Friday, December 28, 2007

The Economics and Politics of Trade

Paul Krugman (hat tip: Mark Thoma, as usual) says:
…I’m not a protectionist. For the sake of the world as a whole, I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect.
Greg Mankiw asks:
But what if those who are worried about trade are protectionists? Should we still respect them?
Until Paul Krugman gives his own answer, I think we can presume that the answer is yes. Respecting protectionists doesn’t mean we are willing to give in to their protectionist demands, but it does mean that we appreciate their concerns and presumably that we are interested in finding some way of accommodating those concerns, short of actual protectionist policies.

It helps, I think, to separate the positive question from the normative question. The positive question is, “Who is helped by trade, and who is harmed?” The normative question, in the abstract, is, “How much weight should we give to the interests of the various parties that are helped and harmed by trade?” Twenty years ago, there was an easy answer to the first question: “Nearly everyone is helped in the long run, and in the short run, only people in a few specific industries are harmed.” That made the answer to the normative question irrelevant. Unless one wanted to give a ridiculously high weight to the short run interests of industries that were hurt by trade, the conclusion was always that trade was good, and protectionism was bad. And anyone who disagreed could be written off as either representing a special interest or misunderstanding the positive economics, thus not deserving our respect.

The answer to the positive question is no longer easy, and Prof. Krugman suggests that the answer now may be something like this: “Rich Americans and poor foreigners are helped, while typical Americans are harmed.” I think most American economists, including both Greg Mankiw and Paul Krugman, will agree with my answer to the normative question: “Since poor foreigners are much, much, much, much poorer than typical Americans, any reasonable notion of distributive justice, utilitarian optimization, or human charity requires that we give more weight to the interests of poor foreigners.” But that answer is unattractively convenient for American economists, since, whether or not they are personally rich, they fall into the functionally defined category of “rich Americans” that benefit from trade. As Archie Bunker once said, “It’s always good to be generous when it don’t cost you nothing.”

The ultimate answer may be even more convenient for Paul Krugman, because it justifies his prior political preferences. He advocates addressing the concerns of protectionists by means of (broadly speaking) redistributionist policies that benefit typical Americans (trade losers) at the expense of rich Americans (trade winners). That answer is convenient, but nonetheless, provided that Prof. Krugman can substantiate his positive conclusions, pretty convincing (though perhaps I’m not one to judge, since I tend to agree with his prior political preferences anyhow). Whatever ones initial preferences regarding equity-efficiency tradeoffs, a recognition of the politics of trade should shift them a bit to the equity side. Or, more precisely, if the marginal efficiency gains (and equity gains at the global level) from trade are first order and you are already at your domestic optimum for the equity-efficiency tradeoff, then, with the introduction of the political constraint, the envelope theorem requires that you revise that domestic optimum.

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28 Comments:

Anonymous Michael Cain said...

...suggests that the answer now may be something like this: “Rich Americans and poor foreigners are helped, while typical Americans are harmed.”

This is not an answer that can be supported by politicians in a democracy in the long term. Well, unless typical Americans are different than I think they are and are willing to take a hit to their standard of living in order to benefit poor foreigners.

Another question for economists who say that the answer is not protectionism, but either "strengthening the social safety net" or "redistributing the benefits of trade": If history suggests that neither the strengthening nor the redistribution are going to occur, should free trade still be supported?"

Fri Dec 28, 01:22:00 PM EST  
Blogger knzn said...

History does suggest that Democrats are more redistributionist than Republicans, so maybe the answer is to support free trade when the Democrats are in charge but not when there are Republicans are in charge.

I suppose there would have to be some kind of explicit link, like for example a provision that says that the US automatically withdraws from a certain trade agreement if the top marginal tax rate goes below a certain level, combined with a Democratic promise to filibuster any future attempt to repeal that provision.

Fri Dec 28, 02:38:00 PM EST  
Anonymous Anonymous said...

KNZN,
I vote for the trade and redistribute scenario. (But first, we need GHG taxes, so that the private cost of moving goods reflects the social cost.)

Sun Dec 30, 03:47:00 PM EST  
Anonymous Chris said...

I recently read an editorial in a prominent publication (FT, WSJ, Economist or such) advocating additional free trade agreements in conjunction with measures to help those dislocated. Specifically, education and retraining benefits, and a more progressive tax policy.

The problem is that free trade economists have a credibility problem. The identical prescription was offered prior to NAFTA. How much more progressive has the tax system become? How much additional education and training is available now? It is a modern day "40 acres and a mule".

The nature of these agreements place jurisdiction over trade into administrative bodies. This makes them political questions as much as economic ones. Most of those who have supported free trade have not been well rewarded. Those who want to win these people over will have to offer more than words this time, I think.

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