Tuesday, October 9, 2007

Can 'Free Traders' Handle Competition?

Dean Baker, an economist from a left-ish think tank, says that free trade is "The Best Weapon Against the Free Traders." He writes:
...[Trade Liberalization] has had exactly the effect that trade theory predicts. It has lowered the wages of less-educated workers relative to workers with college degrees and especially workers with advance degrees. We can reverse this upward redistribution by adopting trade policies that subject the most highly educated workers to the same sort of international competition that textile workers and autoworkers now face....

The big winners in this story are the workers who manage to keep themselves protected from international competition. As a result of recent trade and immigration policy, these highly paid professionals can buy low cost furniture, cars, and clothes. They can also have their homes renovated and their gardens maintained at low prices. They can even get cheap nannies for their kids.

But the key to the success of these highly paid workers is maintaining their own protection from international competition. There are long list of professional and immigration barriers that protect doctors, lawyers, and even economists and journalists from the same sort of international competition faced by textile workers and dishwashers.

There is a basic truth here: it is quite easy to be in favor of "competition," "free markets" and "capitalism" as long as its happening to somebody else, but when it happens to us, we suddenly become concerned about "fairness."

But Baker is mistaken on his trade theory (despite his Michigan PhD!). The Stolper-Samuelson theory, part of standard neoclassical trade theory, says that trade increases the returns to the "abundant" factor of production. If the US is abundant in skilled labor (i.e. compared to other countries we have a higher ratio of skilled labor to other factors like unskilled labor, land and capital) the theory predicts exactly that skilled labor will gain; no selective protection from trade is necessary.

And as for economists: while the immigration system certainly creates unconscionable hassles, we are competing in a global labor market (at least, those of us without tenure are!). Roughly 70% of the doctorates in economics awarded in the US (where most of the world's best programs reside) go to non-Americans, many of whom take jobs at American colleges and universities.


Dean Baker said...

Thanks for giving me a great example of the "Mexican Avocado Theory of International Trade." The fact that a large percentage of econ students and future economists are foreign born hardly proves that we have no barriers to trade in economists, it just means that the barriers are not absolute prohibitions. (What percent of apparel is imported? Do we have free trade in apparel?)

It is illegal for me to explicitly hire foreign economists because they will work for lower wages than citizens green card holders. That is protectionism that does not exist for items like steel, clothes, and toys.

This sort of selective protectionism is a more important issue than the predicted effects from Stolper-Samuelson in shifting income upwards.

Thanks for your posting.

Bill C said...

Thanks for your response. That's a good point - the existence of trade is definitely not proof of the absence of barriers. However, in the case of academic economics, there is relatively free labor mobility. Graduate schools are free to draw from a global pool of applicants - there are no quotas on how many Americans they must take (many have almost no Americans) and academic institutions can hire foreign-born PhDs with relative ease. The immigration system does clearly create real hassles for foreign economists and those that would hire them, but I don't see anything equivalent to a significant tariff or binding quota in this particular market. Of course, the whole credentialing process of PhDs can be viewed as a barrier to entry, but not a trade barrier (indeed, to the extent that American schools lag in mathematical training, it may favor foreigners!).

While an academic institution (or think tank) would never say 'we're hiring foreign labor because its cheaper,' no doubt wages for American PhDs would be higher if the portion of supply attributable to noncitizens was removed. I should note, of course, that when we're talking about factor movements, Stolper-Samuelson, etc., no longer applies since neoclassical trade theory assumes fixed factor endowments.

While I do think economists are sometimes guilty of rather sloppy, reflexive thinking on trade (see, e.g., my post "A Useful Corrective"), I don't think we're guilty of the particular hypocrisy of advocating trade liberalization while being protected ourselves by trade barriers.