Wednesday, January 16, 2008

The Costs of Free Trade

Steven Landsburg, an economist at the University of Rochester and author of the excellent The Armchair Economist, has a very interesting op-ed in the New York Times today. Landsburg argues that calls for retraining and support from workers who lose their job due to competition and globalization should be ignored, especially by the Republican presidential candidates who, particular before the Michigan primary, openly pandered to such calls. According to Landsburg:

All economists know that when American jobs are outsourced, Americans as a group are net winners. What we lose through lower wages is more than offset by what we gain through lower prices. In other words, the winners can more than afford to compensate the losers. Does that mean they ought to? Does it create a moral mandate for the taxpayer-subsidized retraining programs proposed by Mr. McCain and Mr. Romney?

Um, no. Even if you’ve just lost your job, there’s something fundamentally churlish about blaming the very phenomenon that’s elevated you above the subsistence level since the day you were born. If the world owes you compensation for enduring the downside of trade, what do you owe the world for enjoying the upside?

I doubt there’s a human being on earth who hasn’t benefited from the opportunity to trade freely with his neighbors. Imagine what your life would be like if you had to grow your own food, make your own clothes and rely on your grandmother’s home remedies for health care. Access to a trained physician might reduce the demand for grandma’s home remedies, but — especially at her age — she’s still got plenty of reason to be thankful for having a doctor.

Some people suggest, however, that it makes sense to isolate the moral effects of a single new trading opportunity or free trade agreement. Surely we have fellow citizens who are hurt by those agreements, at least in the limited sense that they’d be better off in a world where trade flourishes, except in this one instance. What do we owe those fellow citizens?

One way to think about that is to ask what your moral instincts tell you in analogous situations. Suppose, after years of buying shampoo at your local pharmacy, you discover you can order the same shampoo for less money on the Web. Do you have an obligation to compensate your pharmacist? If you move to a cheaper apartment, should you compensate your landlord? When you eat at McDonald’s, should you compensate the owners of the diner next door? Public policy should not be designed to advance moral instincts that we all reject every day of our lives.

Landsburg is exactly right. In theory. But, in theory, communism works. Landsburg has the economics down, but misses the larger political context of free trade debates. It is true that, as Landburg argues "Americans as a group are net winners. What we lose through lower wages is more than offset by what we gain through lower prices." But that winning can't happen if Americans as a political entity reject free trade and globalization due to the costs.

Free trade by nature is particularly vulnerable to collective action problems (in short, the steel worker who loses his job to foreign competition has more incentive to lobby for redress than the millions of people who save $2 on each car they purchase have to lobby for expanded free trade). As we saw in the 2006 midterm elections, the political opposition against free trade is growing stronger, even as the economic benefits from globalization continue to increase. A recent Pew Research Center poll showed that Americans had the lowest favorable attitudes towards globalization and trade of all 47 nations surveyed.

In terms of pure economic efficiency, and maybe even morally, it might not make sense to compensate the losers from globalization. But from a political perspective, it is imperative that we do so, if only to be able to maintain public and political support for expanding free trade. If some of the gains of free trade have to be spent to maintain the regime, so be it.


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Anonymous said...

I would disagree. I believe there is in fact a moral obligation for government to sponsor the re-training of import-competing sectors that are shrinking. Free trade may compensate the winners more than it penalizes the losers, but if you are employed in one of the blue-collar sectors that faces contraction from free trade, even a minimal penalty will exact a hefty price on your standard of living (no pun intended). The pharmacist in Landsburg's dubious analogy is not threatened with job loss while living from hand to mouth.

Put yourself in their shoes. Do you honestly think that you would find lower prices worth losing your job over, especially if you are already living humbly? Furthermore, where do you think you would find the resources for your retraining? Education is pricey, a fact that any student at the mercy of the financial aid department must appreciate.

This is not to say that free trade cannot benefit society. The positive effect of cheaper prices, especially for essential goods such as food and medicine should not be overly trivialized, but there is no reason why this should happen at the expense of Americans who are already struggling to make ends meet.

There is a burden of proof to be borne as to whether free trade really can benefit society. The strength of the anti-trade lobby in the US as well as South America in particular demonstrates that this burden of proof remains extremely heavy. Claiming that its weight is a consequence of some kind of petty shortsightedness or the latest opiate of the masses is plain wrong. People are concerned about free trade, not out of incompetence, ignorance or childishness (though a certain degree of each is innate in politics) but because they actually have legitimate concerns about what economic globalisation is doing to our society. Try preaching the benefits of open capital markets to the Argentines, who in the process of wading their way out of financial crisis went through several Presidents in a single week, all the while facing unemployment rates as high as 25%. Or try explaining to sweatshop laborers the benefits of foreign direct investment.

The problem here is not that free trade is detrimental, because it's not. Nor is any more accurate to say that liberalization inevitably leads to the exploitation of workers, because it doesn't. It isn't that the destabilizing effects of international capital markets can't be reduced, because they can.
The problem is that markets need to be evaluated not in and of themselves but in the context their benefits to society. Though making blue-collar workers fend for themselves may seem more fiscally astute, it overlooks the need for lessening the human costs of a changing global division of labor. Should this attitude continue, there is a real possibility support for economic globalization will decrease to a trickle.

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