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.
Freer trade (because it has always been managed) has led to an increase of American owned businesses that operate abroad that skew the trade deficit numbers, and panic everyone but those who know better as well as those American shareholders who benefit.
But that's the key here, short-term. The spending multiplier effect still creates spending for the sake of stimulating short-term employment. Later, the piper must be paid by either raising taxes or running budget deficits. There are better ways to stimulate employment besides digging holes that you'll just have to fill at a later date.
I don't see that. I see a capitalist not a Leftist. Of course when the attention is focused upon you, however, i see an ID 10 "Tango".
Good for the big American factory farms, anyway.
Because despite all those hard-working Mexicans down in Mexico, giant American factory farms turn-out food cheaper than Mexican farms can.
Google it up: http://www.google.com/
This year it depends upon which crop and where it was to be harvested.
Not even efficient American commercial farms can do much when the weather is against them, except to import product from their other slave . . . er . . . large commercial farms around the world.
If I were one of them big Mexican farmers, I'd be dumping crops on this side of the border every chance I got. Make it as costly as possible for those Yankee bandits to drive me out of my own markets--as they might well do under NAFTA.
LOL. Can you name one academic paper for which he was famous? Do you have any clue as to what he won the Nobel Prize for?
If you stimulate spending, you stimilate economic growth which generates tax revenue which can be used to pay down the debt in the future.
And that's ignoring the positive supply side effects if tax cuts are part of your stimulous. If you cut taxes, you do two things: you stimulate spending by putting more money in people's pockets (the demand side or Keynesian effect) and 2) you increase peoples' incentives to work harder and take risksm, which also helps growth (the supply side effect).
No serious economist denies either effect is important.
But this is supposed to be a discussion about trade, not macroeconomics.
Yes, that's the thrust of this paper. Some countries can win and other countries can lose as a result of free trade. I don't think he's denying that on net there is more output generated as a result of free trade. Frankly, if we are on the losing end, it does not make me any happier that the winners could subsidize the losers, because in the real world such subsidies never materialize. That's why we should be conducting a trade policy to maximize our income, not China's or Japans or Mexico's or Europe's.
"Keynes was not a socialist". He was not, yet his solutions for economic problems led to socialism.
Not in this paper, and certainly not according to the vast majority of mainstream trade theorists. Sometimes all countries win. Other times some countries gain at others' expense as a result of free trade.
TQ: Firstly, the benefits accrue not only to investors...but also to consumers.
LL: True.
Well, if you agree that it's true, then what is the issue? In a modern capitalist economy (the U.S.), the cvast majority of people act in three roles --- as consumers, investors and workers. The benefits accrue to most of people thus, whereas only a small percentage of workers get hurt --- an only in the SHORT run and only in one of the roles.
What you do, as most of the liberal media is elevate only one of components of a person's welfare --- that which is derived from wages -- and make it paramount. It is not unlike arguing that one became poorer since his employer started to pay wages by check rather than cash. Cash receipts is only one component of income, and wages is only one component of welfare.
Moreover, elevating wages (and workers) to such prominence is precisely what Marx did. He was wrong then, but given what we know at the present time, doing so is intellectually dishonest. Any support or criticism of policy must include the impact on all three components and not just wages.
-----------
TQ: even if you assume that a SMALL number of workers lose in the SHORT-run. LL: If this was as clear-cut as you paint it Samuelson wouldn't have written his mea culpa and we wouldn't be having this discussion.
Your argument is an ad hominem support of Samuelson and an ad hominem attack on me: you simply state that you don't trust me and do trust Samuelson. I don't know why? Do you know my real name?
More importantly, you must not have read Samuelson's article yet. It is a model, and his has certain assumptions like any other.
=======
TQ: displaced workers in outdated industries do not become permanently unemployed: they find other jobs.>P> LL: Here also you muddy the waters. The industries in question are not outdated. Rather the same products can be made abroad using cheaper labor. Thus high-priced American labor is either forced to accept much lower wages, forced into unemployment, or able to find a similar or better paying job in a new industry. What's at issue are the proportions or each.
The "outdated" industries were given merely as an example: to see an effect clearly, it helps to take up the case where it is large.
An industry such as production of TV sets has become outdated just as SOME portions of IT: call centers, from the standpoint of economics, may be viewed as an industry.
The percentage of people is not an issue: aggregate unemployment, which is very small, gives an answer. And, you will notice, most people talk largely about IT --- just like they did about TV sets in late 1980s -- precisely because there is not much else to point to. Again, lack of intellectual honesty.
-----------
TQ: Does that hurt American workers?
LL: LIf it lowers their wages, yes. How would you feel if your employer told you he could replace you with someone earning only half your salary? I know plenty of people in IT who've faced this.
For centuries, it was a fundamental perception of Americans that there are good times and bad. So, when times were not so good, people viewed it as averaging out of good times they had before. Have you DESERVED an abundant crop? Nature smiled at you one year but then gave you a bad crop the other. That's all. Nobody was questioning the fundamental precepts of the economic system because of fluctuations.
The time have changed because people like you were raised, and in turn raise others, to believe that progress is linear: from good gto better. If so, then indeed it follows that you are ENTITLED to what you have today. And, if tomorrow you do not have as much, then someone must've taken it away: the government, CEOs --- the capitalist system itself. And then you are really frustrated.
The foregoing is a logical development of a wrong premise and wrong expectations: progress is not linear; that it was such since you were born is an aberration.
From a different standpoint, you may want to consider a fundamental measure of satisfaction: it is equal to what is delivered minus what was expected. This is explains, in particular, why you are very happy with an even a small increase in something desirable -- salary, gifts, respect -- when none was expected.
Conversely, this explains the lack of satisfaction with today's labor market by people that follow your logic. Feeling unsatisfied, they conclude that NOT enough --- of jobs, wages, health care --- was delivered to them. But observe that there is a different explanation: low satisfaction is a result of unreasonably high expectations. This is corroborated by numerous observations --- and complaints on the part of conservatives --- they our culture has become narcistic, that even adults act as spoiled children.
More specifically, in the IT sector, there is no doubt that this is the case: the previous wages, which provided the grounds for unreasonable expectations, have been elevated for decades (and skyrocketed in the '90s) because of shortage of labor.
---------
LLIt's you who fall into the trap by creating false categories. In a market system there's no such thing as normal.
Thank you that was precisely my point: you cannot speak from both sides of the mouth. If you do not question capitalism when wages are high just because market forces make then so due to shortage of labor, then you should not question their decline when supply of labor increases. Both are market adjustments; that's all.
But that is not what you do. When capitalism produces enormous wealth and ridiculous IT wages --- even our poor live much better than Russian engineers today --- you do not suggest that that it needs to be fixed. You overlook, again only because as a Marxist you view wages as the sole component of welfare, that those extra-high IT wages of the '90s were paid by AMERICAN consumers and retirees that keep their savings in stocks and bonds. When, however, wages decline -- also as a result of market forces --- you complain and question the very system that has so far has proven to be a clear winner even for the poor. Whink what you may, but be honest with yourself. Actually, you make a mistake even as a Marxist. Marx valued complex labor according to training and education rahter than market forces. Well, when a 25-year-old kid makes $150,000 per annum in the '90s, and the AVERAGE salary of an electrical engineer with a Ph.D. and 20 years of experience is only $96,000 --- something is wrong even by Marx.
Make up your mind.
However, when it comes to received monies more is better and less is worse...and decades of experience have taught fiscal planners that falling wages are very bad psychologically.
Wrong. The problem is not that is, or can be, solved by fiscal planners: it is solved by parents and churches; it is they who instill values in you and thus determine how you deal with adversity. Both parenting and religion are in decline throughout the West, and even NORMAL occurrences are perceived as adversity by infantile adults with unreasonably expectations. It is true that this leads to social upheavals, but they have nothing to do with policy issues.
Also investors have no trouble going to Congress and the Courts to ask for protection from unfair competition - meaning tariffs to equalize a cost advantage gained by employing cheaper foreign labor (or time to move their own companies abroad).
Sorry but this is so factually incorrect that it makes it pure garbage. And, be intellectually honest here: the AVERAGE salary of a longshoreman, where no education is required, is about $130,000. That is who has protection through unions. That is how teachers keep talking about how they are underpaid getting $80,000 per annum for nine months of work --- all protected by a monopoly on their labor. As I said, it is the investor and the consumer who subsidize, rather than remain protected.
------------
TQ: The "equalization" occurs in a dynamical system only if it is closed...The process of globalization has been in place forever
LL:We're not speaking about idealizations in physics.
YOu appear to misunderstand both physics and economics here. It is the nature of constituents and the interaction between them that make a system physical or social, but both can be, and actually are, dynamical systems. If you study macroeconomics, you will find that a great deal of time is devoted to DYNAMICS. Even in your microeconomics courses you probably encountered the issue of convergence to market equilibrium.
For nearly a century there's been a national market in the United States that could've been considered closed for many purposes.
You are thoroughly misinformed. About 14% of assets in this country is owned by the British, and that occurred long, long ago. Where do you think the oil and tobacco produced in the U.S. go? Have you not heard that even before the U.S. became a country, we were shipping goods to Britain and the rest of the Americas to Spain and Holland?
Your perceptions are grossly incorrect.
More importantly and more fundamentally, even you put barriers to trade, the economy is never closed as a system: it interacts with the physical environment, the simplest example of which is the use of natural resources.
Given your assumptions, some of your conclusions do follow logically. But the assumptions are incorrect.
Rejected only by those that misunderstand what it is and what it does.
We produce and consumer two kinds of goods: private and public (there is also an intermediate category of so-called club goods). Everybody knows nowadays that markets do not exchange public goods. To produce such goods --- defense, highways, clean air --- we need a coercive force of government, which enables production through taxation. You are arguing thus against a straw man.
Where the significant error occurs is when people claim that markets fail to be best in the exchange of private goods, which are the focus of discussion here. You have heard, correctly, about the shortcomings of hte market system, but misunderstand what those shortcomings are and draw erroneous conclusions. The rejection of the market system in the production of public goods has nothing to do with the issue at hand. The second point that can be made, is that you once again assume that the shortcomings of the market system, especially when it comes to people and their well-being, must be corrected by the government. That is a purely socialist position, to which you appear to subscribe. Such position deliberately ignores other mechanisms, such as charity and inter-family transfers. It is also factually incorrect: in the hardest of times, people deed not die of hunger in this country --- precisely because churches and synagogues, neighbors and family took care of the needy. Every village had an idiot, but that idiot for centuries lived at home or at a convent. Nowadays, it is the government that is assumed to be the sole source of kindness.
Here too you apply logic to erroneous starting point. It is people like you --- the socialists --- that do their very best to kill first the religious values, and now the family values as well. Then it becomes a self-fullfiling prophecy: with those values destroyed the government increasingly does LOOK like the only source that can provide the safety net.
I'm calling bullsh-t! Back that statement up with some evidence.
AofR: So, if no one cleaned your toilets, picked and cooked your food, removed your garbage, swept your streets, shoveled your snow, trimmed your lawns, dug your ditches, mopped hospital floors, cleaned your clothes--that's no matter because that work is not important, but sitting behind a desk is indispensable.
Where on earth did you see me speaking of importance of work? A more productive worker creates more wealth, which provides for a higher standard of living. When we we all were cleaning toilets, we lived to the age of 45 on average, and did not have modern medicine or airplanes. The airplanes are created by people behind the desks and workers on the assembly line --- both have a greater level of education than those clean toilets.
You also misconstrue the economic notion of education: it also includes training for what is manual work.
Indeed, a large number of people that produced TV sets lost their jobs: not a single TV set is produced in this country since 1980s. What happened to these workers? 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?
If the workers cannot atain comparable productivity in another industry, which is likely in many cases, then they see a PERMANENT as in LONG TERM drop in income,
This is incorrect: these workers find jobs in other industries. A person that assembled cars can assemble airplanes without loss of income. 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.
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.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.