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Sunday, February 20, 2011

"Mankiw's Leap"

Angus at Kids Prefer Cheese:

Mankiw's leap, by Angus: In last Sunday's NY Times economics column, NGM quite reasonably points out that voluntary exchanges benefit both parties in the exchange.

However, he then makes an unsupportable leap to the following:

Listening to the president, you might think that competition from China and other rapidly growing nations was one of the larger threats facing the United States. But the essence of economic exchange belies that description. Other nations are best viewed not as our competitors but as our trading partners. Partners are to be welcomed, not feared. As a general matter, their prosperity does not come at our expense

I do agree that China is not one biggest problems the US is facing, but not for the reasoning that NGM uses which is that all voluntary exchanges are mutually profitable (read the article, it's the only principle he speaks of before giving the quote I reproduce above).

People, the United States is not a person! Only in DSGE models do we assume that all individuals are identical! There is no "our" to which general statements can be attached.

Yes, going from autarky to free trade will raise the GDPs of both nations, but that is a very far cry from saying that a large number of individuals will not be made worse off in the process. I figure that NGM is familiar with the Stolper-Samuelson theorem, so I guess he is assuming the political process always provides adequate compensation for the losers??

ROFLMAO, anyone?

Here's a case for free trade:

Individuals should be allowed to contract with whoever they wish, without government interference based solely on geography.

Now, that is not much of an economic argument, but, to tell the ugly truth, THERE ISN'T MUCH OF AN ECONOMIC ARGUMENT.

Once you factor in agent heterogeneity, imperfect competition, increasing returns, and an arbitrarily large number of traded goods, the welfare economics of free trade is murky at best.

Here's a political economy case for free trade:

Yes free trade has its losers and drawbacks, but the losses and distortions from free trade are far less than the losses and distortions from politicized, "managed", trade so free trade is therefore preferable.

Is there a bumper sticker big enough to hold that?

["I guess he is assuming the political process always provides adequate compensation for the losers??" That's the point I was making here.]

    Posted by on Sunday, February 20, 2011 at 09:27 AM in Economics, International Trade | Permalink  Comments (38)


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