David R. Henderson  

What's so Great about Free Trade? Lots

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In a post yesterday, my former UCLA graduate student colleague David Glasner asks "What's so Great about Free Trade?"

It's a long, well-written piece and I can't completely summarize it in a few sentences, but here goes. David argues that the usual way we show that free trade is good for a country (as opposed to the world, which he does not address) is by showing that the gains to domestic gainers, consumers, outweigh the losses to the domestic losers. David challenges the idea that this is a good way. He focuses on a subset of domestic losers, namely workers who lose their jobs. He argues that consumption is just not that important to most people compared to having a job. He hastens to add that he is not making a case for protectionism, but, rather, arguing that we economists have failed to confront the way non-economists typically think about trade. He says that there are some professional economists who are exceptions, that is, who do talk to the public in ways that show a connection with the concerns of the public, but he doesn't name any of them.

One slice of his argument:

What people do is a far more important determinant of their overall estimation of how well-off they are than what they consume. When you meet someone, you are likely, if you are at all interested in finding out about the person, to ask him or her about what he or she does, not about what he or she consumes. Most of the waking hours of an adult person are spent in work-related activities. If people are miserable in their jobs, their estimation of their well-being is likely to be low and if they are happy or fulfilled or challenged in their jobs, their estimation of their well-being is likely to be high.

And maybe I'm clueless, but I find it hard to believe that what makes people happy or unhappy with their lives depends in a really significant way on how much they consume. It seems to me that what matters to most people is the nature of their relationships with their family and friends and the people they work with, and whether they get satisfaction from their jobs or from a sense that they are accomplishing or are on their way to accomplish some important life goals. Compared to the satisfaction derived from their close personal relationships and from a sense of personal accomplishment, levels of consumption don't seem to matter all that much. (italics in original)


What is one to say?

A few things.

First, the argument that David Glasner makes applies to any change that causes people to lose jobs. Think of the introduction of the car. That spelled the end of many jobs for blacksmiths and buggy whip makers. Would David say "I find it hard to believe that what makes people happy or unhappy with their lives depends in a really significant way on whether they have access to a car?" I don't know, but I think, for his argument about free trade to make sense, he would have to say that.

Second, in the very next sentence after the two I quoted above, David contradicts himself. He writes:

Moreover, insofar as people depend on being employed in order to finance their routine consumption purchases, they know that being employed is a necessary condition for maintaining their current standard of living.

But if peoples' happiness doesn't depend much on how much they consume, why worry? They could just cut their consumption.

Third, the argument I make when I teach about free trade, which is in every class I'm currently teaching, is not that there are not losers and is not that the losers' loss from a particular introduction of free trade or a particular new low-cost import is small. The loss can be big. People could be employed for a number of years at wages as much as 20% lower than they were making. I point that out. But I also add that whereas they are losers from that particular trade, they are gainers from the price cuts on the thousands of other goods that they have more cheaply because of free trade. Over, say, 10 years, I point out, the number of net losers from free trade is a small percent, probably under 5 percent, of the number of gainers from free trade and the gainers also include tens of millions of other low-income Americans (ignoring the 100 million or so huge gainers in China.) I don't know if this would satisfy David Glasner because he would probably say, "So what if people can get clothing, shoes, paper clips, and gasoline more cheaply because of free trade? Our happiness doesn't depend much on those things." But it does seem to satisfy most of my students, who come into the class with many of the same ideas that David, in his post, attributes to non-economists.


Comments and Sharing






COMMENTS (15 to date)
Richard A. writes:

But protectionism costs jobs too. See James Bovard's USA TODAY: Oreo and Trump’s Trade Policy Folly.

LD Bottorff writes:

Expanding trade creates a society that is overall wealthier, and able to support the kind of research that improves medicine, the availability of energy, reliable transportation, and clean water. The thing I value most in life is the health of the people I love, family and friends. Expanding trade helps keep us all healthier and that's what I want.

M writes:

Whenever people raise similar "work makes people happy" or "work is core to people's self conception" arguments, I ask them to consider two thought experiments:

1) Useless Labour - would people be as happy or derive as much meaning from work that is useless or unproductive? The government could order ( or regulate) construction work so that supplies are dropped off a half mile from where they are needed, then subsidize the employment of people to haul that material the rest of the way in carts and hand trucks. Even if they were well paid, I doubt many people would be happy doing such work or find it meaningful.

Labour in defunct or inefficient industries supported by protectionism is, if not totally useless, at least wasteful of human effort.

2) Evil Labour - what about people who enjoy working as concentration camp guards and derive a lot of meaning out of it?

Mark Anderson writes:

I think the important issue is short-term vs long-term. Even if just as many people get new jobs as lose current jobs, the change itself can be pretty traumatic. Thus I suspect a pretty good case could be made that change in trade hurts folks more than helps them under a short-term perspective.

But if our government had been successful in protecting us from such short-term shocks for the last 200 years, probably 90% of us would still be farmers. Politicians are all about protecting us from short-term shocks, even when the long-term benefits are obvious. Our job here is to fight that short-term thinking.

Stan writes:

Loss evokes a far more powerful emotion than gain.
Especially abstract gain.

Ask some random strangers if it's worth it to lower the price of bread by 10 cents nationally if 20 people lose their jobs. Not only will they say no, they will think you're possibly sick in the head.

Pajser writes:

It is simple, almost trivial, but nevertheless essential discussion, not addressed frequently on Econlog. David Henderson is right that one who thinks like David Glasner wouldn't accept that most of people are even in long terms better off with free trade - because it is limited on the availability of consumer goods. Nothing implies that availability of the stable jobs will be improved in long terms.

I think that market cannot attempt to maximize utility as Glasner see it. People can individually choose less paid, seemingly more stable jobs as workers - but they do not support such jobs in the role of the consumers because of "the tragedy of the commons." The outcome is probably suboptimal. But it is really the nature of the capitalism. Loss of the jobs due to import is an instance of the general problem. The communism can solve it generally, I believe.

What researches say about job stability trends in market economies like USA? Are workers more or less frequently fired than in the past?

ThaomasH writes:

One response is that, under the same assumptions about resources being re-allocated people both loose jobs and get new jobs, so the consumption loss/consumption gain had a "jobs" counterpart. Still, it is still true that some people will be worse off from an increase in trade than they would have been without it; just as blacksmiths had less work shoeing horses from the development of the internal combustion engine.

The argument for freer trade needs to be made in the context of the way the whole economy is working that lets people who lose from any pareto optimal policy change to be confident that other opportunities will open up that are ultimately even better. Free trade has become a harder sell recently because the growth in real incomes of the middle class has been low and prospects are that it will continue that way.

Swami writes:

In the end, this topic just funnels into the bigger issue of "considering everything, what kind of society do you want to live in?"

Market based economies sacrifice stability and tradition (two good things) for longer term prosperity and opportunity (two good things). One side has lower standards of living and monotony, the other uncertainty and creative destruction (bad things)

I don't think we can tell anyone which to choose. Longer term, I think those who choose the former path (or their descendants) will regret it...but it isn't for me to decide. The best we can do is explain the long term ramifications positive and negative.

Two additional points. First, open market economies also, longer term probably create the more interesting and creative jobs too. A short term view that unemployment and creative destruction leads to lower self actualization is absurdly narrow.

Second, there is also a middle path between the extremes. The US is clearly a society with high payoffs to skill and value creation:
http://hanushek.stanford.edu/sites/default/files/publications/Hanushek%2BSchwerdt%2BWiederhold%2BWoessmann%202013%20NBER%20wp19762.pdf

The other path is to be a follower and draft upon the creative energies and turmoil of the leader. The above article reveals that Nordic countries do just this. Again, there is no right or wrong answer, but drafting only works if someone takes the lead. We can't all draft.

James writes:

Pajser

There are probably several thousand other people near you who share your positive view of communism. If you and they were willing, you could start your own communist economy right now from within whatever country you currently live in. You could appoint a committee from within you members to plan your economic activities and you could all sign a contract promising to obey the orders of the committee.

Admittedly, you would have to pay some kind of taxes to an existing government but unlike other attempts at communism, you wouldn't have to worry about enforcement because all of the participants would be voluntary joiners and in any case the government would enforce the decisions of the committee as a mater of contract law.

Why is it that so few people do so? What is stopping you?

Benjamin Cole writes:

David Glasner's post raises fascinating issues. But I am not surprised the public is skeptical of establishment economists.

Some observations:

1. Economists tell the public that running federal deficits forever will incur and mounting large debts which are not beneficial.

2. But economists say that incurring ever-mounting large debts to foreigners through chronic trade deficits is ok. That when the foreigners buy Treasuries, that is an “investment” or capital flow. And so incurring increasing debts to offshore holders is ok, but not to ourselves through the federal deficit.

3. We hear arguments from establishment economists that saving or protecting Silicon Valley and the tech industry by importing labor is good (even Don Trump says this!). This implies that offshoring tech software and manufacturing to India and China is bad in the case of the tech industry. Keeping an industry and jobs in the US is good, in the case of Silicon Valley. But not for other industries?

4. Something kin happens in shale oil. There is a lot of hullabaloo that jobs were created in Texas and South Dakota. Obviously, there were a lot of high-paying jobs associated with shale oil production. No establishment economist says, "Well, we should actually work with Saudi Arabia, Russia and Iran to radically boost output, and import oil for a lower cost than we produce it here at home. Those people in South Dakota and Texas should be given pink slips. It is well now that they are being laid off."

5. Unfortunately, the US Federal Reserve does not take advantage of the modern-day fact that supply lines are global. Capital, services, goods, even labor are imported to meet demand. Global supply lines do inoculate the US against inflation. (Amazing fact: US new auto prices have not budged in 20 years, in nominal terms. Check out FRED St. Louis). This argument is rarely made, and instead establishment economists jibber-jabber about inflation constantly. If we want the public to embrace free trade, we would have better success if the Fed stomped on the gas permanently.

6. The public might resent establishment economists a little less if the issues were not always how great immigration and free trade are.

There are other, larger structural impediments in the US economy, including ubiquitous property zoning and a large “national security” archipelago. How about the pervasive criminalization of push-cart vending, which prevents millions of Americans from starting up their own businesses? The lawyers guilds?

Those are never topics. Free trade and open immigration are always topics. Does one sense a class bias in the types of structural impediments that are PC to to discuss?

I am sorry to say that most establishment economists are…well, they are establishment economists.

I hope someday to audit the Henderson macro-class, and see prominent chapters devoted to the benefits of highest-and-best use in property zoning (and that single-family detached neighborhoods anywhere near the Pacific should be bulldozed for high-rise condos), the decriminalization of push-cart vending, the drain of a parasitic national security complex, and the evils of occupational licensing, including for lawyers.

After addressing those topics, Henderson could address the costs and benefits of free trade in a world with large structural impediments. And why a mounting federal debt is bad, but mounting debts owed to offshore holders is good. (Yes, I know foreigners are allowed to buy US property and stock, and so in fact some of the debt are re-invested. For that matter, the Fed can conduct QE and monetize debts. But is this a graduate class?).

Now, that would be a thought-provoking class!

Pajser writes:

James - I can give you two answers. One is - private. I simply chosen to work for government. It is communist subset of every society. I had safer job, less paid than I would have in industry - and I had impression that I'm doing something for common good - not for the pocket of the employer. It made me happy.

Another is - general. Those who start company must invest significant amount of money and effort. Their investment is risky. Most of such companies bankrupt. Those who start capitalist company have at least some chance to become very rich. Those who start socialist company in free market environment wouldn't have such chance, but they would still have risk. They have much stronger selfish motivation to start capitalist company.

OK?

David Glasner writes:

David, Thanks for your thoughtful response. The main motivation for my post was that I have been dissatisfied for a long time with how economists characterize utility. The recent attacks on free trade suggested to me that one of the reasons many people are not persuaded by the traditional arguments for free trade may be related to the unrealistic way in which welfare economics treats welfare. Despite my criticisms, I am still a fan of free trade. Of course Donald Trump says the same thing, so I don't know how much good that assertion will do me.

James writes:

Pajser,

I didn't ask about starting a company. You and a few hundred or thousand others could let a planning committee decide what jobs you will seek, give a large fraction of your income to that committee and let that committee spend it according to their economic plans for the group.

Are the risks of starting a communist economy greater the benefits?

Pajser writes:

James - The system must invest and open jobs, otherwise it is pure redistribution, and those with more than average income already have charities for that. And for investment, I think worker's cooperatives serve exactly that purpose. There is number of them; like 30 000 in USA. Not many, but I think it is because there must be some initial and ongoing investment and investors can expect greater profit from capitalist companies.

J Mann writes:

I've been saying this various places in response to Paul Krugman's similar point (that the simplified free trade case either assumes away or glosses over the significant losses to some workers in displaced industries):

1) Doesn't that same argument apply to open borders immigration?

2) As with the argument regarding immigration, doesn't it ignore the worldwide welfare gains?

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