Compensating the Losers from Trade
Uwe Reinhardt’s post the other day, “How Convincing is the Case for Free Trade?“, helped to kick-start a fair bit of discussion recently about the impact of international trade on the US economy. Mark Thoma and William Polley have shared their thoughts about the importance of compensating the losers from trade, while others (e.g. Tim Worstall) have questioned that need.
I’d like to add 3 points to this discusssion.
1. International trade is not substantially different from trade between two people within the same country. Both types of trade are voluntary agreements between the two parties to the transaction. And both types of trade may negatively impact other people in the economy who had nothing to do with the transaction. The main difference is simply that with international trade, the transaction happens to cross an international boundary.
2. Just because trade leads to an efficient outcome, that doesn’t mean it’s a good outcome. I think that a parable about a punch in the nose helps make that point. But even very bright economists often confuse “efficient” with “good”.
3. I see the problem of adequately compensating the losers from international trade as just a part of the larger question of how we treat people in our society who, through no fault of their own, have fallen on hard times. International trade is just one of the many enormous, inexorable forces that constantly reshape our economy. Technological change, demographic change, or the fluctuations of the macroeconomic business cycle may devastate millions of families each year just as surely as international trade. An important measure (to me) of the type of society we live in is how we treat those individuals who are on the losing end of those impersonal economic forces that, in the long run, often help to make the world a more prosperous place.
ah, prosperous.
here’s the problem.
your family has a little farm. it feeds you but not much else. you see that you can grow tobacco for cash and buy food and have money left over for some nice things.
later you see you can sell the farm and work in the city for even more money and nicer things.
then you lose your job. can’t get another one. and can’t feed yourself.
this has been going on long enough that there are folk stories warning about it.
of course, when the whole world does it… and it may have been inevitable… you end up having to do it too.
only if you are smart you join a union or form a government that tries to share the “prosperity” so that no one is too miserable, while leaving room for individual initiative to increase personal as well as general prosperity.
we had something like that in America from about 1932 to about 1980. actually we still have it, but the forces of greed… that’s always what it was, a desire for “more” that transcends human decency… are putting us back on the road to … well… to serfdom.
Problems with compensating the losers from trade: how do you identify them? How do you decide how much they “lost”?
Better: ramp up the EITC, bigtime, so anyone willing to work can make a decent living. With that plus health care and education reasonably well covered, you could resort to more draconian (and presumably efficent) labor and trade policies without utterly screwing people who are at the mercy of larger forces.
I have an issue with your example: It doesn’t involve savings. Let me change that around:
When you are on a farm and you have a bad harvest, you starve and die, because, as you said, the farm feed you but not much else.
When you get a job farming tobacco or a job in the city and have that higher wage, you can save. So when you lose your job you have time to find another one before you starve and die. You can invest your savings and receive extra income that way.
All a union is doing is just managing the savings for you (you give it to them through union dues). They don’t magically come up with extra money. They just redristribute your money in a less efficient way than you would do on your own.
mike:
“All a union is doing is just managing the savings for you (you give it to them through union dues).”
Never having belonged to a union, I don’t know, but I doubt that seriously. Joining a union is not zero-sum. It should be win-win, at least in terms of expectations.
How do you identify losers from trade? How much did they lose?
It is not perfect, but you can identify one group of major losers and approximately how much they lost, the people who lose their jobs. (After all, doesn’t the free trade argument assume full employment?) Maintaining full employment, then, will go a long way towards compensating the losers from free trade, and guaranteeing that it will be beneficial. 🙂
mike
no. the union is the means by which you persuade the boss to pay you enough so that you can save for hard times.
social security is the means by which you are able to save at least a little in case the private schemes for “saving” let you down at the worst possible time.
Min
i guess being unemployed would count as being a “loser.” Maybe an unemployment insurance system would “compensate” the losers, or at least provide a bridge to the “new opportunities” created by “free trade.”
This would require that workers make enough in the first place to pay the premium, and it would also suggest that the country be actively involved in creating those “new opportunities.”
Because history has shown that the private sector isn’t doing it.
Well – I´m a economist and utilitarian and I would say that iff the boxer and economist had similar incomes, I really do think that the world turned out to the better.
However – the important point is that there wasn’t a Pareto improvement – and the economist thus don´t get a free pass in the sense that he can say that the world became better without invoking some normative/ideological rule.
I.e. when I say that the world became better, it´s as an utilitarian, and NOT as an economist.
The issue currently under discussion, as I see it, is whether it´s OK to pretend to endorse things as a economist when you actually are endorsing it as an ideologue.
Agree. Generous social safety net on the margin, and a “brutal” market economy at the core.
nemi
i would tend to agree myself, but brutal markets are blind. we need something… might as well call it the government… to do some foresight and steering.
there is nothing wrong with the market acting in full free enterprise mode taking government action as just another part of the reality any business has to deal with. gravity, friction, entropy, roads, laws, taxes. any entrepreneur who can’t factor all of those things into his business model is just another special pleader.
Yes – of course you still need all kind of regulation – from protection of property rights to regulations concerning externalities, actions to overcome social dilemmas and much more. (I just assumed that this was common sense)
I simply meant “brutal” in the way that we should promote technology, trade and real efficiency (i.e. not “efficiency excluding externalities”) without much regard to its effect on employment. I think such an approach still would deserve the connotation “brutal”.
Point 3 is excellent. I don’t know how many times I’ve seen principles texts use the analogy between free trade and a new technology. You know: take off trade barriers in textiles. Now we have a new superior technology for making textiles. We make airplanes, send them across the sea and back come textiles! And the point is always to imply that opponents of free trade who cite the losses to the textile workers are no different than Luddites. Of course the analogy is a good one, but when I teach I use it , just as you to suggest, to point to destruction in the creative destruction which is capitalism – the destroyed lives and industries that are the counterpart to the vaunted dynamism we are all supposed to bow down and worship.
it looks to a distant observer such as myself that the US is having a “back to the future” moment. Why does nobody refer to previous policy initiatives like the War on Poverty, or M.L.King’s Poor Peoples Campaign? Or is everything so different now that these older initiatives are somehow irrelevant?