Posted on 11/06/2004 2:45:55 PM PST by Willie Green
For education and discussion only. Not for commercial use.
A battle royale has just been initiated in the rarefied world of economic theory, although the rumblings have not yet reached these shores. The first salvo has been fired by no less a person than Paul Samuelson, and the targets he has chosen include some of his most prominent acolytes and disciples.
The MIT professor, winner of the Nobel Prize in 1970 and research mentor of countless economists, who later became major scholars in their own right, has re-assessed his entire stand on globalisation and the benefits that accrue from the process. In doing so, Samuelson has been scathing in his critique of some of his students, including Jagdish Bhagwati, once a member of his innermost circle.
In an article in the Journal of Economic Perspectives, Samuelson has postulated that free trade, far from being an unqualified blessing, may prove to be a major drawback under certain circumstances. The major cult figures who are sought to be chastised by the guru on this issue are Gregory Mankiw, Bhagwati and countless other `globalists'. The first two have been mentioned by name in the article's opening paragraphs as purveyors of `polemical untruth'. In the corridors of theoretical economics, you cannot get more direct than this.
The thrust of Samuelson's analysis is that a country like China, basically a low-wage economy, will create a net negative impact on the American people, when it manages a substantial rise in productivity in an industry in which the United States was earlier a leader. Initially, American consumers may benefit from low-priced goods in their supermarket chains, but their gains may be more than neutralised by large losses sustained by American workers who lose their jobs. This thesis, from the erstwhile mastermind of the neoclassical school of economic thought, has led to tumult in the profession even before its official publication.
Among Samuelson's fellow liberals, this revisionism has been a welcome development and could not have come a day sooner. Many American commentators are saying this is a clarion call for the US to launch serious programmes for supporting workers displaced by globalisation. American workers need a much stronger and a viable safety net, on the lines of their European counterparts or even those in Canada, the immediate northern neighbour. Some American economists are even saying empirical research on the subject in the past was skewed, because of the in-built biases of the free-trade proponents.
Claims of substantial gains from free-trade were based on `extraordinarily poor studies', according to one commentator, Jeff Madrick, who goes on to add there is now hope for a more balanced perspective in future research in international trade theory. Policymakers in Washington are now being urged to move away from their high perches and to take a hard look at ground realities. When one of the most respected contemporary economists has stepped out of the shadows and said things are not as simple as they were earlier made out to be, it is a development that cannot be ignored. Another observer, Pat Choate, feels this paper is the correction of `an embarrassing mistake'.
Samuelson, at the age of 89, is signalling to his disciples that they should think about the real world rather than `postulate assumptions and develop elegant models which ultimately are irrelevant'. More critical economists, like Paul Roberts, feel the maestro's attempt to patch a leaking vessel that is ultimately doomed will just not work. Roberts suggests the paper responds to an insightful critique by Ralph Gomory and William Baumol, another economist familiar to all Indian students of economics.
In their publication, Global Trade and Conflicting National Interests, Gomory and Baumol launched a powerful attack on orthodox international trade theory. They showed free trade is characterised by conflicting interests and not by mutual benefit, as neoclassical economists assume. Roberts, in fact, lambasts Samuelson for not taking on the issue of outsourcing in any depth.
While the friendly fire in this debate is clearly sympathetic to the overall theme, the globalists are clearly worried. The damage-control effort of this brigade is led by none other than Jagdish Bhagwati, the former Samuelson disciple, singled out in the paper for reprobation. The Columbia don has reportedly prepared a response to Samuelson, which will be published in the same journal.
Bhagwati, of course, got a lot of media attention recently when he described John Kerry's trade policies as `voodoo economics'. He has been one of the most committed globalists for many years and was a defender in the 1980s for the Japanese trade lobby, which he exonerated from charges of protectionism, while reserving his blame for `bullying' American policy-makers. He dismissed the argument that non-tariff barriers significantly reduced Japan's appetite for imports from America. There is now sufficient evidence (and semi-official admission) that Japan was a major protectionist country throughout its period of growth in the 1960s and much later on.
Most of us who have worked in this country's corporate sector and interacted with Japanese companies will vouchsafe for the enormous clout of these organisations and the seamless interlinking between the much-vaunted MITI and Japan's private business. In any case, Japan's continuing trade surpluses are likely, once again, to become a controversial issue in Washington very soon.Bhagwati will have his work cut out, as he takes on his former guru in a no-holds-barred fight to defend orthodox economics.
In these shores, North Block and Raisina Hill would do well to ask their think-tanks to introspect on the complex subject. Else, they can be taken to task for swallowing the globalisation mantra a tad too uncritically.
The writer is a financial-corporate analyst and a member of the Delhi Stock Exchange.
Then why do we get larger and larger trade deficits?
Where have I heard that? Oh wait...I posted that myself. When do I get my award in economics?
Wal-Mart buys everything from China to give American consumers the lowest prices until every American is unemployed and can't even buy a hot dog. Everything at Wal-Mart eventually costs a nickel and no American has a nickel to spend.
There's nothing wrong with Friedman's life's work.
Nor Samuelson's, for that matter.
They are both Nobel Laureates, afterall.
It's just that Milton has become more senile and set in his ways.
He no longer has the mental agility to evaluate changing market conditions and adjust his perspective accordingly. He just chants the same old mantra, even though market conditions have changed.
those "freed up resources" are going to go to taxes - to pay for all the social welfare programs americans who now have lower wage jobs, will need. and to pay for the increasing number of americans working for government, directly and indirectly.
Within the current timeframe it's mostly due to Clinton's overly strong dollar. But the economy can take decades to reach equilibrium, and it's still recovering from the Bretton Woods era (early 1940's to early 1970's) when the dollar and imports and exports were artificially held flat. People put too much emphasis on imports and exports. A far better focus is on GDP and productivity growth.
yes, and we don't want america to enter that hole that you correctly point out, europe is in. keeping a strong private sector middle class job/wage base is the only way to do that.
It is not free trade that plagues us. It is not low paying jobs. It is the lack of will of Americans to educate themselves in new career fields. George Bush had it right all long in the debates when he spoke of education being the key to evolving the jobs market, and America. But, people expect the government to hand jobs to them. This is NOT the Soviet Union. "Every man, according to his ability."
USA is also being drained by the high wage economies which shifted their taxation to the Value Added Tax. This tax works like a tarrif on the imports from America and like a subsidy on exports. The impact of VAT might be higher than labor cost difference or cost of regulations.
USA need a national economical policy in order to avoid the fate of Argentina.
Don't you think it's past time for blaming Clinton for all our economic problems?
Conservatives expect a business-friendly domestic economic environment that generates employment opportunities.
The Bush Administration's priorities don't address that expectation.
The administration has left federal regulatory burdens in place while undermining our economic efforts with imported goods and labor. It is a form of economic tyranny being waged against the American Middle Class for the benefit of transnational corporate interests.
the US auto industry is protected by both tariffs (light trucks) and import quotas. foreign manufacturers are building plants all over the US, hiring americans.
You give too much credit to the Administration, I think you mean Congress and the Senate. They are the law makers who created the regalutory burdens in the first place. By the way, talking about a friendly environtment for employment creation, did you see the jobs numbers for the month of October? 337,000 Jobs!!!
Smoot-Hawley's impact on the Great Depression is about the same magnitude that cow farts have on the ozone hole.
Yes, we should all pray for more destructive hurricanes to hit Florida to help generate temporary, government subsidized, construction jobs. </sarcasm>
Ain't it great? I was saddened to hear that Mitsubishi is closing some plants, though. My Sebring is well made.
???
Would you care to try again... in English perhaps?
The Smoot-Hawley Tariff was more a consequence of the onset of the Great Depression than an initial cause. But while the tariff might not have caused the Depression, it certainly did not make it any better. It provoked a storm of foreign retaliatory measures and came to stand as a symbol of the ‘beggar-thy-neighbor’ policies (policies designed to improve one’s own lot at the expense of that of others) of the 1930s. Such policies contributed to a drastic decline in international trade. For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934. More generally, Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations.
japan inc has had more than its share of problems. they export but refuse to buy imports. in the 80s this surplus of cash drove real estate sky high, and then everything came crashing down. japanese isolationism (more adequately put: exportationism) literally makes the japenese slaves of others: they work like hell, but because they don't buy imports, they do not reap the benefits of their wages.
miti and japan's private businesses do have enourmous clout. too bad they are not using this clout to solve their economic problems.
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