This, however, was enough to bring me back.
In their work, economists are typically are not nationalistic. National boundaries mean little to them, other than that much data happen to be collected on a national basis. Whether a fellow American gains from a trade or someone in Shanghai does not make any difference to most economists, nor does it matter to them where the losers from global competition live, in America or elsewhere.
I say most economists, because here and there one can find some who do seem to worry about how fellow Americans fare in the matter of free trade.
In a widely noted column in The Washington Post, "Free Trade's Great, but Offshoring Rattles Me," for example, my Princeton colleague Alan Blinder wrote:
I'm a free trader down to my toes. Always have been. Yet lately, I'm being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation. When I say this, many of my fellow free traders react with a mixture of disbelief, pity and hostility. Blinder, have you lost your mind?
Professor Blinder has estimated that 30 million to 40 million jobs in the United States are potentially offshorable -- including those of scientists, mathematicians, radiologists and editors on the high end of the market, and those of telephone operators, clerks and typists on the low end. He says he is rattled by the question of how our country will cope with this phenomenon, especially in view of our tattered social safety net.
"That is why I am going public with my concerns now," he concludes. "If we economists stubbornly insist on chanting 'free trade is good for you' to people who know that it is not, we will quickly become irrelevant to the public debate. Compared with that, a little apostasy should be welcome."
What do you think?
This led Mark Thoma to wisely say:
Saying that everyone could be made better off with increased international trade is not the same as people actually being made better off. There are winners and losers from increased international trade, and while I agree that the gains exceed the losses in almost all cases, the gains haven't been distributed in a way that leaves everyone, or even most everyone, better off (see, e.g., widening inequality and where the costs of these kinds of adjustments fall). When some people are made better off and others made worse off at the same time, economists cannot say it is unambiguously better or worse. If we are going to make the argument that trade is good because everyone could potentially be made better off, we should do much more than we have to ensure that this potential is realized, i.e. that the gains from trade are distributed widely across the population rather than concentrated among a smaller set of winners.
Which in turn led Tim Worstall to reply:
But this argument then generally morphs into an insistence that we should not have free trade until that compensatory mechanism is put in place, so that, say, I, who will be gaining from that free trade will be compensating those who will lose from that free trade.
Hmm. But do you see what is implicit in that argument?
That there are gains that I am not getting, gains that are going to some other, as a result of our not currently having free trade.
This is obvious: if free trade benefits me and disbenefits you, then not free trade must disbenefit me and benefit you.
Which leads to the question: are you compensating me for those benefits you are getting and the disbenefits I am getting from the absence of free trade?
Where, in short, is my check from those benefitting from protectionism?
I'd like to see Worstall defend that one in front of a class of principles of econ students who have seen jobs in their towns go overseas or south of the border.
Seeing as how for the last 16 years I've been defending free trade to classes of principles students who have seen jobs in their hometowns disappear because of free trade, I feel like I can take a crack at this.
Blinder gets it absolutely spot-on. Print this one and post it on your wall.
If we economists stubbornly insist on chanting 'free trade is good for you' to people who know that it is not, we will quickly become irrelevant to the public debate.
That is exactly what 16 years of defending free trade to Midwestern college students has taught me. And since I have no desire to become irrelevant to my students, I have found it useful to focus their attention on what I was taught about free trade.
You see, it is the potential for a Pareto improvement that makes free trade desirable. There are winners and losers. But the winners gain more than the losers lose. So effect a transfer from the winners to the losers that still allows the winners to gain but compensates the losers for what they lost. Only then can you really say that free trade (with the compensating side payment) benefits everyone. If the compensation is not there, then I cannot unconditionally advocate free trade. I must call attention to the fact that some will lose. Call it professional ethics.
I have shared this approach to teaching trade with liberal and conservative economists alike. Economists, even many liberal ones, like Pareto improvements a lot better than redistribution--if a Pareto improvement is possible. I've never really thought of this as controversial. The devil is in the details, of course, since the transfer payment can be very hard to estimate and implement. Economists are usually content to point out to their students that in the abstract it seems reasonable to try to compensate those who lose from free trade because the losers are usually few in number and identifiable (e.g. workers whose factory moves to Mexico) while the winners are numerous so a small tax on the many can compensate the few who lose their jobs. We then leave it to the wonks to write legislation like the Trade Adjustment Assistance Act.
Worstall's logic seems appealing though. If I gain and you lose from free trade, then the status quo harms me to enrich you. That hardly seems fair. So if you're not compensating me now, why should I compensate you under free trade?
There's a hint of utilitarianism in Worstall's logic as well. If there is some inherent unfairness in either state of nature, then which one is preferred? It must be the one that has the highest total utility. If you're going to punt on the issue of distributional equity, then overall efficiency must be the primary, indeed maybe the only, criterion.
That's fine in a representative agent model, of course, because in such a model distributional equity means nothing. The representative agent contains in his person both the winner and the loser, so there's no need to worry about compensation. The representative agent model does allow us to gloss over some of the distributional questions to highlight the aggregate gains, but no responsible economist would stop there.
But ultimately what is wrong with Worstall's logic? For me, it boils down to the notion of a social contract. People make decisions, many of which are irrevocable or nearly so, on the basis of the best information and their expectations of the future. Sometimes the biggest influences on our expectations are the existing law and the political environment. If I then make a decision in good faith based on existing law, only to have the law change to my disadvantage, I will feel wronged. That I benefited from the way the law was should not be held against me when arguing to change the law.
This is a big reason for the political process moving as slowly as it does sometimes. There is rightly a reluctance to change if a change will harm people who made good faith decisions based on what they expected to prevail.
Take the mortgage interest deduction, for example. Everyone who has a mortgage enjoys higher property values because the mortgage interest deduction is built into the capital value of the house. I paid extra for my house to get it. When I sell, I'll get it back. If the present discounted value of the benefit equals the additional amount I paid for the house, then I'm not getting a free lunch. I weigh the costs and benefits and made my decision--so did those who chose not to buy a house. We all knew the rules. The mortgage interest deduction is a thumb on the scale, but we all know that the thumb is there--and we all expect it to stay there and set our prices accordingly.
Take the thumb off the scale and it's no longer in balance. Take away the mortgage interest deduction and my property value goes down in a way that I probably could not insure against, and certainly wasn't expecting. I would feel wronged. Since taking away the mortgage interest deduction would harm so many people, politicians will think twice about doing it. People make decisions in good faith based on existing law. We tend not to change the law arbitrarily and capriciously on them.
And that's why Worstall's logic fails the test of reality. People make life decisions based on protectionism. No, not directly just like that. But trade protection has kept the factory in their hometown going. They graduate from high school and apply for a job. Maybe it was the only job in their hometown. Sure, they could have gone to the big city to wait on tables or drive a cab but that would take them away from home and family. The made the decision that was best for them based on what they knew and could in good faith expect.
And some people would say to heck with them. What are we coming to?
When you break a contract in law, you must compensate the other party. Sometimes it is in the best interest of both parties to allow that. The social contract is no different. We can, and indeed we should, at times rewrite the social contract, but when we do, the winners must compensate those who made good faith decisions based on the old contract. If we do not, then the law is worth no more than the paper it is printed on, and that will lead to less economic activity for fear that it can always be taken away with the stroke of a pen.









