Opposition to Trade Deals

The usually sensible Brad DeLong is very unhappy with those who oppose the agenda that has passed for globalization over the last three decades. He argues that people are foolish for believing that globalization has had a major impact on employment and the distribution of income in recent years. I'll take the side of Brad's "fools" in this matter.

First, Brad is well aware that the economy has operated well below full employment at least since the collapse of the housing bubble, I would argue this has been the case for almost all of the period since the collapse of the stock bubble in 2001. But he attributes this to a simple failure of the government to run full employment policies, rather than the large trade deficits we saw develop following the East Asian financial crisis in 1997.

While Brad is right, the government could maintain full employment by running much larger budget deficits, as he is well aware, that does not appear to be politically feasible. Even among Democrats, very few are willing to say that we should have larger budget deficits to bring the economy to full employment and some even insist on balanced budgets. There is no need to talk about Republican ideas on stimulus here.

It's also worth noting that the costs of being below full employment are disproportionately borne by disadvantaged groups in the labor market, especially African Americans and Hispanics.

Anyhow, if the political reality is that we will not have full employment fiscal policies, does it take a "fool" to argue that big trade deficits are a real problem? The cost of the shortfall in demand that we have seen over the last decade almost certainly exceeds $10 trillion by now and it is enduring, as we have seen lasting reductions in capacity, as Brad has written about himself. And millions have seen their lives and families disrupted by long periods of unemployment. Should we not worry about this damage from the demand shortfall created by trade deficits because there is in principle an economic fix, even though everyone knows it is not politically feasible?

In terms of the composition of output, we saw manufacturing employment drop by almost 20 percent (roughly 3.4 million jobs), from 2001 to December of 2007. This was before the recession started. That was due to the trade deficit.

The loss of manufacturing jobs, which offered relatively good paying employment for people without college degrees (roughly two-thirds of the labor force), had a large effect on the wages of this group of workers. There was both the immediate effect on the displaced workers and their communities, which has been well-documented by David Autor and his various co-authors, and also the longer term effect from the reduced demand for less-educated workers.

The size of this latter effect has been estimated at close to $2,000 a year for a full-time worker by Josh Bivens. Famous socialist fool Paul Krugman has also done work indicating that trade would have a large effect on the wages of less-educated workers.

It is also worth mentioning in this context that our "free trade" agreements have done little to reduce the barriers that make it difficult for foreign professionals, especially doctors and dentists, from practicing in the United States. One result is that our doctors and dentists earn roughly twice as much on average as their counterparts in other wealthy countries, costing us close to $100 billion a year in higher health care expenses.

There is one other point on this issue worth noting. Brad would certainly support taxing the winners from trade to help the losers. While it is gospel among economists that this sort of redistribution is always possible, so that everyone ends up ahead, that is not true even in theory.

Apart from the fact that this redistribution never happens for political reasons, the standard story is premised on the idea that we have distortion free taxes to extract revenue from the winners and cost-less redistribution programs to hand money to the losers from trade. Of course in the real world, every tax has some distortionary impact. In addition, our programs to hand money to the losers from trade require bureaucracies to administer them and also have some distortionary effects.

Whether we can reduce tariff barriers and redistribute in a way that leaves everyone better off becomes an empirical question that depends on the relative gains from the tariff reduction and the costs from the new taxes and the redistribution program. We cannot claim this possibility to exist as a matter of theory.

Finally, it is important to recognize that in almost all cases current trade barriers between the U.S. and our trading partners are already very low. This means that trade deals like the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Pact have relatively little to do with "free trade" as we usually think about it. These deals are largely about standardizing regulations and also extending and strengthening patents, copyrights, and related protections.

While there are undoubtedly potential gains from standardizing many regulations, this is probably best accomplished in an open process where the public has an opportunity for input. The current method of having the corporations that are most affected write the rules to their benefit, and then throw it at Congress in a massive all or nothing deal, is probably not the best way to go.

Patents and copyrights are forms of protection. They are 180 degrees at odds with free trade. And, they are very costly forms of protection. The remaining tariffs in the world rarely exceed 10 or 20 percent. The increase in drug prices from patent protection is often several thousand percent, and can exceed 10,000 percent.

Given the centrality of patents and copyrights in these and other trade deals, they can as reasonably be called "protectionist pacts" as free-trade deals. Yes, patents and copyrights do serve a purpose in providing incentives for innovation and creative work, but there are alternatives, which you can read about here and in my book Rigged (it's free and worth it).

These protections have also been a big factor in the upward redistribution of the last four decades. To convince yourself on this point, think about how much money Bill Gates would have if there were no copyright or patent protections for Windows and other software.

Anyhow, there seem very good reasons for people to oppose the pattern of globalization that we have seen in recent decades. Fools can be found on all sides of this debate.


Reposted from Prosperous America