Arnold Kling  

Roberts Rules

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Odyssey Years... Overtreated...

The New York Times turned Russ Roberts loose, along with some other economists, on the Republican Presidential debate. One of Roberts' comments:


Mr. Romney is asked if he still supports trade even though we’ve lost 5 million jobs to foreign trade since 1989. Mr. Romney should say, “That’s fewer new jobs than the economy produces in THREE MONTHS. Foreign trade can’t be the source of our economic challenges.” Unfortunately, Mr. Romney answers like a good mercantilist, an economic position that was first put forward in the 14th century and has been out of favor among economists since 1776 when Adam Smith shot it down. (John McCain–this would be a good place to mention that book you did before).

Trade is good, Mr. Romney explains, because we get to sell stuff to foreigners. He claims that the average American family benefits $9,000 a year from EXPORTS because so many Americans work in the export sector. Weird number. Weird idea. Only a minority of Americans work in the export sector so using the average is a meaningless measure of how the TYPICAL American benefits. The only reason to trade with the rest of the world is to be able to IMPORT. The only reason you export is because foreigners want something for what they send us.


It would be fun to see Roberts debate the candidates face to face. Maybe they'll agree to appear on a podcast...


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CATEGORIES: International Trade



COMMENTS (16 to date)
shayne writes:

Roberts writes ...
"The only reason to trade with the rest of the world is to be able to IMPORT. The only reason you export is because foreigners want something for what they send us."

(God, I hope he's being sarcastic or facetious.)

Wow, what a revelation! I'm going to have to dump all my econ and business management texts and throw away my management degrees. All this time I was under the impression - based on my understanding of economic principles - that BOTH sides benefited from a voluntary transaction! Now Roberts says only WE should benefit. I wonder who "we" are. And how dare "foreigners" actually want something they value in return for the goods they send us! It's scandalous!

Roberts follows up with ...
"If foreigners would only give us stuff for free, we could enjoy their gifts and we could take the people and energy and resources used to produce exports to make something else we like. Trade isn’t valuable because it creates jobs. Trade has little or no effect on the total number of jobs. It changes the kind of jobs we have."
from the blog.

(God, I really hope he's being sarcastic or facetious!)

So, I would conclude that Roberts wants the U.S. to be a pure welfare state - receiving, but not producing. Why didn't I think of that? Maybe it's because I actually own a free-market business and have always found that if I don't produce something other folks want to buy, I get very slender!

I have 3 grievances here:
1.) This presidential campaign started the day after the mid-term election in November 2006. Quite frankly, two months of this sort of campaign drivel is too much, let alone two years of it.
2.) The only thing worse than the extended campaign drivel is the commentary and talking-head drivel that accompanies it.
3.) If Roberts is an economist (not proven here), he had better re-phrase and re-state his blog commentary - or better yet, skip it entirely.

There is not now, nor has there ever been a trade imbalance - folks outside our borders send us things (oil, toys, etc.) and we've been shipping them a combination of a few things and lots of U.S. Federal Reserve coupons. The only "problem" is that those folks aren't as enamored with U.S. Federal Reserve Coupons as they used to be and would really prefer us (U.S.) make and deliver more things. Yep, I suspect that means a few of us (U.S.) are going to have to actually build things, rather than just move money - the "changes [in the] kind of jobs we have" sort of thing Roberts alluded to.

Someone might explain to Roberts - more importantly to his readers/students - that this is an increasingly global economy. The concepts of "foreigners" and "borders" are, and increasing will become, less significant than the lines on a service station street map. I suspect the sooner he, and the politicians, get a grip on that fact, the better off we all will be.

Nathan Smith writes:

I wonder if there's an explanation for the continuing popular appeal of mercantilism in utility theory.

The comparative advantage argument is that free trade always makes "the country as a whole" better off, but there are "winners and losers." The gains of the winners, supposedly, exceed the losses of the losers.

But this requires a comparison; what is being compared: (a) cash income, or (b) utility? It's (a), and why is that relevant? We care about utility, not money income. It may well be that whatever redistribution occurs because of free trade increases total cash income but reduces total utility.

Supposedly you can redistribute cash income from the winners to the losers, but it's hard to identify them, and any program that tries to do this will itself create perverse incentives and deadweight losses.

On this basis, I think it could be proven that the utility-maximizing trade policy would almost always involve some deviation from free trade. Now, don't get me wrong: I support free trade. I support it on deontological grounds-- "rights"-- and also because I value foreigners' welfare as well as Americans', and also because a free trade *rule* would probably optimize welfare better than the political process (even if an omniscient, benevolent social planner might be do even better), and also because free trade is more advantageous in the long run, when the economy has time to adjust, than in the short run.

But I suspect that the traditional case for free trade rests on invalid assumptions about how to compare interpersonal utility.

Eric Hanneken writes:
The comparative advantage argument is that free trade always makes "the country as a whole" better off, but there are "winners and losers." The gains of the winners, supposedly, exceed the losses of the losers.

I've heard that argument, but in my opinion a better argument is that trade allows the world to produce more with the same inputs, because of comparative advantage. Or, as Russell Roberts put it, "new opportunities are created when we find cheaper way[s] to make things (technology) or cheaper ways to buy things (trade)."

No interutility comparisons are necessary for that argument. However, politicians might be reluctant to embrace it because it doesn't guarantee that everyone (or, very theoretically, anyone) living within the borders of their country profits when trade is marginally liberated.

shayne: I think you're mistaking Mr. Roberts' factual statements for prescriptions. And nowhere does he deny that voluntary trade benefits both participants.

Now Roberts says only WE should benefit.

He said no such thing. You don't understand his point.

8 writes:

As per Bryan, economic literacy is sadly lacking. It would probably be suicidal, but I would like it if a candidate said, "I don't care if every country in the world closes their market to American exports. Importing still benefits Americans..." and then went on to explain why.

Also, in the discussion about losing manufacturing jobs to China, I wish one of them had said, "Actually, China has lost manufacturing jobs as well..." and explained the effects of technology.

One of the benefits of a long campaign is that candidates have a lot of time to educate voters, if they're willing to di it. I have to wonder who the heck is advising these guys, because it's not like there's a dearth of economists who write in plain English.

shayne writes:

Eric, Patrick:

You are correct - I don't understand his point. And if I don't understand it, perhaps he shouldn't have attempted to make a point. That, gentlemen, is my point.

I can see every protectionist pundit and talking-head citing Roberts' comments (in context and out of context) for the next 13 months as an "economist's endorsement" of why we shouldn't focus policy attention on trade agreements and free trade in general - "Trade isn't valuable ...", "Trade has little or no effect on the total number of jobs.", ad nauseum. His lack of clarity and the use of terms like "foreigners", "imports", "exports", "we", "they" is going to provide no end of nonsense for months to come.

Facts? Here are the facts: "They" aren't "Foreigners". They are suppliers and customers. I produce more than I can consume and more than my "neighborhood" can consume - I'll go outside my neighborhood to provide my surplus production to buyers across the Atlantic/Pacific. They're just customers. By the same token, I want to purchase goods/services that aren't produced in my "neighborhood" - I'll buy from across the Atlantic/Pacific in order to get what I want at the price I'm willing to pay.

Again, the sooner we lose the notion that borders are anything more than lines on a map, the better off we all (ALL 6.5 Billion of us, not just 300 Million of US) will be. It follows that the concept of imports/exports is only relevant to the degree borders are relevant - and borders are becoming less relevant every day.

I'd very much like Roberts to explain what he was saying in his comments - I certainly didn't understand him, and I suspect others won't either. That's not a glowing review of written work. Or, perhaps, I'm a dunce

What Roberts writes seems really strange itself. Like Shayne said, maybe he's being sarcastic? But, people who work in exports don't just take their money and stuff it in a vault never to be seen again, so the idea that the average family benefits from exports is not that weird.

Eric Hanneken writes:

shayne:

My understanding is that Mitt Romney defended free(er) trade under the silly, all-too-common mercantilist premise that exports are good for Americans, while imports are bad for them. Paraphrasing Professor Roberts' response, that is like saying my freedom to trade with a supermarket is good for me because I get to give the store my money, but unfortunately I have to take groceries in return. The truth is that if I could get the groceries without giving money to the store, I would be better off. I trade with the supermarket because even though they require me to give them money, that's still a cheaper way to get food than growing it myself.

[T]he sooner we lose the notion that borders are anything more than lines on a map, the better off we all (ALL 6.5 Billion of us, not just 300 Million of US) will be.

I agree. As Sheldon Richman put it in Made Everywhere,

What is an export? What is an import? These words are defined in reference to political boundaries of only one kind: national boundaries. If there were no such boundaries, there would be no exports or imports. But political boundaries are just that. They are not economic boundaries. To the extent that they can, people go about their business as though those boundaries weren't there. People cross the Canadian-American and Mexican-American borders to transact business every day. If they give them a thought it is only because governments put up barriers patrolled my armed guards who make them wait in line. People learn early in life that they can gain immensely from trade, and with that understanding comes the insight that it doesn't much matter on which side of a Rand-McNally line your trading partner lives.
Russ Roberts writes:

Shane,

Under time pressure, I wrote up my ideas poorly. Here's a better version of what I wanted to say, from Rose and Milton:

"Another fallacy seldom contradicted is that exports are good, imports bad. The truth is very different. We cannot eat, wear, or enjoy the goods we send abroad. We eat bananas from Central America, wear Italian shoes, drive German automobiles, and enjoy programs we see on our Japanese TV sets. Our gain from foreign trade is what we import. Exports are the price we pay to get imports. As Adam Smith saw so clearly, the citizens of a nation benefit from getting as large a volume of imports as possible in return for its exports or, equivalently, from exporting as little as possible to pay for its imports.

"The misleading terminology we use reflects these erroneous ideas. "Protection" really means exploiting the consumer. A "favorable balance of trade" really means exporting more than we import, sending abroad goods of greater total value than the goods we get from abroad. In your private household, you would surely prefer to pay less for more rather than the other way around, yet that would be termed an "unfavorable balance of payments" in foreign trade."

Read the rest here: http://www.hoover.org/publications/digest/3550727.html

John writes:

Isn't Russ off a little in terms of jobs created? According to Economagic.com, the number of US jobs in December, 2006, was 145,926,000, and in September, 2004, was 140,599,000. That's a difference of 5.3 million jobs. So it seems to take the economy about 14 or 15 months to create 5 million jobs, not THREE MONTHS, as claimed.

Russ' point remains--job growth in the US during a period of freer trade vastly outweighed the claimed job losses due to trade. Using the data 2005 and 2006, net growth in US jobs was more than 350,000 per month while, using data from the NYT article, job losses from trade averaged only 23,000 per month.

shayne writes:

To Russ and Eric:

First, thank you for clarification.

Russ, I fear your comments will not be understood and mis-quoted/mis-used to inspire protectionism, as I indicated above.

I can understand your argument that it is "better" to get more for less, but more and less are vague concepts. The only conclusion (as an economist) that can be drawn from the act of a voluntary trade transaction is that both sides of the transaction perceived a benefit. By definition, I have gotten "more" for "less" by virtue of engaging in the transaction, whether I am a buyer or a seller. How much or how little isn't measurable and isn't terribly relevant.

How can a "favorable balance of trade" be the result of sending goods "of greater value" to customers? If they are of "greater value", wouldn't "we" be better off keeping them?

Also, I reiterate my assertion that there is no such thing as a trade imbalance (or a favorable trade balance, for that matter) - "they" send us stuff, "we" send them U.S. Federal Reserve coupons. As long as we perceive benefit from owning the stuff more than owning the coupons and they perceive benefit from owning the coupons rather than the stuff, trade will continue. I suspect their perceptions of the benefit of owning more coupons is changing, however.

Again, my concern was with the terms being used. Foreigners, we, they, us, them, exports, imports, etc. are the vernacular of the protectionists, and of limited and declining utility to economists and businessmen.

Nathan Smith writes:

re:

Isn't Russ off a little in terms of jobs created? According to Economagic.com, the number of US jobs in December, 2006, was 145,926,000, and in September, 2004, was 140,599,000. That's a difference of 5.3 million jobs. So it seems to take the economy about 14 or 15 months to create 5 million jobs, not THREE MONTHS, as claimed.

But remember job churn. The net increase in the number of jobs is not the same as the number of jobs created. The economy also destroys millions of jobs every year. I don't know the numbers myself, but Russ Roberts' claim that 5 million jobs are created every 3 months is not inconsistent with a net increase of 5 million jobs over 3 years.

Russ Roberts writes:

John (and Nathan Smith)

Actually, the Bureau of Labor Statistics numbers are typically in the 8-9 million jobs created every three months. Slightly less than that number gets destroyed every three months, as long as we're not in a recession. Go here to verify and find out more: http://www.bls.gov/bdm/

I was just trying to make the point that worrying that trade has destroyed 5 million jobs over the last 18 years is bizarre. Seven to eight million jobs get destroyed every three months from all kinds of economic change. More than that number are typically created every three months. To focus on trade is bizarre.

Paul S writes:

Obviously most voters are ignorant of the true benefits of trade in all its forms. Does anyone have any thoughts on the possibilities of forming a government sponsored regulatory agency, supported with perhaps a 0.5% tax on all consumer goods, that would have complete authority over trade policies. Perhaps similiar to the Fed in nature allowing for quasi-independent trade experts to control trade policies. It could be argued that if the benefits of trade this organization produces were greater than the cost, then it would be worth it. While there are consumer advocacy groups and free trade organizations, both domestic and global, obviously they are failing to educate the public and arguably failing to benefit society as much as they could.

While this is completely unrealistic politically, would this idea have merit?

Floccina writes:

Politicians are experts at getting more votes than their rivals. I do not assume that the politicians are ignorant of economics some are some that are not but politician’s real expertise is in getting people to vote for them. This means that they do not always make economic sense when they speak to the people. If the were speaking to a group of economists and they knew that it would not get out they might make a great deal more sense.

IMHO Bill Clinton was a great example of a man who could and would often talk economic nonsense to get the votes but showed by his actions that he was just lying to get votes.

Arnold Kling writes:

John, just to follow up on Russ' point about job creation.

The most widely-quoted statistics are for *net* jobs created--the number of new jobs minus the number of jobs lost. As of a few years ago, the Labor Department started to report "gross flows," which meant tallying up new jobs and jobs lost separately. They still report the net, and the media still focuses on the net, but economists are becoming increasingly interested in the "gross flows" figures. See this post.

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