Tuesday, March 13, 2012

Trade, Redistribution, Fairness and Rhetoric

Dani Rodrik has long been a useful critic of economists' rhetoric about international trade.  In a Project Syndicate column, he raises two issues: redistributive effects and procedural fairness. 

The issue of redistribution arises from the Stolper-Samuelson theorem, which is an implication of the basic, workhorse "neoclassical" trade model.  This theory is about changes in "factor prices" - it says that trade leads to gains to the suppliers of resources that are used in higher proportions to produce a country's exports, and losses to those who have the resources demanded more by the import-competing industry.  For example, the US is a net exporter of higher education services and importer of cars, and the theory would predict that college professors would gain, while autoworkers would be hurt by trade (the theory also is very clear that the overall gains outweigh the costs).  As Rodrik put it to a group of Harvard students:
I began the class by asking students whether they would approve of my carrying out a particular magic experiment. I picked two volunteers, Nicholas and John, and told them that I was capable of making $200 disappear from Nicholas’s bank account – poof! – while adding $300 to John’s.  This feat of social engineering would leave the class as a whole better off by $100. Would they allow me to carry out this magic trick?

Those who voted affirmatively were only a tiny minority. Many were uncertain. Even more opposed the change.

Clearly the students were uncomfortable about condoning a significant redistribution of income, even if the economic pie grew as a result. 
The second issue Rodrik raises, "procedural fairness," is less familiar to economists.  He writes:
To pass judgment on redistributive outcomes, we need to know about the circumstances that cause them. We do not begrudge Bill Gates or Warren Buffett their billions, even if some of their rivals have suffered along the way, presumably because they and their competitors operate according to the same ground rules and face pretty much the same opportunities and obstacles.

We would think differently if Gates and Buffett had enriched themselves not through perspiration and inspiration, but by cheating, breaking labor laws, ravaging the environment, or taking advantage of government subsidies abroad. If we do not condone redistribution that violates widely shared moral codes at home, why should we accept it just because it involves transactions across political borders?
I've come to agree with Rodrik that economists sometimes take a too-simplistic view of trade.  In part, I think this is because we feel the need to emphasize the benefits, because we understand them, and the public often seems not to - as evidenced by the mercantilist rhetoric of politicians who emphasize beating out other countries for jobs and exports, rather than mutual gains and the welfare benefits of less expensive imports. 

The idea of comparative advantage is a subtle point that is hard for people to get their heads around.  It is one very valuable thing that people take away from an introductory economics class - and for many economists who don't specialize in trade, may be the one idea they hold in their minds about trade.  Since I've had to learn more about trade theory to teach it (I'm an "international economist," but my specialization is on the macroeconomic side of it, while trade theory is a branch of microeconomics), I've learned alot of very interesting things that most non-specialist economists probably aren't aware of that put caveats on the case for "free trade".

Rodrik concludes:
Too many economists are tone-deaf to such distinctions. They are prone to attribute concerns about globalization to crass protectionist motives or ignorance, even when there are genuine ethical issues at stake. By ignoring the fact that international trade sometimes – certainly not always – involves redistributive outcomes that we would consider problematic at home, they fail to engage the public debate properly. They also miss the opportunity to mount a more robust defense of trade when ethical concerns are less warranted.

While globalization occasionally raises difficult questions about the legitimacy of its redistributive effects, we should not respond automatically by restricting trade. There are many difficult trade-offs to consider, including the consequences for others around the world who may be made significantly poorer than those hurt at home.
There's an irony here, since, in general, economists are people who relish thinking about difficult trade-offs.  Indeed, thinking about them is arguably our comparative advantage.

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