Trade and Morality

I rather enjoyed this recent pro-trade piece by Tim Worstall at TCS, in which he lays out a strong moral case for trade, and I would add that I more or less agree with his position and its underlying reasoning. It did, however, remind me by association Steve Landsburg calling John Edwards a bigot in Slate a couple of years back--which I liked a good deal less. The overall point is much the same: trade is unquestionably turning hundreds of millions of poor people into non-poor people, and therefore a force for good in the world. Opponents of trade are therefore on some pretty shaky ground, especially since workers in the developed world aren't really any worse off absolutely than they were, it's just that the rich are getting richer faster, so that they are relatively less rich than before.

That last point is pretty important, however, in making the case to middle class and working class people, and in the realm of politics in the rich countries of the world. If someone is actually being harmed by globalization, it is rational for them to get upset about it. And if you're a politician who is trying to represent those people, it makes sense to give voice to that discontent. It doesn't make you a racist, just mistaken. Perhaps it's bad form to quote yourself, but it can be efficient. I posted this in the Slate Fray as a response to Landsburg:

Let's be clear--this is not about agreeing or disagreeing with your position on international trade. ... I come down as a pro-trade sort of person. That is, assuming that the truth is probably somewhere between the Lou Dobb's scare-mongering, "outsourcing is evil" alarmism and its polar opposite ..., I think the polar opposite is closer to the truth. I think the free traders (and I have to assume you are one) are probably right. (I support Kerry and Edwards, however, because other issues outweigh the trade issue for me.)

But that has little to do with calling John Edwards a xenophobe or worse. The argument for trade is that we will ALL be better off in the long run, NOT that a foreign worker is just as deserving of a given job as an American. If the idea of free trade is merely that foreigners deserve American jobs, then it is NOT xenophobic to oppose it. In fact it would be a dereliction of duty for an elected official to do otherwise. We elect officials to represent our interests, not to engage in some sort of international welfare program.

I repeat, I think trade is good--Ricardo's comparative advantage and everyone ends up wealthier and all that. But that means that trade is GOOD for Americans, not bad. That's an argument a politician could (and probably should) make. But you aren't saying that, you're saying that if someone running for office believes trade is BAD for Americans, they should support trade anyway, because Americans have some moral duty to give other people their jobs. You are arguing that giving the welfare of Americans priority over the welfare of foreigners makes a politician no better than a common racist. Nonsense, and shame on you.

Worstall, as I indicated, makes the same basic point about trade without the nasty slur used by Landsburg, but I am saying that you still need to make the case in terms of "everybody wins." "Everybody else wins, you get screwed, but you should be all right with that because you're helping poor people!" is not only a political loser, but not necessarily a moral winner either. If the fat cats are getting ever fatter, why is it the middle class' duty to sacrifice for the poor?

Dramatic and growing income inequality might have negative implications for democracy, but it isn't necessarily bad in and of itself, as long as absolute income keeps growing across the board. Conflating relative poverty with absolute poverty is the sleight of hand that Krugman and many others engage in. Krugman, since I think he supports trade, must be angling for good old-fashioned redistribution. Others are trying to shut the borders, to both goods and people. Some of them are xenophobes (Lou Dobbs, Tom Tancredo, and Pat Buchanan come to mind), but others are merely misguided.

Gross Errors

I think Daniel Gross does a generally good job discussing economics in the Moneybox column over at Slate, but his recent two-part (so far) series on the labor market and immigration misses the mark, I think. While not an anti-immigrant stance per se, that is clearly the net result of his analysis, although he at least officially blames business owners and/or managers for the "problem" that he sees. In answer to the "we can't find Americans to do these jobs" argument, he trots out a standard dismissal: just pay more! Gosh, why hasn't anyone thought of this before? Just pay more and Americans will do the work!

Does the word "inflation" ring a bell? While Gross wants to attribute the problem to greed by business owners and managers, or perhaps stinginess on the part of the customers of these businesses, he loses sight of one of the basic concepts of economics (or is deliberately ignoring it). If the price goes up for the exact same thing, that's inflation. Doesn't matter if it's milk, eggs, or labor. The price of labor will work its way through the economy and less stuff gets produced and consumed. No free lunch, folks!

Consider landscaping, a business I know a little bit about. To be sure, if landscapers raised their wages they are paying for labor dramatically, they surely could find some price point at which Americans will be enticed away from other work, or out of comfortable non-work (but since we continue to have low unemployment and high workforce participation, as Gross points out, there's not a whole lot of non-working slack), but there is only so much profit margin in any business. Most landscapers I know aren't fat cats eating truffles on their yachts. To stay in business, they will have to raise prices to their customers. Now, surely there may be a few people in the market for landscaping who aren't price sensitive. The real fat cats are going to get their landscaping, if that's what they want. But the rest of us non-fat cats are sensitive to little things like price. So, raise the price of landscaping and what happens? People buy less of it. People may buy the plants and do it themselves. (Or go down to Home Depot and pick up some Mexicans! ;-) Or do without.

And there's the rub! That is real work that doesn't get done, and therefore real wealth that doesn't get created. So you can say that we just have to raise wages, but that doesn't really create wealth, it actually does the opposite.

No. Free. Lunch.

Popular Economics - Mini Book Reviews Part II: The Undercover Economist

In The Undercover Economist, Tim Harford offers pellucid discussions of many important concepts. The style is lively and engaging, but he does not shy away from tackling some of the big problems facing society (and its economists), and I saw little evidence of an ideological ax to grind. That is, while he might be a bit (or a lot) more taken with the power of markets as a force for good than your average leftist, this is to be expected from most modern economists, and he also takes an honest, thoughtful look at the places where markets break down.

In a chapter ("Crosstown Traffic") dealing with externalities, when he snarkily tells an earnest young environmentalist (could easily have been someone like me, once upon a time) that he traveled to the meeting by anthracite-powered steamship from Australia, I'm sure I chuckled aloud. Admittedly, it was a snotty way to make a point, but a point well worth making: moral posturing has very little to do with actually solving problems. And although the case has been made many times, by many eloquent spokespersons, that economic development and environmental progress are not contradictory but complementary, we can always use another voice making the case intelligently. Because, unfortunately, too many partisans of the left and the right still haven't gotten the message--or won't acknowledge it, for political purposes.

I would heartily recommend this book as an introduction to economics. While it actually deals with a wide-ranging array of topics including environmental issues, income inequality, trade, and macroeconomic growth, Harford manages to make even the mundane microeconomic discussions (he opens with purchasing a cup of coffee) lively and engaging, as opposed to the deathly dry nature of most economics textbooks I have picked up. It's probably as good as you can get without getting significantly into the math. (Math is good! I'm all in favor of it, but perhaps the average reader, even an intelligent one, doesn't pick up a book expecting to manipulate variables for entertainment...)

Mystery of Capital Rides On...

A well-written article at TCS by Peter Schaefer about unlocking the “dead capital” of the developing world, and what a huge opportunity it could be for everyone. I like just about everything he has to say, although I am curious as to why the name Hernando De Soto never comes up. (Answer: ah, I see, he does link to De Soto’s book, as I just did.) At any rate, my one quibble is with the assertion that (mostly) all the developing world needs (I’m paraphrasing and simplifying) is “America’s original blueprint”. That is, the work of the framers at the end of the 18th century, who, in his view, set up everything so well that our economy evolved into its potent, modern form as a matter of course, flowing inexorably from the framers’ genius. I would argue that it is a bit bigger than that. The true construction of America’s prosperity and freedom both started earlier and ended later than the era of the framing itself. To take them backwards, De Soto points out how the process of squatting, followed by formalized property rights, played out over a couple of centuries. This is something that Schaefer seems to acknowledge at certain points, but that gets lost in the simple assertion of the framers as the fount of all this goodness. The framers did some good work, but to the extent that this pattern is the root of modern wealth, it is as much a cultural phenomenon as a political one, or even more so. The framers recognized and helped formalize some of this approach, but the cultural values that gave birth to it before the framing, and perpetuated it afterwards, are really the key.

Property rights, and the securing thereof, are indeed key, but there is a crucial, fascinating, and paradoxical twist. A modern economy clearly relies, in part, on stable and secure property rights, but they cannot be entirely rigid and fixed! If they were, then they formalization process itself would never really work! If you respect the property rights of the wealthy landowners who nominally “own” all this land being squatted upon, then you can’t formalize the squatters’ rights. Indeed one “critique” I read of De Soto’s policy prescriptions suggested that his ideas made things worse because some official landowners go in and forcibly evict squatters when they see formalization coming. I put “critique” in scare quotes because I don’t think much of this line of criticism. Allowing the wealthy, “official” title holders to evict the squatters is absolutely ass backwards of the De Soto plan. You can’t say that an approach that does the exact opposite of the intended plan is the fault of the plan. You have to deal with the rich landowners up front, in whatever manner will work. I’d say in general you’re best advised to buy them off. Use the foreign aid money to do it. Most of the foreign aid to the poorest countries gets skimmed off and goes to the wealthy already, and this way you’d at least get some tangible return on the investment!

Frontline, Wal-Mart, and Trade

I've been a huge fan of Frontline over the years, it’s one of the best shows on TV. The “Is Wal-Mart Good for America?” report, which I just saw last night, doesn’t seem to live up to its typically high journalistic standards. While maintaining a superficial level of even-handedness, it definitely seemed like it had an anti-Wal-Mart axe to grind. Another way of putting it is that it appeared to be a largely anti-trade piece, with Wal-Mart as our “evils of globalization” poster child.

Possible ideological biases aside, part of why so many of these pieces skew anti-trade is laziness. It’s extremely easy to show sympathetic images of factory workers being laid-off, their livelihoods, and lives, upended and uncertain. But the upside is really there, it’s just harder to show, partly because it’s more diffuse. Sure, as one of the anti-trade economists observes, working class Americans are BOTH consumers and workers. Consumers pay lower prices, and nobody really thinks that is bad in itself, but then closing factories does hurt a smaller number of people badly. He proceeds to state that he “believes” the net effect on the American economy is bad. This is in response to a Cato Institute fellow (probably “fellow” in both senses) who pointed out the standard upside: the greater well-being of all the cost-conscious consumers, who then have more money to spend on other things, which in turn stimulates the economy and creates jobs somewhere else.

Well, I don’t know that it’s clear whether “Cato-guy” or “Protectionist-guy” is right, in the balance. It depends, crucially, on the where the savings go. Say Jane consumer buys a Chinese-made blouse for $15 instead of an American-made one for $20. It’s all about what Jane does with the $5 she saved. Does she just sink it into more cheap Chinese goods? If so, Mr. Protectionist is probably right. Or does she put it toward some domestically produced good or service, or God forbid, save it? If so, Mr. Cato is probably right.

This is a complicated issue, and one I find very interesting. The answer(s) is (are) not so straightforward. Economists don’t all agree, but there is actual data out there. For instance unemployment has remained low and I believe that in general, real wages have held steady or risen, and the share of national income going to labor has remained stable. Seems like a point for pro-trade, but there are still subtleties to be explored. For example, how does the job and wage picture break down across income groups, skill levels, etc.? Why not show some of the data, and let some economists duke it out? I expect the cable news networks, with their tiny attention spans and competitive ratings pressures, to take the shallow route (I can hear Lou Dobbs beating his one big drum now), but this is public television, for crying out loud! Do some work guys! If PBS doesn’t do it, who will?