Friday, April 27, 2007

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The greatest threat this blog has ever faced

I see that Dani Rodrik has now set up his own blog.

Great. Just great. Back in the day, I use to have the monopoly on blogging about the global political economy. Now Rodrik -- and his fancy-pants Albert Hirschman Prize -- comes along to make the competition more difficult. It's not enough that the man is responsible for Jaghdish Bhagwati's jeremiad against yours truly.

In all seriousness, Rodrik is a smart economist who can speak to non-economists -- so it's a very good thing that he's joined the blogosphere. And while we have some overlap in interest, his take is quite different from mine. So, in fact, everyone wins!

For example, I have to take issue with the central argument of this Rodrik post:

Imagine some change in the economy leaves Tom $3 richer and Jerry $2 poorer, and I ask you whether you approve of this change. Few economists, regardless of their political and philosophical orientation, would be able to give a straight answer without asking for more information.... In other words, most of us would care about the manner in which the distributional change occurred--i.e., about procedural fairness....

Yet when we teach comparative advantage and explain the gains from trade, we typically overlook this important conclusion. We expect our students to focus on the net gain triangles and disregard the rectangles of redistribution. In particular, we do not ask whether the trade opportunity involves an exchange that most people would consider unacceptable if it took place at home. So it is immaterial to our story if the gains from trade are created, say, by a company shutting down its factory at home and setting up a new one abroad using child labor. (By the way, I chose $3 and $2 in my example as these values are commensurate with the relative magnitudes that come out of trade models under reasonable elasticities.)

The thought experiment clarifies, I think, why the archetypal man on the street reacts differently to trade-induced changes in distribution than to technology-induced changes (i.e., to technological progress). Both increase the size of the economic pie, while often causing large income transfers. But a redistribution that takes place because home firms are undercut by competitors who employ deplorable labor practices, use production methods that are harmful to the environment, or enjoy government support is procedurally different than one that takes place because an innovator has come up with a better product through hard work or ingenuity. Trade and technological progress can have very different implications for procedural fairness. This is a point that most people instinctively grasp, but economists often miss.

I don't disagree with Rodrik's political argument here per se -- but I do have a few quibbles about it's generalizability:
1) Let's change the redistribution to the following:
a) Tom is 30 cents richer;
b) Jerry is two dollars poorer;
c) 135 people are two cents richer.
That's actually a more accurate picture of trade's effects. In focusing striictly on the employment effects, however, Rodrik elides the biggest gain from trade -- lower prices. He's correct that this is weak beer politically, but it's still worth remembering.

2) If the redistribution takes place because of regulatory races to the bottom like Rodrik claims, then he's got a point. What if, however, the redistribution takes place because of honest-to-God wage differentials? There will still be political objections even if Rodrik's provedural fainess critreria are met. How often does Rodrik's story happen as opposed to a standard wage story? As I've said before [Yes, several times--ed.], races to the bottom are pretty rare [UPDATE: for a counterargument that supports Rodrik, check out this Steven Pearlstein column in the Washington Post.]

3) Finally, it's worth pointing out that national identities matter more that questions of procedural fairness. When the the U.S. textile industry moves from the Northeast to the South to take advantage of cost differentials, there is less complaint than when the industry moves from South Carolina to China.

I suspect Rodrik's procedural concerns affect how attitudes about trade. But the simple act of redistribution across borders -- regardless of the reasons -- matters even more.

posted by Dan on 04.27.07 at 09:13 AM


This is the problem with the thought experiments that economists are so fond of. Each time you add a detail to make the model a little more realistic, you reveal another shortcoming of the model, until finally the model becomes unwieldy. My proposal is a very slight modification to Dan's:

a) Tom is 30 cents richer;
b) Jerry is two dollars poorer;
c) 135 people are two cents richer (at least half of whom live in another country)

Yes, it is true that the end product is cheaper, making the consumers "richer," if you want to call it that. But some of the consumers of the product and ALL of the new producers live in other countries. The result is surely better for the people in the other countries, and for SOME of the people in this country. The net global effect is certainly positive as well. Nobody gives a damn about Jerry. But the net effect on country is ambiguous (not clearly positive or negative). And what happens when there are millions of Jerrys? And shouldn't I be more concerned about my neighbor Jerry than Tai, Xing, and Kang?

This reminds me of the old joke about the chemist, physicist, and economist stranded on an island with the only food being a can of vegetables and no can-opener. The chemist proposes to leave the can partially submerged in the sea water until the metal corrodes and the can can be opened. The physicist proposes to use his glasses to focus the sun's rays on the can and weaken the metal. The economist says, "Wait a minute guys. Assume the can is open..."

posted by: OpenBorderMan on 04.27.07 at 09:13 AM [permalink]

I wanted to leave my mark.

I would need some words to be operationally defined to follow parts of the article; however, if Rodrik was merely saying that hidden costs are a part of distributional change, I do not think there is much dispute over that.

If the costs/benefits of child labor, state-sponsorship, labor exploitation wages, or outsourcing are not included in the formulation of the distributional change, then they simply are not included, and the model does not reflect those variables.

Instead the model would just focus on net gain/loss.

posted by: Sarab Singh on 04.27.07 at 09:13 AM [permalink]

It would matter even more depending on how the parties were related. Countries are surrogates for that.

posted by: Lord on 04.27.07 at 09:13 AM [permalink]

"What if, however, the redistribution takes place because of honest-to-God wage differentials?"

Child labor is a canard. Those in the U.S. opposing globalization and outsourcing are every bit as unhappy with the competition from the Indian IT industry as from the Indonesian textile industry. Steven Pearlstein, in the column you link, complains about Intel spending 2.5 billion on a chip plant in China. We can be pretty certain no urchins will be gowning up and laboring away in the clean rooms of that chip plant.

posted by: Slocum on 04.27.07 at 09:13 AM [permalink]

But freer trade also raises the relative price of certain goods - as Dana has explained in his reply to this post.

posted by: pgl on 04.27.07 at 09:13 AM [permalink]

Dan proposed that this variation was more realistic:

a) Tom is 30 cents richer;
b) Jerry is two dollars poorer;
c) 135 people are two cents richer.

I would propose that this variation is more realistic:

a) Tom is $1 richer;
b) Jerry is two dollars poorer;
c) 10 people are two cents richer.
d) 125 are two cents poorer.

The important backstory being that:

a. Tom has neither improved a system or process but has been the beneficiary of a labor shift that involved significant cost reduction. Tom's consumption with this new found wealth is assumed to now be very important to driving the economy, but this overlook's his offshore tax-free savings and offshore living standards.

b. Jerry was the victim of being the last hanger on in a part of the economy that had been the recipient of numerous subsidies previously, most of which went to his employers.

c. The ten people who are two cents richer are the beneficiary of industries that benefit from some form of artificial protection (ala Jerry) by government or organization (AMA.

d. The 125 people who are two cents poorer are the employees of the tech and service industries who thought they were part of the cutting edge of the new american economy only to find that this was already in the process of being sold overseas by Tom.

posted by: Babar on 04.27.07 at 09:13 AM [permalink]

So, Babar, trade is most often a net loss? And you're suggesting the number of consumers is 12.5 times less than the number of producers?

Umm ...

posted by: Jake on 04.27.07 at 09:13 AM [permalink]

"Most often" in a theoretical sense it probably isn't, but put in practice I think we are seeing a short-term benefit to consumers with a slow bleed of the economic health of the country.

posted by: Babr on 04.27.07 at 09:13 AM [permalink]

Those two elements of your "model" are quite flawed and equally distort your pre-determined conclusion.

Dr. Drezner,

Jagdish Bhagwati wrote that letter to the Times AND included a quote from your review in his paper-back book? Weird...

posted by: Jake on 04.27.07 at 09:13 AM [permalink]

Interesting that even the economists tend to resist change....

Tom will be $2 richer because of the increased efficiecy of his business.

125 people (the new offshore workers - albeit non americans) will be 1 cent richer bacause they are able to find a job at last in an underdeveloped economy -which 1 cent goes a lot further than it would in the USA.

Jerry (the competitor) should thank Tom for the opportunity of forcing them to reinvent themselves and their proceses to be able to compete.

oh yes, and 125 people (the american ex-workers of Tom) will be 2 cents poorer, but have the wonderful opportuinity of aplying to work in the cutting edge industry newly developed by Jerry

Perhaps the value added to the system shoed be looked at from a "efficency in utilisation of world resources" perspective?

posted by: mike on 04.27.07 at 09:13 AM [permalink]

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