Read Jeff Madrik

Note to self: read more Jeff Madrik (hey he wrote books which I haven’t read) but for now read his very interesting and stimulating Op-ed “Our Misplaced Faith in Free Trade”

do click the link. After the jump, I will steal fair use the whole op-ed with my comments (is that called fisking ?) but I think my comments are relatively a waste of time.

Here above the jump I note that Madrik argues for Con but it isn’t totally clear if the resolution is

1. Trade is good

2. Free trade is better than not so free trade so
a) Tariffs are bad
b) non tariff barriers are bad
c) Treaty restrictions on non tariff barriers are good
d) industrial policy is bad
e) export subsidies are bad
f) all capital controls are bad

3) The Trans Pacific Partnership is good.

I think the case Pro 1 is pretty strong and the case pro 3 is very weak. The key thing about 2 is that a-f are often treated as if they must all be true or all be false — if you like free trade, you accept the whole package.

OK off to cut paste and comment

JEFF MADRICKOCT. 3, 2014

Trade is one of the few areas on which mainstream economists firmly agree: More is better.

this is totally true — almost all mainstream economists agree on this even though mainstream economists ferociously disagree about many things

But as the Obama administration pursues two huge new trade deals — one with countries in the Asia-Pacific region, the other with the European Union — Americans are skeptical. Only 17 percent believe that more trade leads to higher wages, according to a Pew Research Center survey released last month. Just 20 percent think trade creates jobs; 50 percent say it destroys them.

The skeptics are on to something. Free trade creates winners and losers — and American workers have been among the losers. Free trade has been a major (but not the only) factor behind the erosion in wages and job security among American workers.

As far as I know, this assertion is unproven. Madrik’s argument was first made in the late 80s following a period of rapidly increasing inequality and an over valued dollar. At the time, all efforts to quantify the effect of trade supported the conclusinon that it was a minor factor. This contradicted the prior of some of the researchers. It is very likely that this has changed, but neither I nor more importantly Paul Krugman know of research demonstrating that the effect is major (as most people think and as everyone who hand’t run the numbers thought in the 80s)
It has created tremendous prosperity — but mostly for those at the top.

No no no ! In any case this claim is contradicted by the discussion of China and India later in the op-ed. Here one way Madrik tries to make his case is to define the exports from China and India to the USA as free trade here and as unfree trade when he discusses China and India — so free trade is bad for US workers and unfree trade is good for Chinese and Indian workers. But it is the exact same trade and either it is free or it isn’t.

Of course what is really going on here is that when Madrik writes “those” he means “those Americans”. He is discussing US public opinion where the interests of foreigners are given almost no weight (hence the enthusiasm for cutting foreign aid). I think this is the key to the near unanimity among mainstream economists. Egalitarian mainstream economists support low barriers to imports to first world countries, because we care most about the poorest — third world workers. Un and Anti-egalitarian support free trade because it is good for first world investors. A particular concern for the interests of US workers is absolutely dominant in the general public and almost absent in the economics profession. I honestly can’t name an academic economist who cares about inequality in the USA but doesn’t care about worldwide inequality. This argument about egalitarian mainstream economists is often made in the first person — for examples by Paul Krugman, Brad DeLong and Larry Katz

Little wonder, then, that Americans, in another Pew survey, last winter, ranked protecting jobs as the second-most-important goal for foreign policy, barely below protecting us from terrorism.

Many economists dismiss these attitudes as the griping of people on the losing end of globalization, but they would do better to look inward, at the flaws in their models and theories. Since the 1970s, economic orthodoxy has argued for low tariffs, free capital flows, elimination of industrial subsidies, deregulation of labor markets, balanced budgets and low inflation. This philosophy — later known as the Washington Consensus — was the basis of advice the International Monetary Fund and the World Bank gave to developing countries in return for financial help.

Yes yes yes. Here the key thing is that the Washington Consensus is a package deal — there is no ideological space for the argument that there should be low tariffs but restrictions on capital flows let alone open economies with regulated labor markets. It is clear that the consensus is an ideology not a theory

The irony is that during the Industrial Revolution, today’s rich countries — Britain, France and the United States — pursued the very opposite policies: high tariffs, government investment in industry, financial regulations and fixed values for currencies. Trade expanded, and capital flowed anyway.

yes yes yes. The case of the obscure country called the USA is particularly dramatic. The USA went from a land rich agricultural country to the richest country in the world during a period when it had high tariffs. Other new temperate settlement English speaking countries were still part of the Empire. Australia was much richer than the USA in 1870 and is poorer now. US industrialization began exactly during the war of 1812 — until then US cotton was just shipped to the UK. The evidence from the 19th century strongly suggests that infant industry protection works. The problem is that the evidence from newly independent countries post 1960 doesn’t.

World War II changed everything. Tariffs were seen as having exacerbated the Depression, and inadequate globalization as one cause of the two world wars. So, through the late 1970s, the United States and Europe cut tariffs, though currencies were fixed and capital was still highly controlled. Astonishing American prosperity in the three decades after 1945 led economists to overestimate the impact of free trade.

The word “American” is odd here. European and Japanese economic growth was much more astonishing. By 1975 much of Europe had converged to roughly US levels of astonishing prosperity

In reality, high growth in those years resulted from many factors: pent-up demand from the war; the Marshall Plan; Cold War military spending; investments in universities, highways and scientific research; and falling oil prices.

This will not do. Here there is an effort to estimate the magnitude of various factors based on listing them. You can’t claim that someone overestimated something without an estimate. Also Madrik seems to assume that high nominal aggregate demand always causes high real growth and never merely causes high inflation. This just isn’t true — the world isn’t always in a liquidity trap and the effect of say military spending when private investment can be crowded out is ambiguous. The Marshall plan ??? Hah it just wasn’t big enough. Ask Economic Historians about the Marshall plan v The Washington (not yet) consensus https://ideas.repec.org/p/nbr/nberwo/3899.html

Starting in the 1970s, however, under the influence of free-market enthusiasts like Milton Friedman, economists urged further removal of barriers to trade and capital flows, hoping to turn the world into one highly efficient market, unobstructed by government.

The results were often disastrous. The lowering of protective tariffs did not lead to rapid growth in Latin America, which stagnated in the 1980s.

See above my 2 a-f and yes yes yes contra the Washington consensus. In the 80s Latin America suffered from the debt crisis. This has a lot to do with international finance but not so much to do with trade. In Brazil, the borrowing was related to extremely enthusiastic state subsidies to industry by teh military dictatorship. Note also the methodological shift from mocking relying on a simple correlation to relying on it (after 1945 US and European tariffs were cut and growth was excellent but correlation is not causation. After 1980 Latin American tariffs were cut and now correlation is cuasation.

Mr. Friedman’s acolytes also urged the reduction or elimination of capital controls — starting in the 1970s in the United States, and in the 1980s in Europe — along with lower tariffs. This, too, was ruinous. An exodus of short-term investments contributed to financial crises in East Asia, Russia, Argentina and Turkey in the mid-1990s, and to the collapse of the Long-Term Capital Management hedge fund in 1998 (a prelude to the 2008 crisis).

Yes yes yes. Hot money has caused huge problems. Friedman proved this can’t happen, but it does so his proof is invalid. I come back home to Rome. When did the European Community (now EU) eliminate intra EC capital controls ? … Correct answer 1992 as a result of the “1992 discovery of Europe” reform. When I arrived in Europe I opened 2 checking accounts. One joint with my Italian citizen wife which was subject to capital controls and one in my non European name only which wasn’t. In 1992 there was a huge uncontrolled devaluation of the Lira which fell out of the EMS (exchange rate mechanism). At the time, it was noted that it was impossible to maintain fixed exchange rates (in spite of the usual inflation differentials) without capital controls. The EC faced a choice between reintroducing capital controls or the Euro. Yes also “ever closer union” but also free capital markets tend to limit the choice to float or currency union. Thinks aren’t going well over here — I blame Columbus. No Columbus no U Chicago

Though these mistakes were recognized, the World Trade Organization continued to push one-size-fits-all rules, premised more on ideology than experience, that hurt developing countries.

yes yes yes so true

In 1995, it demanded that members substantially reduce subsidies for export industries. Imagine what would have happened if South Korea, Japan and Taiwan had had to follow this guidance; they became economic powerhouses in the 1960s and 1970s by nurturing their export sectors. (To join the W.T.O., in 2001, China was forced to slash industrial subsidies, but it resorted to currency manipulation to boost its export sector.)

well how much good would that have done them if the USA and Europe had kept 1930s tariffs ? See when trade has good effects, it is defined as unfree trade and when it is bad it is defined as free trade. And this when it is the exact same trade, the same Toyotas on the same ship. On the other hand yes yes yes — the period during which Indian and Argentine industrial policy were disasters was the exact same period when Japanese, Korean and Taiwanese industrial policies were triumphs. I complain that Madrick defines trade as free or not depending on whether it is good, but he is just following (for once) the Washington consensus. Korean industrial policy was called “export oriented growth” so the massive state intervention in the economy was pro export so pro trade. Export subsidies are absolutely banned by the WTO, but the effects of export subsidies are called benefits from trade by the heads I win tails you lose free trade fanatics. My problem is that Madrik’s heads you lose tails I win is no better than the conventional dodge which it stands on its head

Also that year, the W.T.O. adopted a rule obliging members to abide by rich nations’ patent laws. (Never mind that Americans stole technologies from Europe throughout the 1800s.) These laws typically enabled investors in rich countries to reap substantial rewards, while poor nations like India were forced to pay the same price for patented drugs as the rich West, because they were not allowed to make generic substitutes.

Yes yes yes. What does that have to do with free trade ? Patents are restrictions on competition imposed for a reason. The idea support for free exchange implies enforcement of patents is schizophrenic. I am not a free trade fanatic and I support the existence of patents (but don’t want 1st world patents enforced in poor countries). Here it is clear that 1st world trade representatives were representing 1st world corporations.

But the consensus was flawed. Even free-trade advocates now admit that American wages have been reduced as a result of outsourcing, the erosion of manufacturing and an ever-increasing reliance on imports.

Here the column is much longer than a standard op-ed, but I would like some names. I think he is thinking of Krugman who wrote that he doesn’t know. Also US manufacturing hasn’t eroded — US manufacturing employment has eroded. http://research.stlouisfed.org/fred2/series/IPMAN
The relative importance of outsourcing and capital biased technological progress is unclear to me (and I insist to Krugman who should know)

Middle-income countries, meanwhile, have been blocked from adopting policies that might make them world-class competitors. Nations that have ignored the nostrums of the Washington Consensus — China, India and Brazil — have grown rapidly and raised their standards of living.

This is nonsense. India very much moved towards adoption of the nostrums of the Washington consensus. The shift from slow to rapid growth followed deregulation called the end of the license Raj. Leftist Presidents in Brazil did not offend against the Washington consensus. The case of Brazil proves the value of Bolsas Familias (AKA welfare) and public education, but not of protection. Unsuccesful Brazil did not use a free market approach, successful Brazil did not turn away from trade. The shift in fortunes which came with the shift from the people who tortured Dilma Rousseff to Dilma Roussef doesn’t tell us much about the pros and cons of free trade. Notice I haven’t mentioned the implicit equation of Milton Friedman and Mas Tse Tung as that would be running up the score

Improvements in poverty and inequality occurred in Latin America only in the 2000s, after the I.M.F. and the World Bank reduced their grip on those nations.

Again (as noted by Madrik re the OECD pre and post 1945) correlation is not causation. The IMF had a grip on those nations because they couldn’t pay their debts. With lower real interest rates and better economic performance, they can pay their debts. So the grip of the I.M.F. has been loosened by economic improvements. I think Madrik has cause and effect backwards here. Two policy related shifts which were important in two countries are the depreciation of the Brazilian Real and the collapse of the Argentine currency board etc. The IMF does not advocate overvalued exchange rates. In any case, this is about foolish national pride based monetary policy and not about free trade vs protection. You don’t have to be a hard money fanatic to support international trade (note there is a mainstream economists consensus on trade and a huge debate about how insanely inflation phobic we should be)

Expanding global markets is a worthy goal, but history offers lessons that can lead to more constructive trade, capital and currency policies.

The first is that gradual reform is more effective than a sudden turn to free markets, deregulation and privatization. Shock therapy in Russia was a failure, and nations from Argentina to Thailand paid a dear price for liberalizing capital markets too quickly. The historical models of sustained growth are clear: gradual development of core industries; economic diversification; improvements in literacy and education, especially for women; slow, deliberate opening of capital markets; and the protection of labor from abusive pay and working conditions.

yes yes ! Yes ! YES! huhhhh ????

And YES !! I have no affection for capital controls, but the alternative is clearly horrible and it is time to face facts and not wait for theory to catch up with them.

A second lesson is that nations should be left space for experimentation. Some spend too much on social programs, others too little; some need transportation infrastructure, others improved banking; some require literacy programs, others advanced education; some need to subsidize emerging industries, others to privatize bloated state industries; some need worker protections like unemployment insurance, others need labor mobility.

Holy mother of God. I wasn’t expecting to run into Ballance here. What state spends too much on social programs ? “Some require literacy programs, others advanced education” It isn’t hard to tell which are which. Literacy first. When literacy rates are near 100% then expand advanced education. There is a case of trying advanced education before universal literacy. It is India pre success. There is no case of a country getting rich without near universal literacy. The rule is literacy first, this is a conclusion based on experimentation of which no more is needed.
Unemployment insurance promotes labor mobility. Does Madrik really think some countries should have no unemployment insurance at all (just let them starve) ? I note that none of this has to do with trade and that, when not dumping on trade, Madrik seems to have rapidly turned into a very serious centrist notes that opinions differ and both sides have a point.

Most have too few regulations to protect the environment, finance and consumers.

A third lesson is that models of growth that depend indefinitely on exports are not sustainable. The large imbalances in trade between China and the United States distort economies. The same is true of Germany’s huge trade surpluses, which are based on a fixed euro and restrained domestic wages.

What does “not sustainable” mean ? That the cases of Japan, Taiwan, Korea and China should warn countries not to try their approach ? A country can’t run huge trade surpluses forever, but it can be very rich when the export by hook or by crook approach ceases to be sustainable.

Finally — and this is especially true for rich nations — every free-trade agreement should come with a plan to strengthen the social safety net, through job training, help for displaced workers, and longer-term and higher unemployment benefits.

why is this especially true for rich nations ? Notice he argues for “longer-term and higher unemployment benefits” but not for introducing unemployment benefits where they are now zero. I really honestly don’t understand why he wrote that clause.

Free-trade deals must also be accompanied by policies to stimulate growth through infrastructure investments, subsidies for clean energy and, perhaps, other industries, as well as loans to small businesses, and even wage subsidies.

Here the idea seems to be that whatever the level of public infrastructure investment currently is, it should be increased. It should be clear that increased infrastructure investment doesn’t always cause increased growth (if we spent 100% of GDP on new supertrains we would starve and GDP would be zero next year). Here I think a totally abstract unqualified claim is based on the case of the USA. More infrastructure spending in the USA sure. In Japan ? Well they first have to find part of the country which they haven’t covered with cement already. Also again here is vulgar Keynesianism which only makes sense if all economies are always in liquidity traps. Madrik doesn’t even consider the idea that sometimes some spending crowds out other spending by driving up interest rates.

I think that with “small businesses” and “especially in rich countries” political considerations are sneaking into a policy essay. The only way I can make sense of those bits is as a way to buy off interest groups which can block free trade agreements.

Free trade has been a priority for the Obama administration, but Congress, wisely, has not given it “fast track” authority, as it gave Presidents Bill Clinton and George W. Bush, to negotiate new trade deals without its approval.

Any trans-Pacific agreement, its terms still a secret, should be discussed in the open with ample protection of worker rights and healthy debate over regulatory changes requested by developing countries or big business. A trade agreement with the European Union makes more sense, but the danger is that environmental, financial and product-safety regulations will be watered down to meet the demands of corporate interests.

Economists are correct that free trade need not be a zero-sum game. But the genuine gains in prosperity from free trade can be maximized, and broadly shared, only if the policy errors of the past 40 years are properly understood.

I agree with the conclusions.