal government picking up $468, or 65%, of the cost and the former employee paying the $252 remainder. ...

The administration acknowledges problems. The White House Office of Management and Budget has called the program "not performing," and cited as a reason "the affordability of coverage to potential recipients."... The Senate Finance Committee chairman, Max Baucus of Montana, says he plans to introduce legislation this year "to make this benefit work better." ...

Tuesday, February 27, 2007

Japan's Food Security

Is Japan's protection of its agricultural industry justified by the fact that it is an island nation, or should Japan drop its worries about food security and end the subsidies it gives to domestic farmers? First, here's Malcolm Cook of the Lowy Institute for International Policy in Australia writing for Project Syndicate. He's hopeful Japan's protectionist tendencies in agriculture are subsiding, and that Japan will lead the way for others to relax their agricultural protections. An editorial from the Japan Times follows and gives additional perspective: 

Japan is showing the way forward for agricultural free trade, by Malcom Cook, Project Syndicate: Last year was a bad one for free trade. The Doha Round was supposed to make agriculture the centerpiece of negotiations... But instead of breathing life into free trade in food, rural protectionism in rich countries seems to have killed the Doha Round... Most galling, agriculture is a small and declining part of these "rich club" economies...

Continue reading "Japan's Food Security" »

Saturday, February 24, 2007

Bill Gates: Open the Doors to More High-Skill Immigration

Bill Gates continues his crusade to allow more high-skilled immigrants into the U.S.:

How to Keep the U.S. Competitive, by Bill Gates, Commentary, Washington Post: ...Innovation is the source of U.S. economic leadership and the foundation for our competitiveness in the global economy. Government investment in research, strong intellectual property laws and efficient capital markets are among the reasons that America has for decades been best at transforming new ideas into successful businesses.

The most important factor is our workforce. Scientists and engineers trained in U.S. universities -- the world's best -- have pioneered key technologies such as the microprocessor, creating industries and generating millions of high-paying jobs.

But our status as the world's center for new ideas cannot be taken for granted. Other governments are waking up to the vital role innovation plays in competitiveness. ...

Two steps are critical. First, we must demand strong schools so that young Americans enter the workforce with the math, science and problem-solving skills they need to succeed in the knowledge economy. We must also make it easier for foreign-born scientists and engineers to work for U.S. companies. ...

Our schools can do better. Last year, I visited High Tech High in San Diego; it's an amazing school where educators have augmented traditional teaching methods with a rigorous, project-centered curriculum. Students there know they're expected to go on to college. This combination is working: 100 percent of High Tech High graduates are accepted into college, and 29 percent major in math or science, compared with the national average of 17 percent.

To remain competitive in the global economy, we must build on the success of such schools...

American competitiveness also requires immigration reforms that reflect the importance of highly skilled foreign-born employees. Demand for specialized technical skills has long exceeded the supply of native-born workers with advanced degrees, and scientists and engineers from other countries fill this gap.

This issue has reached a crisis point. Computer science employment is growing by nearly 100,000 jobs annually. But at the same time studies show that there is a dramatic decline in the number of students graduating with computer science degrees.

The United States provides 65,000 temporary H-1B visas each year to make up this shortfall -- not nearly enough to fill open technical positions.

Permanent residency regulations compound this problem. Temporary employees wait five years or longer for a green card. During that time they can't change jobs, which limits their opportunities to contribute to their employer's success and overall economic growth.

Last year, reform on this issue stalled as Congress struggled to address border security and undocumented immigration. As lawmakers grapple with those important issues once again, I urge them to support changes to the H-1B visa program that allow American businesses to hire foreign-born scientists and engineers when they can't find the homegrown talent they need. This program has strong wage protections for U.S. workers: Like other companies, Microsoft pays H-1B and U.S. employees the same high levels...

Reforming the green card program to make it easier to retain highly skilled professionals is also necessary. These employees are vital to U.S. competitiveness, and we should welcome their contribution to U.S. economic growth.

We should also encourage foreign students to stay here after they graduate. Half of this country's doctoral candidates in computer science come from abroad. It's not in our national interest to educate them here but send them home...

During the past 30 years, U.S. innovation has been the catalyst for the digital information revolution. If the United States is to remain a global economic leader, we must foster an environment that enables a new generation to dream up innovations, regardless of where they were born. Talent in this country is not the problem -- the issue is political will.

On High Tech, the fact that more graduates major in math and science in college than at other schools (29% versus 17%) is not, in and of itself, evidence that these schools work since a high degree of selectivity bias is likely present (those who like math and science are more likely to enroll in a "High Tech High" than other students, the web site says they get 3,000 applications for 300 slots). I agree completely with the message on education, but worry that instead of building upon what works, we are too ready to tear it all down and start over. We have a Gates Foundation small schools initiative here in Eugene that broke an existing high school into three smaller specialty schools (an International High School, a school specializing in Invention, Design, Engineering, Arts, & Science, and North Eugene Academy of Arts). If it works, great, but these are kids lives we are playing with and if it doesn't work and outcomes deteriorate, the price of innovation, the risk, becomes very localized and very steep for those students who participate in the failed experiments (and it's not always voluntary). I wish there was a better way to spread the risk of these experiments across the population rather than localizing it in schools that are already, for the most part, having troubles.

As for immigration, I am generally supportive of open door policies. However, I do want to point out that there is another solution for Gates and others. They believe that there is plenty of talent in the U.S., that's not the problem, it's just that workers lack the training they need. Microsoft could provide the training itself instead of free-riding on the educational system. It takes a little longer and costs more, of course, but consistent with advocates of privatization and efficient markets, it forces Microsoft to internalize the costs of training its workers, particularly specialized training. But I can't blame Microsoft for wanting to avoid these costs if it can, and for wanting to increase the supply of labor as much as possible by opening the borders to more high-skill immigration.

The shortage of U.S. graduates in this area may be because students have no certainty that specialized skills in these areas will retain their value in the future, a consequence of changes in technology that undermine existing skills over time, digital technology that allows collaborative work to be performed outside of the U.S., and the prospect of more temporary visas being issued in the future.

My observation is that there is a large set of talented students who respond strongly to expected employment prospects when they choose a major, though there is, of course, a time-delay between the appearance of shortages and surpluses in particular areas and changes in the number of majors. But the effect is there. If U.S. students perceive that an investment in computer science training relative to investing their time elsewhere will have the largest long-run payoff, any shortage will take care of itself. [And, as noted in comments, access to education may not be equal so that another way to increase supply is to increase educational opportunities within the U.S.]

In the long-run, due to technology and globalization and to comparative advantage, trying to close doors to high-skilled workers is, for the most part, a losing battle. We can create artificial barriers to foreign competition and steer our students in particular directions but there is a danger that in doing so, we set them up for a bigger fall later. If the walls keeping out foreign competition cannot be maintained in a digital age, and if we artificially direct students to particular occupations, once the walls do come down people employed in these areas will be very exposed and in danger of a large fall in income and employment prospects due to the increased competition. For that reason, I think we are better off letting the walls come down now, within reason of course, and allowing prices direct our students to the places they will, so far as markets can predict, be most highly valued in the future.

Update: Dean Baker also comments in Bill Gates Comes to the Coward's Corner. PGL too.

Thursday, February 22, 2007

How Secure is Global Capitalism's Future?

Timothy Garton Ash of Oxford University and a senior fellow at the Hoover Institution at Stanford University says that Karl Marx "was prescient" in his description of global capitalism:

Will capitalism fall victim to its own success?, by Timothy Garton Ash, Commentary, LA Times: What is the elephant in all our rooms? The global triumph of capitalism. Democracy is fiercely disputed. Freedom is under threat, even in old democracies like Britain. Western supremacy is on the skids. But everyone does capitalism.

Americans and Europeans do it. Indians do it. Russian oligarchs and Saudi princes do it. Even Chinese communists do it. And now the members of Israel's oldest kibbutz, that last best hope of egalitarian socialism, have voted for salaries based on individual performance. Karl Marx is turning in his grave. Or perhaps not, because some of his writings eerily foreshadowed our era of globalized capitalism. His prescription failed, but his description was prescient.

What, after all, are the big ideological alternatives? Hugo Chavez's "21st century socialism" still looks like, at most, a regional phenomenon best practiced in oil-rich states. Islamism — billed as democratic capitalism's great competitor in a new ideological struggle — offers no alternative economic system (aside from the peculiarities of Islamic finance) and does not appeal beyond the Muslim umma. Most anti-globalists are better at pointing out the failings of global capitalism than they are at suggesting systemic alternatives. "Capitalism should be replaced by something nicer," read a placard at a May Day demonstration...

Does the lack of any clear ideological alternative mean that capitalism's triumph is secure? Far from it. For a start, the history of capitalism hardly supports the view that it is an automatically self-correcting system. ...[G]lobal markets are now more than ever constantly out of equilibrium — and teetering on the edge of a larger disequilibrium. Again and again, capitalism has needed the visible hands of political, fiscal and legal correction to complement the invisible hand of the market.

And the bigger it gets, the harder it can fall. An oil tanker is more stable than a dinghy, but if the tanker's internal bulkheads are breached and the oil starts swilling from side to side in a storm, you have the makings of a major disaster. Increasingly, the world's capital is like oil in the holds of one giant tanker, with ever fewer internal bulkheads to stop it from swilling around.

Then there is inequality. One feature of globalized capitalism seems to be that it rewards its high performers disproportionately. What will be the political effects of having a small group of super-rich people in China, Russia and India or other countries where the majority are super-poor? In more developed economies, such as Britain and the U.S., ... if a lot of middle-class people begin to feel that they are personally losing out as a few fund managers get stinking rich and jobs are outsourced to India, you may have a backlash. Watch Lou Dobbs on CNN for a taste of the rhetoric to come.

Above all, though, there is the inescapable dilemma that this planet cannot sustain 6.5 billion people living like today's middle-class in its rich north. In just a few decades, we would use up fossil fuels that took about 400 million years to accrete — and change Earth's climate as a result. Sustainability may be a gray and boring word, but achieving it is the biggest single challenge to global capitalism today. However ingenious modern capitalists are in finding alternative technologies ... somewhere down the line richer consumers will have to settle for less rather than ever more.

Marx thought capitalism would have a problem finding consumers for the goods that improving techniques of production enabled it to churn out. Instead, it has become expert in a new branch of manufacturing: the manufacture of desires. It's that core logic of ever-expanding desires that is unsustainable on a global scale. But are we prepared to abandon it?

We may be happy to insulate our lofts, recycle our newspapers and bicycle to work, but are we ready to settle for less so others can have more? Am I? Are you?

Tuesday, February 20, 2007

Robert Reich: Minimum Half Median

Robert Reich is trying to broker a deal: renewed trade authority for the president in return for labor standards on future trade deals:

A Labor Standard for Future Trade Deals: Minimum Half Median, by Robert Reich: The Bushies want to renew the President's authority to negotiate trade deals... This gives House and Senate Dems an opportunity to win a long-sought Democratic goal -- putting labor standards into all future trade deals.

But what sort of labor standard? If workers in developing nations were required to have the same, or even nearly, the level of wages and working conditions as Americans, jobs wouldn't go to developing nations. This would be a back-door form of protectionism.

Here's a better idea. First, borrow from standards already issued by the International Labor Organization -- barring slave labor, forced labor, and the labor of young children under 12. ILO standards also recognize the ... right of all workers to form unions. ...

Step two: Encourage developing nations to raise their labor standards as their economies grow. The easiest way to do this is to require that they set a minimum wage that's half their median wage. With this ... standard in place, more of their people will share the gains from trade. ...

Market fundamentalists will object that establishing any minimum wage in a developing nation will force some poor workers out of jobs and into the black market. But that's what market fundamentalists argued almost seventy years ago when America first established our own minimum wage. A minimum wage -- like minimum health and safety standards -- is the hallmark of a civilized society.

The biggest hurdle is that this "minimum half median" standard will force the United States to set and keep our own minimum wage at half our median -- which would be about $7.50 in today's dollars...

This seems reasonable. For many decades, America's minimum wage was roughly half its median wage; only since the late 1970s has it fallen much lower than that. ...

Monday, February 19, 2007

"The Globally Integrated Enterprise"

An email says:

You might wish to discuss this article on your blog. The article traces the development of MNC’s up to the present. It is a celebration of the MNCs and their positive impact on globalization.

Unfortunately, Palisiano (CEO of IBM) does not address the issue of corporate power in distorting the market place and in controlling governments themselves (think K Street). Nor does he seriously address the rising global inequality of wealth (think sweat shop labor).

Nor does he address the issue of global warming, environmental decay, and resource depletion—and the ability of MNC’s to cast doubt on the seriousness of these issues. All of these issues are the dark underside of globalization, on which I tend to focus. He frames the discussion in such a way as to avoid these issues—most economists follow his lead.

Anyway, the article is worth discussing. Most economists would agree with Palisano. ...

I'm a bit rushed until much later today and can't do much with this, so, quickly, here's the beginning and end of the article along with a link to the whole thing. Hopefully, some of you can provide analysis:

The Globally Integrated Enterprise, by Samuel J. Palmisano, Foreign Affairs: Beyond Multinational The multinational corporation (MNC), often seen as a primary agent of globalization, is taking on a new form, one that is promising for both business and society. From a business perspective, this new kind of enterprise is best understood as “global” rather than “multinational.”

Continue reading ""The Globally Integrated Enterprise"" »

Wednesday, February 14, 2007

Edward Prescott: 'Competitive Cooperation'

 Edward Prescott, winner of the 2004 Nobel Prize in Economics, defends globalization:

'Competitive Cooperation' by, Edward C. Prescott, Commentary, WSJ: Of all the thankless jobs that economists set for themselves when it comes to educating people about economics, the notion that society is better off if some industries are allowed to wither, their workers lose their jobs, and investors lose their capital -- all in the name of the greater glory of globalization -- surely ranks near the top. This is counterintuitive to many people (politicians among them), because they view it the government's economic responsibility to protect U.S. industry, employment and wealth against the forces of foreign competition. If the government has any economic role at all, surely this must be it.

Actually, no. Government has a higher calling ..., which is to provide the opportunity for people to seek their livelihood on their own terms, in open international markets, with as little interference from government as possible. That doesn't mean we shouldn't provide short-term social insurance policies to aid those displaced by foreign competition, but the purpose of that aid should be to prepare workers, not protect them. ...

[B]roadly speaking -- and these broad operating principles matter -- those countries that open their borders to international competition are those countries with the highest per capita income. ...

How to explain this phenomenon? The answer lies predominantly with competition ... [I]t is useful to consider the example of the U.S., which, from its early days, created wealth from the healthy competition among businesses and industries in its member states. ...

This same competitive cooperation has been firing the economic engine of Europe for 50 years... And there is other evidence throughout the world for the benefit of international openness. Like the U.S., Australia is also a tale of competition among member states... The five wealthy countries of Eastern Asia -- Taiwan, Singapore, Japan, South Korea and Hong Kong -- were not so well off just a few decades ago, but their subsequent commitment to export markets and international competition put them on an upward trajectory that has improved the lives of millions of people.

And what of Latin America? Unfortunately, the region provides a case study in the perils of protectionism. ... [There is] much evidence to support ... that competitive barriers are to blame for Latin America's retarded growth. ...

Of course, many other factors account for marginal differences in productivity and wealth among countries that are already wealthy -- tax rates being key among those factors -- but they are comparative "frosting on the cake," and the cake in this case is the institutional commitment to international competition. ...

Protectionism is seductive, but countries that succumb to its allure will soon have their economic hearts broken. Conversely, countries that commit to competitive borders will ensure a brighter economic future... This lesson should not be lost on the U.S., the paragon of competitive growth, where politicians and policy makers are contemplating whether to construct more protective barriers. It is openness that gives people the opportunity to use their entrepreneurial talents to create social surplus, rather than using those talents to protect what they already have (or to protect rents, as economists like to say). Social surplus begets a rising standard of living, which begets growth, which begets social surplus, and so on. Rent protection stops growth cold and keeps people poor.

People in all countries are motivated to improve their condition, and all countries have their share of talented risk-takers, but without the promise that a competitive system brings, that motivation and those talents will only lie dormant. ...

Wednesday, February 07, 2007

Kenneth Rogoff: Why Hasn't the Dollar Crashed Yet?

Ken Rogoff looks at "the world's largest foreign aid program," foreign loans to the U.S., why the dollar hasn't collapsed under increasing pressure from the trade deficit, and the risks ahead:

Betting with the house's money, by Kenneth Rogoff, Project Syndicate: Many people have been asking why the dollar hasn't crashed yet. Will the United States ever face a bill for the string of massive trade deficits...? ...[S]taggeringly, US borrowing now soaks up more than two-thirds of the combined excess savings of all the surplus countries in the world...

Foreigners are hardly reaping great returns on investing in the US. On the contrary, they typically get significantly lower returns than Americans get on their investments abroad. ...[T]he central banks of Japan and China are holding almost two trillion dollars worth of low-interest bonds. A very large share of these are US treasury bonds and mortgages. This enormous subsidy to American taxpayers is, in many ways, the world's largest foreign aid program. ...

Most sober analysts have long been projecting a steady trend decline in the dollar... So why hasn't more adjustment taken place already? The first answer, of course, is that the trade-weighted dollar has fallen - by more than 15% in real terms since its peak in early 2002. Yet the US deficits have persisted, and even risen, since then.

The real driving force has been two-fold. First and foremost, America's government and consumers have been engaged in a never-ending consumption binge. On the consumer side, this is quite understandable. ...

Overall, after almost 25 years of stunning prosperity, punctuated by only two mild recessions, most Americans feel pretty confident about their economic situation. ... So it is not surprising that private consumption continues to hold up... People have enjoyed such huge capital gains over the past decade that most feel like gamblers on a long winning streak. By now, they see themselves as playing with the house's (or their houses') money.

It is less easy to rationalise why the US government is continuing to run budget deficits despite a cyclical boom. When a fiscally responsible government launches a war, it typically cuts back on other domestic expenditures and raises taxes. The Bush administration did the opposite. It may not be good economics, but the strategy proved to be good politics, for a time. Unfortunately, it is unlikely the new Democratic majority in Congress will do much about it.

Of course, it takes two to tango. In order for the US economy to run deficits with the world, other countries must be willing to ... supply ... savings. Ben Bernanke ... once famously pinned the whole US current account deficit on a "global savings glut". But it would be more accurate to say that there is global investment shortfall, with investment trending downwards despite the upward trend in global growth.

This investment shortfall is due to many factors, but perhaps the main one is ... substantial medium-term institutional roadblocks to investment in many developing countries, where long-term returns now seem to be by far the highest. The net result is that money is being parked temporarily in low-yield investments in the US, although this cannot be the long-run trend.

What then is future of the dollar? As long as the status quo persists, with strong global growth and stunning macroeconomic stability, the US can continue to borrow and run trade deficits without immediate consequence. Over time, the dollar will still decline, but perhaps by no more than a couple of percent a year. Nevertheless, it is not hard to imagine scenarios in which the dollar collapses. Nuclear terrorism, a slowdown in China, or a sharp escalation of violence in the Middle East could all blow the lid off the current economic dynamic. ...

In sum, the fact that the US trade balance has defied gravity for so many years has made it possible for the dollar to do so, too. But some day, the US may well have to pay the bill for its spendthrift ways. When that day arrives, Americans had better pray that their creditors will be as happy to accept dollars as they are now.

Update: Kenneth Rogoff continues to worry about the stability of the global financial system. This is from the Financial Times:

No grand plans, but the financial system needs fixing, by Kenneth Rogoff, Commentary, Financial Times: What ever happened to all the grandiose plans for improving the global financial architecture? Up until a few years back, leading policy economists seemed to be tripping over themselves to come up with blueprints for radical change. Particularly popular were plans for new global institutions... More modest plans (such as mine) merely called for a sweeping restructuring of the major existing multilateral financial institutions, the International Monetary Fund and the World Bank.

Over the past couple of years, however, all introspection appears to have vanished. Instead, the policy community has developed a smug belief that enhanced macroeconomic stability at the national level combined with continuing financial innovation at the international level have obviated any need to tinker with the system. ... There is no problem that markets cannot solve.

Really? How well would markets handle the fallout from a sharp slowdown in India or China? How would they react to a dirty nuclear bomb in a US city..., and a sudden reluctance on the part of global investors to keep financing America’s 800-plus billion dollar current account deficit? Or a rapid escalation of conflict in the Middle East that encompassed Iran and Saudi Arabia? ...[C]ontrary to market perceptions, global central banks have only very limited instruments for dealing with a genuinely sharp rise in global volatility, particularly one that is geo-politically induced.

True, it is not clear that any of the grand plans of the past couple of decades would better equip the world economy to deal with such catastrophic shifts. The typical grand plan was far too simplistic and heavy-handed... But just because most grand plans were far too simplistic does not mean we should dismiss the deeper problems that they aimed to address. ...

The real shame with the disappearance of grand plans is that they had provided a valuable reservoir of ideas to spur major improvements in the world’s existing multilateral financial institutions. ...

We should bemoan the world’s lack of interest in grand plans to improve the financial architecture, but not because any of them was necessarily perfect. The problem, rather, is a lack of the purpose and energy needed to sustain even more modest, and unambiguously positive, reforms. Which means, of course, that after the next round of crises, we shall be deluged with even more and even grander plans.

Wednesday, January 31, 2007

The "Davos Dilemma"

Can the divide between the world's political and economic forces be bridged? Martin Wolf has some possibilities:

A divided world of economic success and political turmoil, by Martin Wolf, Commentary, Financial Times: The world's economy is in excellent shape, but its politics is disturbing. ..-. The question is whether and how this divergence might end. ...

One possible outcome might be the exact opposite of conventional wisdom: economic disappointment and political stability. ... Today, the underpricing of risk and the combination of low interest rates with fast growth almost invite economic blunders. Meanwhile, the world's political leaders, aware of the risks of conflict and reliant on their people's prosperity for retaining power, may well continue to muddle through. This surprising outcome is quite possible.

A second alternative is that the economic and political tracks would continue in their separate directions. The reason for this would be that, far from being distinct, the contrasting economics and politics are two faces of just one globalising world. ...

The fact that economics is making our world more interdependent and connected, while politics remains national or local, makes the contrast between economics and politics inevitable. ...

It is plausible, therefore, that political disarray and economic success will continue in tandem, the challenge being to avoid the emergence of too wide a gap between the two. For, as we learned in the first half of the 20th century, a big enough backlash is capable of causing devastation. In a nuclear age, that devastation would be greater still. ...

A third possibility is that the politics overwhelms the economics, as it did between 1914 and 1945 and in the communist "second world" and much of the so-called "third world" for much longer. An attack on Iran - a much-discussed possibility in Davos - would bring far closer the clash of civilisations... feared by so many... In that case, the economic optimism of today would prove unfounded - possibly destroyed by a world of $150-a-barrel oil in the aftermath of the closing of the straits of Hormuz through which so much of the world's oil flows.

Yet there is also a far more comforting possibility: the economics overwhelms the politics. One of the stories of our era is the way in which vast countries such as China and India are orienting their politics around the goal of prosperity. This forces them to seek domestic and global stability and accept international openness and mutual dependence. They see no benefit in international conflict. It is surely possible that this view of national priorities will take hold in more of the world, including the Middle East. ...

In such a world, the issues discussed in Davos - climate change, the Doha round and African development - might be handled successfully. The difficulties of collective action are profound. But ..., the less credible are unilateral approaches to a resolution, the more likely are co-operative ones.

This year's "Davos dilemma" - the contrast between the world's favourable economics and troublesome politics - is clear enough. But its resolution is not. A range of possible outcomes, from the perverse and catastrophic to the uncomfortable and even benign, is conceivable. The outcome is not inevitable. We can choose. ...

Tuesday, January 30, 2007

FRB Dallas: Does Foreign Direct Investment Help Emerging Economies?

This Economic Letter from Anil Kumar of the Dallas Fed asks whether FDI helps developing countries grow. With a bit of qualification, the author finds the answer is yes:

Does Foreign Direct Investment Help Emerging Economies?, by Anil Kumar, Economic Letter, FRB Dallas: The gap between the world’s rich and poor countries largely comes down to the financial and physical assets that create wealth. Developed economies possess more of this capital than developing ones, and what they have usually incorporates more advanced technologies. The implication is clear: A key aspect of economic advancement lies in poorer nations’ capacity to acquire more capital and scale the technological ladder. Emerging economies undertake some capital formation on their own, but in this era of globalization, they increasingly rely on foreign capital.

Indeed, total capital flows to developing economies have skyrocketed from $104 billion in 1980 to $472 billion in 2005.[1] The foreign capital has the potential to deliver enormous benefits to developing nations. Besides helping bridge the gap between savings and investment in capital-scarce economies, capital often brings with it modern technology and encourages development of more mature financial sectors. Capital flows have proven effective in promoting growth and productivity in countries that have enough skilled workers and infrastructure. Some economists believe capital flows also help discipline governments’ macroeconomic policies (see box titled “Does Financial Globalization Shape Fiscal Policy?”).

Capital flows come in three primary forms:

Continue reading "FRB Dallas: Does Foreign Direct Investment Help Emerging Economies?" »

Hal Varian's Answer to Larry Summers

Hal Varian, in response to Larry Summers' column on the steps that must be taken "If America is to maintain its leadership in life sciences," emails:

My answer to Larry Summers: What Goes Abroad Usually Comes Back, With Benefits

Econ 1 trade theory says: invest in those areas in which you have a comparative advantage. I think that you can make the case that we have a comparative advantage in this area [biotech], but of course, the argument should be made.

Here’s the column:

What Goes Abroad Usually Comes Back, With Benefits, by Hal Varian, Commentary, NY Times, March 11, 2004: The Jan. 31 issue of The Economist described the consequences of high-tech jobs moving overseas.

According to the story, "with the trans-Atlantic shift in R&D goes many high-value jobs, as well as a greater share of the industry's profits." This trend has led to an "increasing concern" in the industry, with some executives speaking out against the outsourcing trend.

Old news, you might say. The press is filled with articles about high-tech jobs being outsourced to India.

The twist here is that the article is about biotech research jobs being outsourced to the United States from Europe. But the language is eerily familiar: replace "biotech" with "infotech" and switch the roles of Europe and America and this story could pass for yet another Silicon Valley requiem.

Articles like this should remind us that trade is a two-way street.

The money paid to foreign producers, whether businesses or workers, typically comes back home to buy domestic goods and services, thereby generating domestic employment. That is true whether it is European companies paying American biotech researchers, or American companies paying Indian programmers.

Think about it. If Oracle sends $10,000 abroad to pay an Indian programmer, then that money either finds its way back to the United States or it doesn't. If it comes back, it can be used to buy American goods and services, employing American workers. If it doesn't come back then it's even better from the viewpoint of the country: we've sent them paper, while they've sent us valuable goods and services.

Yes, these days it's more likely bits than paper, and maybe they are sending us more services than goods. And perhaps the way the money comes back is via a purchase of Treasury bonds or other financial securities.

But the same principle applies. If the income from the Treasury bonds is used to buy something produced in the United States, it creates jobs. If the money is never spent in the United States, we've gotten something for nothing.

The political problem with trade is simply this: when the dollars flow offshore, it is easy to identify those who are hurt. But when the dollars flow back, it is much more difficult to discern the beneficiaries.

Continue reading "Hal Varian's Answer to Larry Summers" »