Paul Krugman on Trade

Writing in 2016:

"But it’s also true that much of the elite defense of globalization is basically dishonest: false claims of inevitability, scare tactics (protectionism causes depressions!), vastly exaggerated claims for the benefits of trade liberalization and the costs of protection, hand-waving away the large distributional effects that are what standard models actually predict. I hope, by the way, that I haven’t done any of that; I think I’ve always been clear that the gains from globalization aren’t all that (here’s a back-of-the-envelope on the gains from hyperglobalization — only part of which can be attributed to policy — that is less than 5 percent of world GDP over a generation); and I think I’ve never assumed away the income distribution effects.
...
So the elite case for ever-freer trade is largely a scam, which voters probably sense even if they don’t know exactly what form it’s taking.
...
But it is fair to say that the case for more trade agreements — including TPP, which hasn’t happened yet — is very, very weak. And if a progressive makes it to the White House, she should devote no political capital whatsoever to such things."


Writing in 1995:

"I believe that if the rhetoric that portrays international trade as a struggle continues to dominate the discourse, then policy debate will in the end be dominated by men like [James] Goldsmith, who are willing to take that rhetoric to its logical conclusion.  That is, trade will be treated as war, and the current system of relatively open world markets will disintegrate because nobody but a few professors believes in the ideology of free trade.

And that will be a shame, because for all their faults the professors are right.  The conflict among nations that so many policy intellectuals imagines prevails is an illusion; but it is an illusion that can destroy the reality of mutual gains from trade."

And in 1994:

"Most worrisome of all is the prospect that disguised protectionism will eventually give way to cruder, more open trade barriers.  For example, Robert Kuttner has long argued that all world trade should be run along the lines of the Multi-Fiber Agreement, which fixes market shares for textile and apparel. In effect, he wants the cartelization of all world markets.  Proposals like that are still outside the range of serious policy discussion, but when respectable voices lend credence to the wholly implausible idea that the Third World is responsible for the First World’s problems, they prepare the way for that kind of heavy-handed interference in world trade.

We are not talking about narrow economic issues.  If the West throws up barriers to imports out of a misguided belief that they will protect Western living standards, the effect could be to destroy the most promising aspect of today’s world economy: the beginning of widespread economic development, of hopes for a decent living standard for hundreds of millions, even billions, of human beings.  Economic growth in the Third World is an opportunity, not a threat; it is our fear of Third World success, not that success itself, that is the real danger to the world economy."

And these two from 1993:

"What is true in the Washington view, at least in broad terms, is the belief in the virtues of free markets and the evils of protectionism.  There are qualifications to that view, but they are minor compared with the essential correctness of this position."

"One of the most popular, enduring misconceptions of practical men is that countries are in competition with each other in the same way that companies in the same business are in competition.  Ricardo already knew better in 1817.  An introductory economics course should drive home to students the point that international trade is not about competition, it is about mutually beneficial exchange."


Emphasis added.

Hat tips to Don Boudreaux and Scott Alexander/Noah Smith for the quotes/links.

The Confused and Backwards Thinking of Protectionists

Scott Alexander’s latest post, about the link (or apparent lack thereof - the Easterlin Paradox) between wealth and happiness, on his Slate Star Codex blog is interesting and thought-provoking as always.  I recommend reading the whole thing.

Scott makes some good points and I find myself in complete agreement with his conclusion that:

“...I am forced to acknowledge that happiness research remains a very strange field whose conclusions make no sense to me and which tempt me to crazy beliefs and actions if I take them seriously.”

I do have one objection to his argument.  Specifically, it’s with the way he discusses free trade and protectionism in part II of his post.

Here’s Scott:

“Suppose that some free trade pact will increase US unemployment by 1%, but also accelerate the development of some undeveloped foreign country like India into hyper-speed. In twenty years, India’s GDP per capita will go from $1,500/year to $10,000/year. The only cost will be a million or so extra unemployed Americans, plus all that coal that the newly vibrant India is burning probably won’t be very good for the fight against global warming.

Part of me wants to argue that obviously we should sign the trade pact; as utilitarians we should agree with [Scott] Sumner that lifting 1.4 billion Chinese out of poverty was ‘the best thing that ever happened’ and so lifting 1.2 billion Indians out of poverty would be the second-best thing that ever happened, far more important than any possible risks. But if Easterlin is right, those Indians won’t be any happier, the utility gain will be nil, and all we will have done is worsened global warming and kicked a million Americans out of work for no reason (and they will definitely be unhappy).”

I think Scott’s thinking here is confused.  I don't mean to pick on Scott here, he’s not alone, I think this is an issue where many people's thinking is very confused.  For now, let’s put aside the question of whether or not raising people’s income can make them any happier or not; as this is not relevant to the point I wish to make here.

The way he words this is as if:

1. The US government has the option to take some action X (in this case signing a free trade pact).
2. Positive consequences of X are: a >6 fold increase in the material well being of over a billion people, who are mostly extremely poor by US standards, in just 20 years.  (Additional positive consequences not identified by Scott include some combination of reduced prices, improved quality, better selection and/or improved availability of certain goods and services to American consumers - and to other American producers not in the protected industries.)
3. Negative consequences of X are: 1 million people, who are mostly well off by global standards, lose their jobs and additional fossil fuels are burned, contributing to global warming.  (Note that most of these 1 million people will eventually find other work; some will take early retirement; some may set up businesses of their own.)

Should the government take action X?

I think this gets things backwards.  Here’s what I think is a more accurate way to look at this:

1. The US government has the option to take some action Y (in this case imposing tariffs, quotas and/or outright bans on US imports from India).
2. Positive consequences of Y are: 1 million people, who are mostly well off by global standards, can remain in their current jobs and don’t have to be forced to retrain, find other work, or be forced into early retirement.  Also, less fossil fuels will be burned, leading to less global warming.
3. Negative consequences of Y are: severely retarding the improvement in the material well being of over a billion people, who are mostly extremely poor by US standards.  Higher prices, worse quality, more limited selection and poorer availability of various goods and services to American consumers - and to other American producers not in the protected industries.

Should the government take action Y?

Some people will look at the above and ask what’s the difference?

The difference is free trade is what would happen anyway unless the government actively goes out of it’s way to prevent it from happening, if it didn’t erect barriers to trade between people who happen to live in different countries.  Free trade does not require a free trade pact to happen, it just requires that government doesn’t get in the way.

Here’s Scott again, later in the post:

“If we were to actively try to keep the Indians from industrializing, that would be pretty awful. But that’s not the argument at hand here. The argument at hand is ‘are we morally required to sacrifice our own economy in order to help the Indians industrialize?’”

I think many (most?) people would answer 'no' to the above question.  However I think this question is a red herring.  Even more than that, I think the quotation above perfectly highlights what is so confused about many people’s thinking on international trade, globalisation and protectionism.

What does the phrase "our own economy" mean?  It seems from the context and from common parlance that it means "the US economy".  However, it needs to be emphasized there is nothing economically or morally relevant about political boundaries.  Trade between someone in New York and someone in New Delhi is no different, in any economically or morally relevant way, than trade between someone in New York and someone in New Jersey.

Or, as one commentator, j r, put it:

“We don’t use these sorts of rationales to restrict trade between California and Utah or to stop a white American from going to a Chinese American dry cleaner.

What’s the basis for using the nation state as an intrinsically valid moral or ethical unit?”

It seems to me that the argument at hand really does revolve around actively trying to keep less developed countries from industrializing.  Consider the question: what is protectionism?  Protectionism is the active effort of government to prevent, limit or restrict trade across political boundaries.  No active efforts are required on the part of government to allow mutually beneficial free trade.  All this requires is that government doesn’t stop it from happening by erecting artificial barriers to trade.

Contrary to the implication of the question: “are we morally required to sacrifice our own economy in order to help the Indians industrialize?”, free trade does not involve any sacrifice.  It is what would naturally happen if governments and others were to refrain from butting into other people’s business.  Protectionism is an active attempt to retard the economies of the countries which it is directed against (not to mention the adverse unintended consequences on the economy of the country imposing the protectionist measures).

I would rephrase the argument at hand as: “can we morally justify sacrificing the Indian economy in order to help a minority of domestic producers?”

I think many (most?) people would answer 'no' to the above question.  However, our political system often produces outcomes that would appear to suggest an affirmative answer to this question.  I think this is largely a result of the confused thinking about these issues.  Many people’s intuition causes them to get this issue precisely backwards.

A Modest Proposal from Tim Harford

"let's just abolish the Budget"

As he explains:

"Would the country’s economic policy really be harmed if the chancellor set out his fiscal direction at the beginning of the parliament and left it unchanged unless extraordinary circumstances intervened?
We should abolish 100 per cent of Autumn Statements and 80 per cent of Budgets — that’s a fiscal rule that I could really get behind."

Here, here.

Good Interview with Dame Judith Hackitt on the IChemE Blog

Published last week, but I'm still catching up with my regular blogs after getting back from holiday on Sunday.

Some excerpts:

"[Interviewer:] Now you’re moving to become Chair of the EEF, what are your plans while [you're] there?  I took a sample size of 12 EEF customers and only one had a female CEO.  Is that on your agenda as Chair?

[JH:] I honestly don’t think that it’s front and centre of my mind.  What matters to me is not about gender equality, it’s about diversity.  And I think there is a real danger in playing on this ‘what we need is more women on boards’ debate.  It’s not.  What we need is boards to recognise how important it is to have diversity of thinking.  That is what will make them more robust, more resilient – and we need that more than ever in the challenging times we live in right now.  If you recognise that need for diversity of thinking, the rest will follow.  Women will become more numerous, along with other men who think and act differently from the stereotype that currently populates those boards."

"[Interviewer:] What else would you like to address in your new role at EEF?

[JH:] If you ask most people what manufacturing in the UK is about right now there is a perception that there used to be a manufacturing industry, and it’s now gone.  That’s so far from the truth it’s unbelievable.

The truth is we have some amazing new and exciting manufacturing industries out there.  The innovation that is going on is incredible.  I’m also on the board for the High Value Manufacturing Catapult and some of the things that come out of that is amazing in terms of new products and innovative processes."

Reblog: The Open Borders Manifesto

I repost here a copy of the open borders manifesto, which I first shared on this blog one year ago today, on Open Borders Day, 16 March 2015.

This seems especially pertinent now that the UK Government are moving to introduce, in April of this year, the spectacularly illiberal measure of imposing a minimum earnings threshold of £35,000 pa* for non-EU citizens wishing to live and work in the UK.**

"Freedom of movement is a basic liberty that governments should respect and protect unless justified by extenuating circumstances. This extends to movement across international boundaries.

International law and many domestic laws already recognise the right of any individual to leave his or her country. This right may only be circumscribed in extreme circumstances, where threats to public safety or order are imminent. We believe international and domestic law should similarly extend such protections to individuals seeking to enter another country. Although there may be times when governments should treat foreign nationals differently from domestic citizens, freedom of movement and residence are fundamental rights that should only be circumscribed when the situation absolutely warrants. 

The border enforcement status quo is both morally unconscionable and economically destructive. Border controls predominantly restrict the movement of people who bear no ill intentions. Most of the people legally barred from moving across international borders today are fleeing persecution or poverty, desire a better job or home, or simply want to see the city lights.

The border status quo bars ordinary people from pursuing the life and opportunity they desire, not because they lack merit or because they pose a danger to others. Billions of people are legally barred from realising their full potential and ambitions purely on the basis of an accident of birth: where they were born. This is both a drain on the economic and innovative potential of human societies across the world, and indefensible in any order that recognises the moral worth and dignity of every human being. 

We seek legal and policy reforms that will reduce and eventually remove these bars to movement for billions of ordinary people around the world. The economic toll of the modern restrictive border regime is vast, the human toll incalculable. To end this, we do not need a philosopher’s utopia or a world government. As citizens and human beings, we only demand accountability from our own governments for the senseless immigration laws that they enact in our name. Border controls should be minimised to only the extent required to protect public health and security. International borders should be open for all to cross, in both directions."

Originally from http://openborders.info/open-borders-manifesto/

Happy Open Borders Day!  Spread the word.


* £35,000 pa is way above (~35%) the median income in the UK, which according to the ONS was £496 pw in December 2015, which equates to £25,802 pa.  The government claims that the £35,000 figure was arrived at because it was the median pay of the UK population in skilled jobs which qualified for Tier 2 ("graduate level") at the time of the Migration Advisory Committee’s consultation in 2011.

** Note there are exceptions to this rule.  The new restriction only applies to a certain group of immigrants, specifically those working in what the government defines as "graduate level" jobs.  There are other exceptions in specific circumstances also.

See also here: https://petition.parliament.uk/petitions/118060

Dentopia

The following image has recently been circulating on my social media (I don't think it's new, but it's the first I've come across it):

I have a few problems with the message conveyed here, basically everything stated above is incorrect or misleading in some way:

1. There is no such thing as "free" healthcare or "free" college.  In order for someone to receive healthcare or college education, someone else must provide said healthcare or college education.  And someone: either the recipient, the provider, or some other 3rd party (e.g. the taxpayer) must pay for said healthcare or education.
2. There is no legally stipulated minimum wage in Denmark.
3. The average Danish worker works 27.6 hours per week.  This compares to 26.4 in Germany, 28.3 in France, 32.3 in the UK, 34.4 in the US, and an OECD average of 34.0 hours per week.*
4. Whilst Denmark does tend to score very highly on most attempts at measuring 'happiness' between various countries.  'Happiness' is a vague, poorly-defined and ambiguous concept that by it's nature is subjective and not easily measurable.  Attempts to quantify 'happiness' rely on self-reported assessments and are prone to all of the usual potential pitfalls and problems of, say political surveys, and are uncertain at best or potentially completely misleading at worst.

Here's my attempt at a more accurate "be like Denmark" message:

"This is Denmark.
Denmark has one of the World's most free labour markets.
Denmark has no legally stipulated minimum wage.
Denmark is amongst the most free countries in the World, both economically and in terms of civil liberties.
Be like Denmark."

* All figures from the OECD for 2014 from here.  Figures reported by the OECD are average annual hours worked.  Approximate weekly figures presented here calculated by dividing the OECD annual figures by 52 (i.e. figures presented here will take into account part-time work, annual leave, etc.).

Quotation of the Day

Is from Adam Smith's 'Theory of Moral Sentiments', Part I, Section III, Chapter III: Of the corruption of our moral sentiments, which is occasioned by this disposition to admire the rich and the great, and to despise or neglect persons of poor and mean condition:

"To deserve, to acquire, and to enjoy the respect and admiration of mankind, are the great objects of ambition and emulation.  Two different roads are presented to us, equally leading to the attainment of this so much desired object; the one, by the study of wisdom and the practice of virtue; the other, by the acquisition of wealth and greatness.  Two different characters are presented to our emulation; the one, of proud ambition and ostentatious avidity; the other, of humble modesty and equitable justice.  Two different models, two different pictures, are held out to us, according to which we may fashion our own character and behaviour; the one more gaudy and glittering in its colouring; the other more correct and more exquisitely beautiful in its outline: the one forcing itself upon the notice of every wandering eye; the other, attracting the attention of scarce any body but the most studious and careful observer.  They are the wise and the virtuous chiefly, a select, though, I am afraid, but a small party, who are the real and steady admirers of wisdom and virtue.  The great mob of mankind are the admirers and worshippers, and, what may seem more extraordinary, most frequently the disinterested admirers and worshippers, of wealth and greatness."