Arnold Kling  

Free Trade Equals Redistribution?

Trains versus Tulips... Climate Science...

George Borjas writes,

Immigration policy is just another redistribution program. In the short run, it transfers wealth from one group (workers) to another (employers). Whether or not such transfers are desirable is one of the central questions in the immigration debate.

There is an isomorphism between immigration, outsourcing, and free trade in general. In each case, overall economic efficiency is increased, due to the law of comparative advantage. There are distributional effects, to be sure, but no nation has been able to demonstrate an ability to use trade restrictions of any sort to reduce overall poverty.

Redistribution implies that trade is a zero-sum game. Borjas implies that immigration works like a tax on low-income workers and a subsidy to high-income employers. Of course, in any sort of competitive market, employers do not profit from lower costs but must instead pass them onto consumers. But why let a little economics get in the way of a folk-Marxist story?

Immigration, like all other forms of trade, is positive-sum game. All forms of trade restrictions hurt the economy. Immigration restrictions may change the composition of the least-well off. Overall, however, by weakening the economy immigration restrictions are likely to produce more poverty rather than less.

I am not a passionate supporter of open immigration as an economic policy. I do not think that the gains are huge. But I am angry any time an economist misleadingly describes trade as a "redistribution program." At that point, you forfeit your identity as an economist and instead become a demagogue.

See also Daniel Drezner's take (note that Lawrence Katz, who co-authored a paper with Borjas, makes much more reasonable comments).

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The author at Innovation Online in a related article titled A C type Discussion on Immigration writes:
    Arnold Kling is upset at the characterization of immigration as redistribution plan. I am not a passionate supporter of open immigration as an economic policy. I do not think that the gains are huge. But I am angry any time... [Tracked on April 18, 2006 2:40 PM]
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T.R. Elliott writes:

So I look at that Eduardo piece.

First, the whole California versus Ohio comparison? Comparing apples and oranges. What was held constant in this comparison? Nothing.

Then I look further and what I find is that the economists think the impact was 8.2% but for the fact that there's a bunch of stuff they can't really compute and if they did it would probably be more like--well, smaller. Definitely smaller.

This seems little better than guessing. It looks a lot like noise to me. Much cloudier than climate science.

And why the statement "Redistribution implies that trade is a zero-sum game." Redistribution can increase or decrease total income. Redistribution is first and foremost about percentages. Isn't it? Why zero-sum? You seem to be imposing that restriction. Why? Is anyone arguing otherwise? A more egalitarian distribution of incomes may not be optimal overall. That's not necessarily an argument against redistribution of some form, or policies to achieve these ends.

Regarding trade restrictions and poverty, is there any research or study that consider the positive and negative aspects of the asian economies trade barriers that they maintained for years in order to build up competitive manufacturing and technological capabilities? I'm curious what impact this has had on their poverty rates. Same for european countries like Germany. In particular, when creating new manufacturing capabilities.

Any understanding why the poverty rate is so high in the US?

John S Bolton writes:

If increasing economic efficiency, means the global utility, or the national production, but not per capita, how is that a relevant consideration? Our offcials may not put some concern for more efficient use of the entire world's surplus labor above the responsibility not to increase the aggression on the net taxpayer here.
To have succeeded in raising total output domestically, but not per capita,
would be an economic disgrace, not a praiseworthy result.
Economics has again, as in the past, been exposed to the most complete humiliation, for failure to predict the relative growth of national economies on common theoretical assumptions.
Now IQ and birth rates have turned out to have the highest correlations for predicting relative growth per capita of national output, as between countries
This contradicts the expectation of theory that more labor is always better regardless of what happens to its average quality.
There is a terrible irresponsibility in economics not telling the advised, that the maintenance of a high technological level requires that there be some such progress, and this depends on some nations and regions being vastly further ahead in terms of productivity. To want to globalize the world's technological level thus would mean to reduce it.

Matt writes:

Arnold, you are dismissive of the idea that anyone but consumers benefit from engaging in this (surplus increasing) behavior. But wouldn't this kind of trade lower the capital/labor ratio, and thus raise the interest rate? The trade-off, at its most basic level, is between capital and labor as Borjas ought to have claimed (rather than employees and employers as he DID claim).

Now whether this is even likely, given that international capital flows can easily eliminate the change in the C/L ratio, is another question. And perhaps David Card's article goes a long way toward answering it (T.R. Elliott does not seem convinced, but he has clearly not read the underlying article)

John B. Chilton writes:

Borjas wrote: This [lower wages] does not imply that immigration is a net loss for the economy. True, but vague bordering on obfuscatory. It is unfortunate that he did not instead write lower wages imply immigration is a net gain for the economy because the loss to native labor is smaller than the gain to capital.

This is exactly what he says in ch 9 of his textbook -- something I happened to be covering today in class here in the UAE. One of my students asked "since Republicans are capitalists doesn't this mean they are on the side of more liberal immigration policy in the US?"

To some degree I can understand why Arnold is wound up about Borjas' use of the term redistributive. It leaves the impression that trade or immigration are merely redistributive and do not also result in a net gain.

Fair enough for T.R. Elliott to say Kling added the restriction zero sum, not Borjas. But Borjas should be more careful. In not admitting in the op-ed that immigration is a net gain it is legitimate to use stronger language than "be more careful."

Aside - it also of course hardly ever true that a "purely" redistributive policy change turns out to be zero sum. I am referring to the equity-efficiency tradeoff. Kling might to be more careful than to imply you can redistribute with creating a net loss.

John S Bolton writes:

Why would one leave the impression that an increase in total output, from immigration, is also an increase in per capita production? Well over 90% of readers or students will assume that you mean that an increase in per capita output necessarily arises from immigration, won't they? If you say, it builds up our economy, while ever so [un]candidly, concealing that you have not said that it does so per capita; knowing that almost anyone will think that improving the economy means improving per capita output, isn't that deception?
But the subject is immigrants, those presumptively helpless sacred monkeys, on whose behalf it is quite acceptable to practice deception, and all the more so, if we are smashing the selfish sedentes, or what is going on with this?

Mark Seecof writes:

I wish you would stop using "free trade" and "unrestricted immigration" as synonyms. Although I regard "transborder outsourcing" as trade (and think it ought to be "free" as in "free trade"), not so with immigration. The difference is the nominal 6,686 hours per year that the immigrant is not on the job! The presence of an immigrant represents a gigantic externality, which his/her employer sloughs off on society at large.

With free trade (whether in tangible goods or labor and proceeds-of-labor), you get what you pay for. It's a mutually-beneficial exchange: both participants end up better off. Some externalities may accrue, but by and large these are local and symmetrical (there has been some whining about international air pollution caused by ships carrying goods across the oceans).

With immigration, you get what you pay for, and then the taxpayer gets the costs of housing inflation, then SSI and Medicare/Medicaid as the immigrants get too old for their backbreaking-labor jobs or get injured doing them, then the costs of schooling the immigrants' children, then the astonishingly large costs of crime committed by those children... and so-on.

The gains are not at all symmetrical. The source country gets remittances and lightens its tax-funded pension/healthcare loads. The destination country gains the differential value of some labor (that is, if an immigrant will do a job for $5/hour that a native worker would demand $7/hour to do, the gain to the destination country is only $2/hour), but loses the remittances, loses the costs of pensions and healthcare (and schooling and crime), and loses the stimulus to invest in productivity improvements which might be worth, say, $1.50/hour to the employer--and worth much more to the country in the long run, because machines don't demand pensions (and never vote for leftist politicians).

If "immigrants" could just do a day's work then go home (all the way home, to Matamoros or wherever) at 5PM, then we could see them as "free trade" in action. Since that's not the case, you should consider the whole impact of immigration--not just dismiss concerns as the ignorant bleating of people who haven't grasped the principle of comparative advantage.

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