Arnold Kling  

Extreme Free Trade

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What happens when you take free trade to extremes among states with uneven incomes? Virginia Postrel suggests looking at the fifty United States as an example.


The United States is one giant free trade zone. Businesses can move their plants, investors can move their money and workers can move themselves from region to region without government permission.

Over the last century, a lot of that movement has occurred. Rich and poor regions have converged to about the same standard of living. But the results haven't been anything like the "race to the bottom" of protectionist imaginations.

...Over the last half-century, "once-poorer states have been growing faster than richer ones," says Professor Mitchener of Santa Clara University in California. "That's going to cause the poor ones to catch up to the richer ones." But, he adds, that doesn't mean impoverishing the rich ones.


For Discussion. Edward Lotterman wrote, "There is no historical example of a nation where overall employment or average incomes fell because of greater trade." Is that disputable?


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CATEGORIES: International Trade



TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/51
The author at Abhijit's Eclectic Blog in a related article titled Global Free Trade writes:
    Virgina Postrel writes in "US is a Case Study in Free Trade" SUPPOSE we lived in an economic world with no borders, where goods, capital and people could move anywhere. We've all [Tracked on February 26, 2004 4:10 PM]
COMMENTS (20 to date)
Eric Krieg writes:

In 1950, upstate New York (Albany, Syracuse, Rochester, Bingampton, and Buffalo) had THE highest per-capita incomes in the United States. Today, they are at the bottom.

There are many reasons for this turnaround. The biggest is that New York State has extremely high taxes and too much regulation. Over time, businesses have left. High taxes ensure that new businesses aren't created to take their place.

Now, some might say that this is an issue of trade. States like North Carolina have "stolen" New York jobs. But that really isn't the issue. The issue is competitiveness and how government creates the conditions that allow businesses to thrive.

The previous post points to a theme I have been playing for several months now. The states themselves are free trade zones in microcosm, and the less prosperous communities in states often catch up relative to the more prosperous ones. The metaphor I use is Wilmette (a tony North Shore suburb of Chicago) and Waukegan (some of it is an industrial community in the Binghamton mode, but some of it is new-style bedroom community with the kind of wide open spaces families go for to build houses.) The effect of suburban development has been to allow the less prsosperous communities to catch up, if they follow the right policies.

David Foster writes:

The analogy with states in the U.S. is only partially valid, because there is a common legal framework throughout the country. Example: you can try to form a union in any state of the U.S. without being jailed or threatened by the government. By no means all of our trading partners can make that claim. There are other example, including the protection of intellectual property or lack thereof.

Eric Krieg writes:

Check out the most recent issue of Wired magazine. They have an article about media piracy, and claim that filmakers originally moved to Hollywood from out east in an attempt to escape from Edison's patents on filmaking.

Seems far fetched to me! God knows how you would fact check it.

Anyway, jobs aren't being offshored because of weaker IP laws in foreign countries, so I don't see your point. As for unions, you are just wrong. Have you ever heard of the Right to Work movement?

Arguably, one reason that Upstate New York was de-industrialized was because of millitant unionism. That is where a great deal of the over-regulation has come from, albeit in more recent times from public employee and teacher unions.

Mark writes:

As for unions, you are just wrong. Have you ever heard of the Right to Work movement?

Right to Work laws do not allow people who try to form unions to be jailed or harassed by the government or beaten up by employers; they merely allow some workers at unionized workplaces to free-ride. You haven't addressed David's point.

Eric Krieg writes:

The point is that there are differences in how state and local governments treat unions in the US. Okay, it isn't as extreme as in China. Big deal. This simple fact is that private sector unionization is under 10% of the labor force. Unions are irrelevant in the US, at least in the private sector.

The US isn't losing jobs because we're unionized and China isn't. We ARE losing jobs because of structural problems: lawsuits, (mis)education, taxes, and pensions.

Eric Krieg writes:

There are so many interesting trade articles lately...

http://www.nytimes.com/2004/02/26/opinion/26FRIE.html?hp

Lawrance George Lux writes:

There are instances where Trade has reduced average income and overall employment. Almost all concerned a dominant Trading partner destroying a weaker Trading partner. Cases: What the Spanish did to the Indians in Mexico, what American Corporations did in the banana republics between 1880s-1940s, and what the Copper Cartel did to Chile in the last two decades.

I had previously read the Postrel article, and basically agree but with caveats. There was always great dislocation to the invaded economy with advancement, leading to local Price advances long before Wage advances, and there was a universal appearance of monopoly investment in the form of Company towns etc. Long-term Income gains derived, but often with the destruction of the original economy.

Eric,
Moviemakers moved to California to escape Edison limitations of allowing purchase of limited amounts of film, restriction to production of only Shorts, and extremely disadvantageous film supply contracts. Upper New York State did not lose appreiably in Income overall, it is simply that it was surpassed in other States. lgl

david foster writes:

Eric, decisions as to where to do business are based on many factors. The lack of unions in China (and many other countries) certainly prevents wages from rising at the same rate that they would if free unionization was allowed and hence increases their labor cost advantae. The lawsuit frenzy, to which you allude, makes matters worse for us by increasing the overall cost of doing business. These things aren't mutually exclusive, though the first one is more likely to be pointed out by Democrats and the second one by Republicans.

Eric Krieg writes:

David, China has a higher unionization rate than the US. State industries still dominate the Chinese economy, even though they are in steep decline. Those state industries are entirely unionized.

And again, with private sector unions at trivial levels in the US, I don't think that unionization has much to do with outsourcing.

Also, don't forget how hard it is to organize a union in a Right to Work state. The only time unionization was successful in this country was when it was pushed on industries by the federal government in the 1930s. If people aren't coerced into joining unions, they generally won't join them. The decline in unionization started in 1948 when the federal government's policy towards forced unionization changed.

Eric Krieg writes:

LGL, your point about incomes is like arguing over how many angels can dance on the head of a pin. The fact is that Upstate NY used to be wealthy. Now it is dirt poor.

I don't think thay anyone in Buffalo rationalizes their paltry income by thinking that, hey, at least it hasn't DECLINED since 1950!

David Thomson writes:

“In 1950, upstate New York (Albany, Syracuse, Rochester, Bingampton, and Buffalo) had THE highest per-capita incomes in the United States. Today, they are at the bottom.”

My mother lives in Watertown, New York, and the area is in a permanent deep recession. A friend’s son committed suicide because he failed to get a position with the state troopers. Why was the young man so desperate? That’s easy to answer. Someone with a modest education is virtually forced to obtain a government job if they wish to earn a decent living. A close relative earned a great salary providing vocation assistance in a public school. He retired around four years ago at the age of only 56---with a guaranteed retirement income of well over $55,000 annually. I believe he and his wife also receive free health care. The private sector barely pays even $8 an hour. I’ve heard of individuals possessing college degrees forced to accept positions paying less than $400 a week. One young lady who had just finished college could only find a job as a store clerk at $6 per hour. Do I really need to add anything else? This is why so many move away from the area. And yes, high state taxes and powerful unions have made the upper area of New York a very bad place to do business. My hometown of Houston,Texas has far more to offer.

Luke writes:

By increasing the total labor pool, we're also increasing the total consumer pool, aren't we? As people who weren't employed before become employed, they buy more goods, so production will increase to match, justifying those jobs.

I think it is a fair analogy to present the 50 states as a free trade zone. However, I think it would also be interesting to study the comparisons of laws between the different states, and see what effect it has on the more restrictive states' economies. It's obvious the different states have different laws and regulate commerce amongst themselves, or at least, in theory.

John Thacker writes:

Eric-- there is a difference between no longer being the wealthiest area, and actually declining in income, of course.

That Upstate New York has declined relative to the rest of the US is beyond dispute, I believe, but I don't believe that in any absolute sense that it has.

Also, it seems that several of you are reading the same phrase differently, causing a problem. "you can try to form a union in any state of the U.S. without being jailed or threatened by the government."-- the original author apparently meant that if you try to form a union, the government will not threaten you for it.

Eric apparently interpreted this to mean that one has a good chance of successfully forming a union, even without government pressure or intimidation helping you form it. Hence the comments about Right to Work states showing that non-coerced employees rarely form unions.

Boonton writes:
The US isn't losing jobs because we're unionized and China isn't. We ARE losing jobs because of structural problems: lawsuits, (mis)education, taxes, and pensions.

Losing in an abstract sense. Before I posted an interest section from the Marginal Revolution about 'insourcing' (when foreign companies outsource their jobs TO the US). If you want to really talk about losing jobs to outsourcing, then you should add back in jobs gained from insourcing.

While the US has outsourced more than it insources, the gap has been falling! In other words the US's insourced jobs have been growing faster than lost outsourced jobs.

Clearly our education, legal and economic system is doing something right.

gerald garvey writes:

Uh, LGL, we were talking about mutually voluntary exchange. Your examples of bad trade are:

"What the Spanish did to the Indians in Mexico, what American Corporations did in the banana republics between 1880s-1940s, and what the Copper Cartel did to Chile in the last two decades."

Are these examples of free trade? The first was more like military invasion, the second was similar in that US firms basically outsourced the use of force to local dictators. As for the third, well, we also call a cartel a "restraint of trade".

Eric Krieg writes:

>>Clearly our education, legal and economic system is doing something right.

Our economic system, in particular our lower taxes and regulation relative to Europe and Japan, is behind the "insourcing" trend. Also, the US is a huge market, and in some situations it is more important to be in the market you are serving to be able to service it more quickly.

But this has little bearing on competition with India and China. It we are going to compete with India and China, we need structural reform of our legal, education, and econmic system. The flip side is that, if successful, we will "steal" even more jobs from Europe and Japan.

Luke Lea writes:

Has there ever been a case in which a relatively small high-wage country started trading freely with a several times larger (in population)low wage country?

That is the heart of the question, so far as free trade with China and India are conerned.

And I can't think of any examples.

Eric Krieg writes:

Britain in the 1800's was the small country. The U.S. was the large country.

It is not unprecedented.

Mats writes:

An more important ingredient is probably free labour mobility. Have the Mexican-Texan income smoothed out at the same pace since NAFTA were signed? Has it smoothed out at all?

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