Posted on 11/20/2004 9:56:42 AM PST by curiosity
When the 1970 Nobel laureate Paul Samuelson was asked what it takes to win a Nobel Prize, he volunteered, "It doesn't hurt to have good students."
But even Samuelson's overachieving students -- he has taught economics at MIT for six decades -- sometimes need to be put in their place. At least that seems to be the subtext of a new Samuelson paper in the Journal of Economic Perspectives.
Samuelson argues that, far from representing an unmitigated boon, free trade may in some circumstances prove a net loser. Among countless globalists who stand duly corrected, not the least chastened are two of Samuelson's own former students: Jagdish Bhagwati and Gregory Mankiw. Noted for their ardent embrace of globalism, the pair are identified by name as purveyors of "polemical untruth" in Samuelson's opening paragraphs.
Samuelson's insight is that if a low-wage country like China suddenly makes a major productivity leap in an industry formerly led by the United States, the result can be a net negative for the American people. Although American consumers may benefit via low-low prices at Wal-Mart, their gains may be more than outweighed by large losses sustained by laid-off American workers.
This conclusion, coming as it does from the pope of economic orthodoxy, is already (even before its official publication) causing a sensation in the economics profession.
Mainly the reaction is positive. Certainly this sudden flash of the obvious has come not a moment too soon for many of Samuelson's fellow liberals.
According to Jeff Madrick, author of Why Economies Grow and editor of Challenge, the take-home message is that the United States needs to do much more to support workers thrown on the scrap heap by globalism.
"The Samuelson paper is a strong argument from the most illustrious of neoclassical economists for a much stronger safety net for American workers," Madrick says. "The price being paid for free trade is falling on many workers, and there's little empirical doubt of that anymore. Moreover, I think the bias among free-trade advocates has skewed the empirical research in the field. Claims of finding that gains from free trade are many magnitudes larger than the losses have been based on extraordinarily poor studies that have hardly been criticized. Maybe some serious sense -- I would ask only for balance -- will now return to trade economics."
For James Fallows, a liberal-leaning critic of Washington's blink-first style in trade diplomacy, Samuelson's analysis is a call to policy-makers to break free from utopian theories and, instead, take a hard look at the real world.
"The great problem in Western discussion of trade theory has been its simpleminded Panglossianism," he says. "The main thing that has supported globalism, apart from the self-interest of many powerful participants, has been the idea that economic theory was 100 percent on the side of Dr. Pangloss. To have the most esteemed of all modern economists say that things are not this simple is a very important step."
On the moderate right, Pat Choate sees Samuelson's paper as essentially defensive, less a confident breakthrough than the correction of an embarrassing mistake.
“At the age of 89, Samuelson is finally stepping onto the road to wisdom,” says Choate. “It is a road where uncertainty prevails over the certainty of the ‘laws’ of economics, which are not laws but ruminations by closeted academics. His article is important, for it effectively gives permission to his disciples to begin to think about the real world, rather than try to postulate assumptions and develop elegant models which ultimately are irrelevant.”
Paul Craig Roberts, a fiercely anti-globalist economist who served as President Ronald Reagan’s assistant treasury secretary, puts it even more pointedly. Samuelson’s rethink, he suggests, is merely an attempt to patch up a leaking, and ultimately doomed, vessel.
As he points out, the paper is in large part a reaction to arguments made by Ralph E. Gomory and William J. Baumol, who in Global Trade and Conflicting National Interests have mounted a powerful challenge to the orthodoxy's utopian take on international trade. Roberts adds, “Gomory and Baumol show that, in the relevant zones, free trade is characterized by conflicting interests -- not by mutual benefit, as economists unthinkingly assume."
In Roberts' view, though the Samuelson paper is an important modification of free-trade theory, Samuelson has chosen his assumptions carefully to avoid any frank discussion of the widespread damage being caused by outsourcing.
If Roberts is disappointed by the narrowness of the Samuelson modification, many on the globalist side of the trade argument are evidently worried. A leader of the damage-control effort is none other than Bhagwati, the former Samuelson student singled out for obloquy in the paper.
Already Bhagwati, a Columbia University professor, has collaborated with two allies in a hastily written response that will be published in the same journal.
Judging by a bad-tempered recent contribution to The Wall Street Journal, Bhagwati is clearly rattled. Describing John Kerry's trade policies as "voodoo economics," Bhagwati embarrased his cause by hurling juvenile personal abuse at the anti-globalist CNN presenter Lou Dobbs.
What is clear is that Bhagwati has plenty to be rattled about. As one of the earliest and most extreme globalists, he has offered several hostages to fortune over the years, most notably in his indecent embrace of the Japan trade lobby in the 1980s. Blaming "bullying" American policy-makers for most of the tension at the time in U.S.-Japanese relations, he exonerated Japan from charges of protectionism. Writing in Fortune magazine in 1989, for instance, he argued that the evidence was "slim" that nontariff barriers significantly reduced Japan's appetite for American exports.
In what must have been the ultimate bad hair day for Bhagwati, one of Japan's leading spokesmen has now admitted that Tokyo's 1980s denials of protectionism were poppycock. The admission came from Mitsubishi Corporation President Minoru Makihara, who told the Tokyo foreign correspondents' club that the Japanese market in the 1980s was "still closed and tightly protected.”
Bhagwati's demeanor cannot have been improved by the realization that Japan’s continuing trade surpluses (they never went away) are likely soon to re-emerge as a hot-button issue in Washington. The reason: Japan’s current account surplus is headed for a record $170 billion this year. By comparison, in 1989 -- which was both the last year before the Tokyo stock-market crash and the year of peak Washington lamentation about Japan’s “juggernaut” trade strategy -- Japan earned a current surplus of a mere $57 billion.
Under the circumstances, Bhagwati seems a weak candidate to lead what will obviously be a hard fight to defend academic orthodoxy. Certainly only the first casualty will be Henry Kissinger's cruel witticism about academic life: that the fights are so bitter because the stakes are so low. This is one dispute where the stakes justify the bitterness.
I didn't say outsourcing was the ONLY cause of unemployment, Top Quack.
Not to belabor the point, but this too is not quite correct: we have outsourcing, and yet unemployment is incredibly low, remaining pretty much the same as, say, 8 years ago.
Your humble, yet Top, Quark.
Yep. It's tough living in changing times. My own profession (programming) has pretty much been outsourced. There are jobs, but it's a buyer's market. Imagining a painless solution, however, is tough. Every attempt to prevent a qualified person from immigrating or taking a remote job just means that some government is stepping on someone's freedom.
Same with tariffs and other barriers to trade. Opponents of free trade are really advocating government intervention and restrictions or elimination of freedom and free trade in the name of some vague higher goal -- like full employment.
If I want to buy sugar from the Caribbean instead of Louisiana, why should the Federal Government force me to pay a tax on one but not the other? They are taxing me for no other reason than to favor other citizens at my expense. That isn't right.
I find it odd that the so-called peace movement is the stronges opponent of globalization. I can't think of any route to world peace that does not eventually equalize opportunity. We are in an era that sucks; we are suffering from an economic revolution.
I would be ticked off except that life is objectively better for more people than in any other time in history.
Yes, with all those factories shut down across the states. But I didn't mean to step on your toes, little quark.
Well, the "peace movement" is not exactly what I would call thinkers.
Thank you. Yours is a voice of reason that is desperately needed in this forum, which is conservative in everything but economics and free enterprise.
You can progress logically from a fallacious premise. Garbage in, garbage out (or, as COBOL programmers used to say in ancient Rome, purgamentum init, exit purgamentum).
In other words, Marx celebrated free trade for a wrong reason. This does not make free trade wrong. It's pretty amazing, actually, that a computer scientist can commit such an error.
Let A = "free trade is good;" B = "free trade hastens the fall of capitalism." Marx accepted as true the implication C = B -> A.
You make the following implication: C -> not A. You know perfectly well that this is ridculous: just draw a few Venn diagrams of truth tables.
You also can notice that even the modern extreme leftists know that Marx was incorrect: they know that free trade STRENGHTNES capitalism --- i.e., B is false --- and are on the forefront of resistance to what they call globalization.
How about this: Professor Samuelson made perfect sense back when he taught Bhagwati.
Check this out:
One of Samuelson’s most important contributions tothe development of economic theory are those whichhad an influence on the theory of international trade.This concerns primarily his analysis of gains from trade,the analysis of the transfer problem and contributionsdedicated to Ricardian, Heckscher-Ohlin and also theViner-Ricardo model. His first contribution in this fieldwas the article Protection and Real Wages (1941), written in cooperation with W. Stolper. Samuelson provedthat from the imposition of a tariff will benefit the factorof production that is relatively scarce (in relation to theother country). The opening of trade on the other handbenefits the relatively abundant factor. Economists havelong been occupied with the question of whethera country as a whole gains from foreign trade. Samuelson showed that the individuals who gain through thistrade will be richer, even if they were to have to whollycompensate the losses of those whose position has inconsequence of international trade worsened. "In this sense free trade ispotentially[I think the emperical evidence can lead us to strike the word potentially...after all, why trade if it made you worse off] superior to protectionism".Source: Profile of World Economists - Paul Anthony Samuelson
As you wish. I can see you are not familiar with the mainstream economic research in the field of trade. Over the last 25 years, there have been an enormous number of studies published in top-tier mainstream , peer-reviewed journals proving that there are circumstances under which free trade can hurt a country. Below is a partial reading list for you:
Bhattacharjea, A. 1995. "Strategic tariffs and endogenous market structures: trade and industrial policies under imperfect competition." Journal of Development Economics 36: 287-312.
Brander and Spencer, 1985. "Export subsidies and market share rivalry.." Journal of Internaltional Econmics 18: 83-p 100.
Eaton and Grossman, 1986. "Optimal trade and industrial policy under oligopoly." Quarterly Journal of Economics 101: 383-406.
Fuerst and Kim, 1997. "Two part trade policy under imperfect competition." Review of International Economics 5 : 63-71.
Grossman and Horn, 1988. "Infant industry protection reconsidered: the case of international barries to entry." Quarterly Journal of Economics 4: 767-787.
And, of course, there is the excellent new peer-reviewed book published by MIT press that points out two very plausible scenarios in which free trade can hurt a country like the US:
Gomery and Baumol, 2000. Global Trade and Conflicting National Interests. Cambridge MA: MIT Press.
You will see that the above are published by reputable, peer-reviewed mainstream outlets, and the authors have credientials beyond dispute.
So overwhelming is the evidence that free trade can sometimes hurt a country that no mainstream economist denies this fact. Even Columbia professor and free trade ideologue Jagdish Bhagwati admits it. He, and others like him, still support free trade because they believe that in practice governments are incapable of implementing the right mix of tarrif and industrial policies that would be superior to free trade.
Whether governments can succed in implementing policies superior to free trade is controversial, and reasonable people can disagree. I am agnostic on the question, and lean toward the view that some countries can and others cannot. However, there is absolutely no doubt that a policy other than free trade can be better for a particular country under some circumstances that are by no means uncommon.
The younger ones retrained and got comparable jobs. Older ones were not so lucky and took large pay cuts.
In addition to the labor income, our economy also lost the rents that come with an oligopolistic industry such as television and consumer electronics. We did not lose these rents because we were less productive or had inferior technology. We lost it because of Japanese industrial policy that deliberately targets oligopolistic industries so that the Japanese economy can capture rents. They do it by pricing below cost for a long enough period so that Japanese producers acheive critical mass in the industry, and then can finally drive our producers out of business by exploiting economies of scale. Our loss in oligopoly rents was permanent.
In 1961, out of every 12 airplanes flying anywhere in the world, 11 were produced in the U.S. Now, this is clearly not the case. What happened to those workers?
In mid 1800s Pittsburgh was producing half of all steel and three quarters of glass in the world. What about now?: What happened to those workers?
Skills in steel production are easily transferable, and the industry is pretty competitive (few rents involved), so letting this industry lose to foriegn competition was smart.
If the workers cannot atain comparable productivity in This is incorrect: these workers find jobs in other industries. A person that assembled cars can assemble airplanes without loss of income.
And you're basing this on....
The one who assembled TV sets in 1980s assembled computers in 1990s at a HIGHER level of income. Your perception, driven perhaps by what you read in the newspapers, is simply incorrect.
Prove it.
The wholes in free trade theory have been apparent to academics for 20 years. Now they're finally being made public. It's about time.
Don't be silly. Please point to specific papers that you have in mind.
See post #131. The classical case for free trade is based on a bunch of idealized assumptions: perfect competition, constant or decreasing returns to scale, symetric infomrtion, and the like. The minute you start relaxing these assumptions, as in the real world they seldom hold, many circumstances emerge in which free trade cease to be optimal.
Oh, please. The deterioration of morals is evident in all levels of our society, including the highest levels of our Government and Corporations. Those with the highest level of power, during much of this country's history have recognized that, again:
not everyone has the same intellectual and social skills
It is far better for our country for those people to work for a shot at a very modest "American Dream" than it is to have them on welfare, while we export their jobs to an enemy country's slaves. Better generations of Americans recognized this as being fundamentally important to our sovereignty; this is putting us on the fast track to socialism.
This, Ms. Executive, you should've learned in Organizational Behavior 101 (or even Marketing 101, if it were taught right).
Sorry I wasn't indocrinated with a business degree by a bunch of liberals; I have degrees in other areas. Probably why I can see so clearly.
If you would like a perfect compare/contrast example of the "old" business model, and the "new" business model research two older companies in Iowa: Maytag and Winnebago.
Look who is running them; compare their backgrounds and company philosophies...then take a look at the company performance and get back to me. I'll send links if you want (I'm sure you won't...LOL).
I am agnostic on the question
Oh, so am I if you can believe it. [/sarcasm] Also, I know that it's hard for protectionists to understand but for the most part it is not through government that trade happens in the United States with her trading partners. Usually it's private businesses that make the decisions regarding if they're getting a "good deal" or not in a transaction - just the way it ought to be. I know what the protectionists must be thinking though, "It's not fair! Race to the bottom! Giant sucking sound." And it's at that moment where one should realize that the giant sucking sound is really the protectionists' very own government procured competition-killing-pacifier in the form of tariffs, quotas, and subsidies. Yet, the free trade advocates are called the Marxists by the "conservatives". It's a head-scratcher for sure.
It was you that brought up assumptions, so let's assume that you are correct and that the Japanese, in fact, sell at below cost. That would mean that the more they sold the more money they'd lose - and for two reasons if you consider the law of diminishing returns on the factors of production as output increased. Let's also assume that the Japanese government is involved in this conspiracy to drive out U.S. domestic producers and that they help their producers by subsidizing. Let's also assume that the now displaced American worker can only find a "burger flipping" job OR, have to remain a public charge to the taxpayer for how many ever weeks the benefits last. The final assumption is that the American consumer gets no utility from the below cost products that the Japanese producers made.
My next two questions are:
How are we worse off? And what happens to the Japanese economy for their shenanigans in altering the marketplace?
Well, obviously cheaper goods are bad for Americans. When Americans save money it's bad.
When the Japanese lose money to sell us cheaper goods it's obviously good for Japan.
You just don't understand economics. We need a tariff to stop Americans from saving money.
This quasi-scientific statement does not explain the absence of this industry in the U.S.: new firms could've been formed.
It is also not true that we lost these jobs due to dumping or some such actions of the Japanese: we were less productive --- as measured by the ratio of costs, particularly labor, to revenues.
Skills in steel production are easily transferable, Transferable to what?
and the industry is pretty competitive (few rents involved),
It appears that you are in love with the word "rents" Actually, steel industry at the time was all but competitive: transportation costs were prohibitive and created high barriers to entry for foreign competitors. so letting this industry lose to foreign competition was smart. Who was that smart? Who was taking this course of action purposefully. Nobody "let" this happen --- it just did.
Most importantly, you missed the point, which was: what happened to workers when those industries went into decline? And the answer is that they find other jobs. The point also was that with all the talk about outsourcing, unemployment at the level that until recently was considered the lowest possible. True, some people, especially close to retirement drop out of the labor market, but most find other jobs. The younger ones retrained and got comparable jobs. Older ones were not so lucky and took large pay cuts.
So? Make up your mind what you are talking about. If you look longitudinally over the lifetime of a person, it is clear that the older one gets the harder it is to make transitions. What does that prove? And what's new?
Prove it.
You are welcome to speak to your dog in this tone. When addressed to me, requests, if any, must be accompanied with the word "please."
The wholes in free trade theory have been apparent to academics for 20 years. Now they're finally being made public. It's about time.
TQ: Don't be silly. Please point to specific papers that you have in mind. See post #131.
Thank you. I will look up some of these references at the first opportunity. Until then, I cannot comment on whether they invalidate the main conclusion, that free trade is beneficial in the long-run.
The classical case for free trade is based on a bunch of idealized assumptions: perfect competition, constant or decreasing returns to scale, symetric infomrtion, and the like. The minute you start relaxing these assumptions, as in the real world they seldom hold, many circumstances emerge in which free trade cease to be optimal.
The real question is optimal in terms of what? If the current state of the art is any indication, new models still deal with at most two periods, two countries, two commodities, etc. So much for impeccable credentials.
Consider for instance, the case of asymmetric information and suppose there is a case that shows disadvantages to free trade. But all such models take the informational asymmetry as given and exogenously specified. In the real world and over time, agents also acquire and trade information. So, yes, a partial-equilibrium analysis may show some temporary disadvantages to free trade --- that still does not invalidate the main point.
The question is ill-posed: it is much like, "Is it better to eat or to sleep?" As is these were mutually exclusive.
Nobody suggest to put these people on welfare; if you want to come up with an opinion, it would be nice if you understood what the issue is. The problem in an industry such as IT stems from the fact that wages outpaced productivity: an American worker that, say, is 10 time more productive than an Indian one must receive no more than 10 times the Indian's salary. If (s)he makes 11 times more, the wages will drop: sometimes through the renegotiation of wages at the present job, and sometimes through a change of jobs. Nobody says that the wage will drop to the level of the Indian worker: only a cut of about 9% is needed.
So, your statement is an emotional propaganda, as if the choice was between making $100,000 a year and being on welfare.
Sorry I wasn't indocrinated with a business degree
Oh, please, since when it has become noble to "justify" own shortcomings by pointing at the shortcomings of others? You clearly not only lack education in this area but don't even know what it is. Hardly anything you would hear in a business course would have anything to do with political philosophy of the instructor.
by a bunch of liberals; I have degrees in other areas. Probably why I can see so clearly.
You are not only justiftig your ignorance but also put down others without a shred of evidence. That's a violation of one of the Commandements, Ms. Conservative Executive.
If you would like a perfect compare/contrast example of the "old" business model, and the "new" business model research two older companies in Iowa: Maytag and Winnebago. It is hard to understand what you mean since you are misusing the term "business model." It also not clear what you mean by old and new --- old and new in terms of what?
Look who is running them; compare their backgrounds and company philosophies... What does that have to do with the issue? Should I also inquire about what cars the executives drive? Would that be relevant?
then take a look at the company performance and get back to me. And report to you what? Are you always so clear when you give tasks to your subordinate?
And what do you mean by performance? At your level, Ms. Executive, you should know that THE measure of performance does not exist. Oh, I forgot: you are not "indoctrinated" with basic knowledge.
I'll send links if you want Thank you, but I manage to find info when I research companies, and both are publicly traded.
(I'm sure you won't...LOL). YOu are correct: I am not eager to go look for something that you have not even specified. But I did have some detailed knowledge of the marketing strategies of Maytag in mid-1990s.
Simple. Winnebago is fabulously successful...sales AND profits have been increasing exponentially. They are run by the "old" business model (it's telling that you have no idea to what I'm referring); their CEO has a two-year degree, started on the production floor and has worked his way to the top spot. The old business model also included making a quality product, selling it at a reasonable price, and advising your investors that they could expect modestly good, steady profits.
Maytag (back when they were worth a crap) followed the same model. They strayed from the model drastically with their first MBA-made-delegate-while-I-run-my-fiefdom-and-collect-my-stock-options-CEO ("new" business model) and have continued with this same failed disastrous plan. They will be done within the next couple of years. I know people who work there; trust me...you can have an MBA and be a complete imbecile...in fact I've come to expect it. The new business model is: profits, profits, profits...at the expense of quality, repeat business, employee loyalty...on and on. Maytag has had two recalls of very high-end, expensive, appliances in the last six months...one of which has started four consumers' kitchens on fire! That, from the company that used to be known for the "lonely" repair guy.
As I said, I have degrees in other areas; but have been very successful in business; you seem to have a huge problem with that for some reason. The twentieth century juggernaut that was our economy, complete with a thriving middle class occurred because of the "old" business model; and is being destroyed by the "new."
You really should take the time to consider the fact that socialist business professors are the source of most of this.
We seem to have rather different perspectives. I think I am right about what's going on; but I really hope I'm not. Time will tell; I think that some companies are starting to see the light. We'll see....
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