It's Managed Trade, Not Free Trade

Yves Smith recently spotlighted so-called 'Free Trade' that puts a mask on the reality of 'Managed Trade' in our political economy. It's worth a look, as are embedded reference materials. Via Naked Capitalism:

The Truth about Free Trade: Small Net Gain, Big Redistribution, Yves Smith, Sept 17: Consider the ironies in the discussion of free trade. It's widely depicted by economists to be a good thing, and anyone who opposed it is considered to be economically illiterate. Yet the system we have deviates considerably from the free trade ideal and is more accurately called managed trade. And in this system of managed trade, other countries seem to do a better job of protecting their labor markets and achieving trade surpluses than we do.

In particular, Harvard's Dani Rodrik has shed a good deal of light on this topic. In one post, he set forth the conditions that have to be in place for trade liberalization to enhance economic performance (short answer, a lot); in another, he reviewed the analyses that claimed that our current trading system produced large economic gains and found the logic to be badly flawed.

The advocates of more open trade are particularly upset at the growing backlash against globalization, which they see as retrograde and self-destructive (funny how the same citizens who are viewed as savvy economic actors when they function as consumers are regarded as morons as far as their labor market attitudes are concerned). But if you are, say, an auto worker, being against more open trade is a perfectly sensible position.

The trade liberalization advocates would say that anti-trade auto worker and call center employees are simply selfish. Yes, they wind up as losers, but the collective gains outweigh the losses. But since there are not mechanisms to make sure the gains are shared, the losers have legitimate concerns.

Dani Rodrik turns to this topic via comments on a new paper by Robert Driskill, "Deconstructing the Argument for Free Trade." Driskill finds the arguments for more open trade to be doctrinaire and dismissive of the impact of redistribution. As Rodrik tells us:

Driskill is a distinguished economist who knows the theory of comparative advantage as well as anyone else. And his argument is not against trade per se, but about the manner in which economists present their arguments in public and in their textbooks. His main argument is that the standard renditions

gloss over a key issue the resolution of which is anything but obvious: What does it mean for a change in economic circumstances to be "good for the nation as a whole", even when some members of that nation are hurt by the change?

In other words, instead of sticking to what they are good at—analyzing trade-offs—economists typically engage in amateur normative political theorizing about what is good for society.

Driskill also makes a more fundamental point:…

My point is not that the economics profession is not on the side of angels in the policy debate over trade liberalization—although I will argue that a more careful argument should lead to a more nuanced view—but that the argument is poorly made. This reflects negatively on the credibility of the economics profession as a whole: critical thinkers might believe all economic arguments are as poorly supported as is the one in support of free trade; others might believe economists are mere propagandists and handmaidens in service of some philosophical or political goal. Furthermore, it obscures some key ideas that should be part of a persuasive argument in support of free trade. And finally, it has confused many people into false beliefs about what economic analysis really says about the effects of international trade.

A pervasive such false belief, for example, is that trade necessarily benefits more people than it hurts.

Driskill illustrates his arguments by drawing on the writings of a range of economists, from Deirdre McCloskey to Paul Krugman. …

{Update 4:06 PM} Related:

Introducing this Blog, Paul Krugman, 09/18/07

Democracy - Not "The Free Market" - Will Save America's Middle Class, Thom Hartmann, 03/12/04

Snip from Krugman, via DeLong:

… [L]et me start this blog off with a chart that’s central to how I think about the big picture, the underlying story of what’s really going on in this country. The chart shows the share of the richest 10 percent of the American population in total income – an indicator that closely tracks many other measures of economic inequality – over the past 90 years, as estimated by the economists Thomas Piketty and Emmanuel Saez….

The Long Gilded Age:… In many important ways, though, the Gilded Age continued right through to the New Deal…. Public policy did little to limit extremes of wealth and poverty... working Americans were divided by racial, religious, and cultural issues…. The Great Compression: The middle-class society I grew up in… was created, in a remarkably short period of time, by FDR and the New Deal…. [I]ncome inequality declined drastically from the late 1930s to the mid 1940s…. Middle class America: That’s the country I grew up in… a society without extremes of wealth or poverty… of broadly shared prosperity, partly because strong unions, a high minimum wage, and a progressive tax system helped limit inequality… a society in which political bipartisanship meant something… in spite of the sinister machinations of Nixon and his henchmen…. The great divergence: Since the late 1970s the America I knew has unraveled. We’re no longer a middle-class society, in which the benefits of economic growth are widely shared: between 1979 and 2005 the real income of the median household rose only 13 percent, but the income of the richest 0.1% of Americans rose 296 percent.

Most people assume that this rise in inequality was the result of impersonal forces, like technological change and globalization. But the great reduction of inequality that created middle-class America between 1935 and 1945 was driven by political change; I believe that politics has also played an important role in rising inequality since the 1970s…. no other advanced economy has seen a comparable surge in inequality – even the rising inequality of Thatcherite Britain was a faint echo of trends here.

On the political side, you might have expected rising inequality to produce a populist backlash. Instead, however, the era of rising inequality has also been the era of “movement conservatism,” the term both supporters and opponents use for the highly cohesive set of interlocking institutions that brought Ronald Reagan and Newt Gingrich to power, and reached its culmination, taking control of all three branches of the federal government, under George W. Bush… taxes on the rich have fallen, and the holes in the safety net have gotten bigger, even as inequality has soared. And the rise of movement conservatism is also at the heart of the bitter partisanship that characterizes politics today….

Comments

[Firozali A.Mulla MBA PhD]

When the politicians get their fingers in the trade zone and mess with the economist calling this as democracy, the farce is the trade failure

I thank you
Firozali A.Mulla MBA PhD
P.O.Box 6044
Dar-Es-Salaam
Tanzania
East Africa

[DOR]

Why do people argue against trade when it is widely acknowledged that the failure is in the adjustment mechanism?

Trade can displace some workers. Having an adjustment mechanism can ease that displacement. Not having such a mechanism allows the pain to run its full course, for better or worse.

Yet, we hear nothing about the failure to set in place a proper adjustment mechanism. All we hear is "trade, bad; protectionism, good."

.

One more thought: when we restrict the import of goods, we necessarily increase the domestic prices paid for such goods. This mainly hurts the poorer members of society.

Protectionism is anti-poor.

David O'Rear
Hong Kong