David R. Henderson  

Adam Davidson Turns Mercantilist

An Answer to a Monetary Riddle... Social Capital, Property Value...
The currency intervention also functions as a massive inequality-creation machine. U.S.-based behemoths, which own or use many of those exporting Chinese factories, benefit, as do their shareholders. And because more than 90 percent of U. S. stocks are owned by the wealthiest 20 percent, the spoils are disproportionately concentrated at the top. Meanwhile, lower wages, lost jobs and crippled manufacturing employment fall on the less wealthy. The economists that I spoke to estimated that China's currency policy has cost the U.S. between 200,000 and 3 million jobs. Of course, the wide range suggests that these are little more than educated guesses. But a broad picture does emerge. U.S. manufacturing employment has fallen by around 6 million over the last decade. If China had allowed its currency to adjust naturally, life might be much better for many former American factory workers.
This is from Adam Davidson, "Come on, China, Buy Our Stuff!," New York Times Magazine, January 25, 2012.

Do you notice a little benefit that Davidson left out of his purported cost-benefit analysis? Davidson understands that if the Chinese government keeps its currency artificially low, that makes its exports artificially low-priced. He also understands that we import a lot from China. So the question: who benefits from those exports from China? He mentions one set of beneficiaries: owners of corporations. Let's see. There are gains from exchange. Hmmm. Who else is he leaving out?

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CATEGORIES: International Trade

COMMENTS (13 to date)
Peter writes:

Why does their currency manipulation cause their exports to become cheaper? The prices should adjust in the long run.

david writes:

@Peter - not if you keep accumulating dollars. Yes, eventually you will have an non-optimally large stock of dollars, but China has plenty of capital controls to restrict money movement.

@our kind host - much of complaining by non-economists about economic policy are about what we can recognize as pecuniary externalities, and it is the case here. Presumably you understand that it is entirely theoretically possible, and empirically plausible, to argue that a fall in semiskilled wages is not sufficiently offset by a fall in the price of consumer goods. We can have socially net gains from trade without losers being compensated by winners.

Ideally we might impose a state-enforced redistribution to change a Kaldor-Hicks improvement to a Pareto improvement, but that would be a Tax, which is Bad. So we moan about the PBoC. So much easier to blame foreign enemies than domestic ones, eh? There's absolutely no way this might end badly.

Kenneth A. Regas writes:

Hurray for what David said in his 2nd paragraph.

Tariffs on imported products in which the labor content is largely semi-skilled (tires, perhaps) would also perform the role suggested in David's para 3, yes David? But before imposing bad bad tariffs we could repatriate large numbers of semi-skilled foreigners living in the US without permission. That would also boost wages at the low end, yes?


david writes:

Shrug. Look to the empirics on relevant elasticities. AFAIK the domestic wage effects of Mexican illegal immigration seems very small but negative (little substitution); the marginal gains from trade from recent liberalization small but positive, but even smaller when taking the deadweight losses generated by ensuing demands on social services into account - possibly zero. This shouldn't be surprising - we have already attained most of the gains from international trade and therefore there is little left.

Insofar as we're pretending that comparative advantage and comparative statics are the only relevant arguments, Henderson is trying to sweep the inconvenient parts of the model under the rug. At best this is intellectual myopia; at worst is is intellectual dishonesty.

What's unfortunate is that there is really no need to do so: you can build a case for free trade and open borders on ethical grounds. But that would entail recognizing that the process would generate material losers that the polity decides not to compensate, that we judge the winners more deserving than the losers, that this is a political and distinctly normative stance, and that value-free positive economics has actually virtually nothing to say about it.

wintercow20 writes:

How depressing after I just recommended his recent Atlantic article on manufacturing (I think it is the same author) to several folks.

Bob Murphy writes:

David (Henderson), are you thinking of US consumers? Because I think an even more obvious one, given the "I care about poor people" attitude of this guy, is that the policy benefits Chinese workers at the expense of American workers. I'm guessing Chinese workers have a lower standard of living.

david writes:

One should denounce the nation-state as the relevant ethical unit anyway, but I think it is fair to demand a degree of honesty when you do so (or fail to do so), rather than pretend that all economic changes are Pareto improvements, which is manifestly false.

David R. Henderson writes:

@Bob Murphy,
Yes, I’m referring to American consumers. That’s why I highlighted that paragraph. But you make a good point.
I pretended nothing. I simply pointed out that Davidson left out the huge gains to U.S. consumers. These gains are almost certainly much larger than the losses to workers: notice that the upper limit is 3 million. And remember that many of these workers were in high-paying union jobs. So with tens of millions of low-income consumers getting large gains and at most a few million relatively high-income workers receiving a loss, it’s likely that trade with China produces more income equality in the United States.

david writes:

@David R. Henderson - you are (rightly) much more exacting about welfare analysis when analyzing the alleged effects of, say, fiscal stimulus. I suggest you apply the same degree of care here as well. "Large gains" compared to what? When Americans invest overseas, don't they receive the return from doing so? So which class of Americans disproportionately receives the returns from capital investment? Foreign wages can be lower without export prices being that much lower as well. What is the net distributional effect here? I don't know, but I know that you don't, either.

You would rightly laugh if I asserted that we should confiscate any wealth of the richest three million above the median household income and redistribute it among the rest of the US, because the gains would be much larger than the losses. So why offer such a shoddy argument?

david writes:

A simple argument, for those who don't know, or are pretending not to know, EC201:

Recall the comparative-advantage pedagogy that international trade is essentially a strange technological box where you put American wheat in and get iPads out. So take the productivity of this box full of Chinese labor as given. One day the box appears into existence. The production possibility frontier (PPF) moves out by a given amount.

The fight over the gains from this improvement is therefore zero-sum, as is always the case for every technology whose social gain does not accrue wholly to the inventor. You're not paying the inventor any more (the Chinese wage rate may be taken as largely exogenous to American policy), so the American consumer (of net imports) gains to the extent that the American investor (in capital located in China) loses. Both might still win compared to the old PPF, because free trade is a small net gain, but it's quite possible for one to lose wholly depending on domestic price shifts. American investors might have owned a lot of older American technology that is suddenly outdated, aka American export incumbents. American households might likewise have possessed a lot of now-outdated skills. Or they might not, etc. But because the gains from the "technology" of marginally more trade are limited, there is a natural political dispute over who receives it.

There is no obvious ethical case over who "deserves" the marginal returns of greater trade with China, because neither party is responsible for China being a communist state and then suddenly liberalizing. Saying that consumers and investors alike should be satisfied with what the idiosyncrasies of the institutions of the 80s and 90s created is a political value judgment, nothing more.

America is rich enough that it can afford to relegate such disputes to a culture-war proxy fight, fortunately, where liberals pretend that the only desirable American export industry is manufactured consumer goods and conservatives pretend that America doesn't already aggressively protect its domestic agriculture industry against Chinese exports. The gains from trade policy are for me, the losses for thee.

Costard writes:

Bad reporting but also a poor argument. The imagination of some economists is a poor basis for saying that the benefits are "almost certainly much larger than the losses", and common sense would indicate otherwise. Trade is a balance, and is unlikely to result in winners and losers. Rather each side will gain something, and each lose something. To the extent that this creates an unsustainable imbalance, it will almost "almost certainly" result in a great deal of wasted time and resources in both countries.

But at the moment it disguises economic disfunction in China and political disfunction in the States. It has allowed us to defer inflation, and them to maintain the illusion of growth and liberalization. Fine and dandy. But when you tabulate the "costs" of the situation, be sure to include the fallout from its eventual resolution.

david: however the situation rebalances, it will result in lower US consumption and, one way or another, larger budget deficits. If these cannot be financed in the absence of China, we find ourselves very quickly in a bad situation. I'm not sure I would call anything in this situation, including tariffs, a "solution".

Ed writes:

I think most non-economists are unknowingly economic nationalists/mercantilists at heart.

Cyberike writes:

Mr. Davidson is doing exactly the same thing that a large number of other Americans are doing: ignoring benefits while focusing on costs. Of course the cost-benefit is going to look unbalanced! It certainly appears that way to many Americans, this type of analysis just confirms their beliefs.

Those same Americans make their purchasing choices everyday based on the relative price of the item without any consideration at all of macro-economic effects like job losses. Then they complain about those effects.

Consumers could have kept jobs in America by paying the higher price for American made products. They didn't, and now those manufacturing jobs are gone and consumers don't even have the choice between American made and foreign goods.

However, what they do have are flat screen TV's, fancy cell phones, and more nice clothes than will fit in their closet. It's nice when you can ignore certain facts just to make a political point.

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