Project Syndicate: Debunking America’s Populist Narrative

Debunking America’s Populist Narrative: BERKELEY – One does not need to be particularly good at hearing to decipher the dog whistles being used during this year’s election campaign in the United States. Listen even briefly, and you will understand that Mexicans and Chinese are working with Wall Street to forge lousy trade deals that rob American workers of their rightful jobs, and that Muslims want to blow everyone up.

All of this fear mongering is scarier than the usual election-year fare. It is frightening to people in foreign countries, who can conclude only that voters in the world’s only superpower have become dangerously unbalanced. And it is frightening to Americans, who until recently believed – or perhaps hoped – that they were living in a republic based on the traditions established by George Washington, Abraham Lincoln, and Teddy and Franklin Roosevelt. READ MOAR

Must-read: Paul Krugman: “Trade Deficits: These Times are Different”

Must-Read: There are big reasons to be for “mercantilist” policies:

  1. In a world in which a country suffers from a shortage of risk-bearing capacity or a savings glut, exports are a very valuable source of aggregate demand.
  2. In a world in which there are substantial spillovers from the creation and maintenance of communities of engineering practice, exports in associated industries are a powerful nurturant and imports a powerful retardant of such communities.
  3. To the claim that subsidies to such communities are better, the proper rebuttal is “subsidies to whom?” Export champions reveal themselves to be competent productive organizations, and policies that encourage competent productive organizations are likely to do more to nurture communities of engineering practice than policies that encourage competent lobbying organizations.

The arguments against “mercantilist” policies are two:

  1. The little one: such policies are inefficient, in that the losers lose more than the winners win.
  2. The big one: such policies are not win-win, and economic policy energy is best devoted to things that are win-win–at least in the behind-the-veil-of-ignorance sense of win-win.

Paul Krugman: Trade Deficits: These Times are Different: “In normal times, the counterpart of a trade deficit is capital inflows…

…which reduce interest rates, and there’s no reason to believe that trade deficits reduce employment on net, even if they do redistribute it. But we are still living in a world awash with excess savings and inadequate demand, where interest rates can’t fall (or at any rate not much) because they’re already near zero. That is, we’re in a liquidity trap. And in that kind of world it’s true both that trade deficits do indeed cost jobs and that there are basically no benefits to capital inflows — we already have more desired savings than we are managing to invest.

One indicator of how the rules differ in these circumstances: Remember all the hand-wringing about our dependence on Chinese financing, and how U.S. interest rates would spike if the Chinese stopped buying our bonds? Well, the Chinese have stopped buying bonds and started selling them…. And US interest rates remain very, very low — still under 2 percent on 10-year bonds.

I’m not saying that Trump has any idea what he’s talking about; he doesn’t. But we are living in a world where, for the time being — and maybe for a long time to come, if secular stagnation theorists are right — mercantilism makes a fair bit of sense. But then Keynes could have told you that.

Must-read: Dani Rodrik: “More on the Political Trilemma of the Global Economy”

Must-Read: I find myself more on Martin Sandbu’s side than that of the very-sharp Dani Rodrik in this debate. This is largely, I think, because Dani remains at too abstract a level. The commitment of foreign trading partners to “openness”, whatever that turns out to mean in practice, enlarges domestic political and economic opportunities in some directions. But one’s own government’s reciprocal commitment to “openness”, whatever that turns out to mean in practice, restricts domestic political and economic opportunities in different directions. How much should a government and a people value the gains in the first set of directions? How much should a government and a people regret the loss in the second set?

These are questions that must be answered pragmatically. The devil is in the details. And ideologies–either Friedmanesque rants that globalization is always good or Trumpist rants that “we” are always outmaneuvred in trade deals by shifty foreigners–seem to me profoundly unhelpful here. And so the word “globalization” becomes an obstacle rather than an aid to thought…

Dani Rodrik: More on the Political Trilemma of the Global Economy: “Here are [Martin] Sandbu’s main points and my take on them…

…”if economic integration limits a national democracy’s room for manoeuvre, does it limit a national dictatorship’s opportunities any less?” I think Sandbu’s point is true for some dictatorships, but not all. Today the prevailing worry of progressives is that an oligarchy of financiers, investors, and skilled professionals has captured the polity and is using globalization as a way of imposing its policy priorities. What globalization does for these groups is actually to expand their political opportunities, rather than constrain them…. [In] a democracy… the electorate can decide on their own path… even when it may conflict what a narrowly based, internationally mobile elite want–and that is what hyper-globalization restricts….

“We should beware of conflating economic integration with technocracy.”… In practice, globalization is used to impose a particular technocratic set of rules serving the interests of particular groups. That it need not do so is a valid point for globalization in general, as long as don’t take it as far as hyper-globalization….

“Is [there] necessarily a loss of democracy when the rules are set internationally while most democratic institutions remain nationally rooted[?]… Negotiating rules together is an exercise of national self-determination, not its abrogation.”… As long as we are not trying to eliminate every transaction cost to international trade and investment, there are multiple models of globalization… leaving plenty of space for countries to devise their own social and economic arrangements….

The fact that an international rule is negotiated and accepted by a democratically elected government does not inherently make that rule democratically legitimate…. There are many ways in which globalization actually harms rather than enhances the quality of democratic deliberation. For example, preferential or multilateral trade agreements are often simply voted up or down in national parliaments with little discussion, simply because they are international agreements. Globalization-enhancing global rules and democracy-enhancing global rules may have some overlap; but they are not one and the same thing…. International commitments can be used to tie the hands of governments in both democratically legitimate and illegitimate ways…. The constraints really bind in the presence of a hyper-globalization/deep-integration model (a la Eurozone)…

Must-read: Robert Z. Lawrence and Tyler Moran: “Adjustment and Income Distribution Impacts of the Trans-Pacific Partnership”

Must-Read: Robert Z. Lawrence and Tyler Moran: Adjustment and Income Distribution Impacts of the Trans-Pacific Partnership: “Between 2017 and 2026, when most of the adjustment to the TPP occurs, the costs to workers who will be displaced…

…both from unemployment and lower future wages, will amount to about 6 percent of the agreement’s benefits…. The percentage gains for labor income from the TPP will be slightly greater than the gains to capital income. Households in all quintiles will benefit by similar percentages…. The agreement will confer net benefits to households at all levels of income and will certainly not worsen income inequality…

Must-read: Paul Krugman: “Globalization and Growth”

Must-Read: Paul Krugman: Globalization and Growth: “Brad DeLong… arguing that the really big benefits of globalization come from technology diffusion…

…which make it a much more positive force than I suggest. I used to believe the same thing, and still find myself thinking along those lines now and then. But I’d argue that economists need to be, at the least, upfront about the argument’s limitations. First, it doesn’t come out of the models. As Brad says, the map is not the territory; but guesses about such things are, well, guesses. There was a time when everyone knew that import-substituting industrialization was the key to economic takeoff, based on loose historical reasoning (America and Germany did it!). Then developing countries tried it en masse, and the results weren’t great.

Furthermore, my sense is that nonstandard free-trade arguments tend to involve, often unintentionally, a kind of bait and switch. Economists love to talk about comparative advantage…. Somewhere Alan Blinder said that economists would almost all agree on the slogan ‘Yay free trade.’ But the seeming authority of the comparative-advantage case then ends up being carried over, illegitimately, to arguments for trade that have nothing to do with comparative advantage. Yes, there could be positive externalities associated with trade, but there could be positive externalities associated with lots of things, and Ricardian models don’t give us any special reason to think that the trade ones are more important.

So how would you test such arguments? Well, in a way we did carry out an experiment. In the early 1990s there was a widespread orthodoxy that ‘outward-looking’ development policies were much more favorable to growth than ‘inward-looking’ policies… the rapid growth of Asian economies, which had followed an export-oriented path rather than… import substitution… in the 50s and 60s. The question, however, was whether you would see dramatic acceleration of growth in other places, such as Latin America, when policy shifted away from inward focus. And the answer turned out to be, not so much. Look at Mexico, which did a radical trade liberalization in 1985-88, then joined NAFTA. It has seen a transformation of its economy in many ways; it has gone from an economy that didn’t export much besides oil and tourism to a major manufacturing export power. And the effect on development has been… underwhelming.

So Brad could be right; but the evidence is far from conclusive. I would still argue very strongly that it’s crucial to keep markets open for poor countries. But we should be cautious in our claims about the virtues of free trade.

The benefits of free trade: Time to fly my neoliberal freak flag high!

I think Paul Krugman is wrong today on international trade. For we find him in “plague on both your houses” mode. On the one hand:

Paul Krugman: Trade and Tribulation and A Protectionist Moment?: “Protectionists almost always exaggerate the adverse effects of trade liberalization…

…Globalization is only one of several factors behind rising income inequality, and trade agreements are, in turn, only one factor in globalization. Trade deficits have been an important cause of the decline in U.S. manufacturing employment since 2000, but that decline began much earlier. And even our trade deficits are mainly a result of factors other than trade policy, like a strong dollar buoyed by global capital looking for a safe haven.

And yes, Mr. Sanders is demagoguing the issue…. If Sanders were to make it to the White House, he would find it very hard to do anything much about globalization…. The moment he looked into actually tearing up existing trade agreements the diplomatic, foreign-policy costs would be overwhelmingly obvious. In this, as in many other things, Sanders currently benefits from the luxury of irresponsibility….

But on the other hand:

That said… the elite case for ever-freer trade, the one that the public hears, is largely a scam…. [The] claims [are] that trade is an engine of job creation, that trade agreements will have big payoffs in terms of economic growth and that they are good for everyone. Yet… the models… used by real experts say… agreements that lead to more trade neither create nor destroy jobs… make countries more efficient and richer, but that the numbers aren’t huge….

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…. 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…. Furthermore, as Mark Kleiman sagely observes, the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins—but we now have an ideology utterly opposed to such redistribution in full control of one party…. 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….

And, Paul summing up:

Why, then, did we ever pursue these agreements?… Foreign policy: Global trade agreements from the 1940s to the 1980s were used to bind democratic nations together during the Cold War, Nafta was used to reward and encourage Mexican reformers, and so on. And anyone ragging on about those past deals, like Mr. Trump or Mr. Sanders, should be asked what, exactly, he proposes doing now.… The most a progressive can responsibly call for, I’d argue, is a standstill on further deals, or at least a presumption that proposed deals are guilty unless proved innocent.

The hard question to deal with here is the Trans-Pacific Partnership…. I consider myself a soft opponent: It’s not the devil’s work, but I really wish President Obama hadn’t gone there…. Politicians should be honest and realistic about trade, rather than taking cheap shots. Striking poses is easy; figuring out what we can and should do is a lot harder. But you know, that’s a would-be president’s job…. [But] he 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.

So I guess it is time to say “I think Paul Krugman is wrong here!” and fly my neoliberal freak flag high…

On the analytics, the standard HOV models do indeed produce gains from trade by sorting production in countries to the industries in which they have comparative advantages. That leads to very large shifts in incomes toward those who owned the factors of production used intensively in the industries of comparative advantage: Big winners and big losers within a nation, with relatively small net gains.

But the map is not the territory. The model is not the reality. An older increasing-returns tradition sees productivity depend on the division of labor, the division of labor depends on the extent of the market, and free-trade greatly widens the market. Such factors can plausibly quadruple The Knick gains from trade over those from HOV models alone, and so create many more winners.

Moreover, looking around the world we see a world in which income differentials across high civilizations were twofold three centuries ago and are tenfold today. The biggest factor in global economics behind the some twentyfold or more explosion of Global North productivity over the past three centuries has been the failure of the rest of the globe to keep pace with the Global North. And what are the best ways to diffuse Global North technology to the rest of the world? Free trade: both to maximize economic contact and opportunities for learning and imitation, and to make possible the export-led growth and industrialization strategy that is the royal and indeed the only reliable road to anything like convergence.

So I figure that, all in all, not 5% but more like 30% of net global prosperity–and considerable reduction in cross-national inequality–is due to globalization. That is a very big number indeed. But, remember, even the 5% number cited by Krugman is a big deal: $4 trillion a year, and perhaps $130 trillion in present value.

As for the TPP, the real trade liberalization parts are small net goods. The economic question is whether the dispute-resolution and intellectual-property protection pieces are net goods. And on that issue I am agnostic leaning negative. The political question is: Since this is a Republican priority, why is Obama supporting it without requiring Republican support for a sensible Democratic priority as a quid pro quo?

That said, let me wholeheartedly endorse what Paul (and Mark) say here:

as Mark Kleiman sagely observes, the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins—but we now have an ideology utterly opposed to such redistribution in full control of one party…. 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….

Must-read: NPC Newsmakers: “Feb. 11 Newsmaker Panel Asserts that the Proposed Trans-Pacific Partnership’s ISDS Provision Will Undermine U.S. Courts and Legislative Bodies”

Must-Read: As I understand it, all precedent suggests that ISDS provisions are not a problem for the United States. ISDS panels make their determinations, and as a result other countries gain or fail to gain the right to impose countervailing duties on U.S. exports–and then the negotiations begin, with the first move being the U.S. negotiators say: “Do you really think this company of yours now waving around an ISDS panel ruling has a strong enough case that you want to seriously risk pissing us off?” It is much easier all around for everyone if the ISDS panel rules for the United States–and the pattern of rulings in the ten years we have watched this instrumentality at work strongly suggest that that is how it works.

Of course: things could change. And ISDS panels do rule against other countries’ governments–that is, after all, why the U.S. has put ISDS into this agreement: to give its companies protection.

But the disturbing thing is that I do not understand these institutions very well–neither how they are formally supposed to work, how they work in practice, and why they work the way that they appear to do:

NPC Newsmaker: Feb. 11 Newsmaker Panel Asserts that the Proposed Trans-Pacific Partnership’s ISDS Provision Will Undermine U.S. Courts and Legislative Bodies: “What are the ramifications of the Trans-Pacific Partnership…

…and in particular will the Investor-State Dispute Settlement (ISDS) provision of TPP take the enforcement of U.S. laws out of the hands of the nation’s courts and legislatures in favor of corporate-controlled tribunals? On Feb. 11, at 10 a.m., in the National Press Club’s Bloomberg Room, three experts on trade and investment law will address a National Press Club Newsmaker news conference…. Joseph Stiglitz… Lise Johnson… Ralph E. Gomory


Must-read: Dani Rodrik: “The Trade Numbers Game”

Must-Read: I had thought that we understood rather well why freer trade created substantial winners and losers–that the shifts in the prices of goods from moves to freer trade caused magnified shifts in the rewards to factors that were used intensively in the production of such goods. And the consequences for the overall level of employment seem, to me at least, to be limited to the era of “Depression Economics” that we entered in 2007 and from which we have not emerged: NAFTA did not raise unemployment in the United States.

So I find myself failing to grasp large pieces of the very sharp Dani Rodrik’s argument here:

Dani Rodrik: The Trade Numbers Game: “The Trans-Pacific Partnership (TPP)… is the latest battleground in the decades-long confrontation…

…between proponents and opponents of trade agreements…. The pact’s advocates have marshaled quantitative models that make the agreement look like a no-brainer…. There is no disagreement between the models on the trade effects…. The differences arise largely from contrasting assumptions about how economies respond to changes in trade volumes sparked by liberalization. Petri and Plummer assume that labor markets are sufficiently flexible that job losses in adversely affected parts of the economy are necessarily offset by job gains elsewhere…. Capaldo and his collaborators offer a starkly different outlook: a competitive race to the bottom in labor markets…. The Petri-Plummer model is squarely rooted in decades of academic trade modeling…. By contrast, the Capaldo framework lacks sectoral and country detail; its behavioral assumptions remain opaque; and its extreme Keynesian assumptions sit uneasily with its medium-term perspective….

Economists do not fully understand why expanded trade has produced the negative consequences for wages and employment that it has. We do not yet have a good alternative framework to the kind that trade advocates use. But we should not act as if reality has not severely tarnished our cherished standard model….

The uncertainties do not end with macroeconomic interactions. The Petri-Plummer study predicts that the bulk of the economic benefits of the TPP will come from reductions in non-tariff barriers (such as regulatory barriers on imported services) and lower obstacles to foreign investment. But the modeling of these effects is an order of magnitude more difficult than in the case of tariff reductions…

Must-read: David Becker: “Republican Senator Portman Opposes TPP Trade Deal in Present Form”

Must-Read: An interesting political tack by ex-USTR Portman. TPP doesn’t make any attempts to constrain “currency manipulation”. But it doesn’t contain any provisions that make “currency manipulation” easier. And I, at least, had not thought that the rules-of-origin on auto parts mattered at all…

David Becker: Republican Senator Portman Opposes TPP Trade Deal in Present Form: “Dealing a significant blow to the pact a day after officials from 12 countries signed it…

…Portman, from Ohio, said the Pacific trade deal fails to meet the needs of his state’s workers because it lacks an enforceable provision to fight currency manipulation and because of new, less-stringent country-of-origin rules for auto parts. ‘I cannot support the TPP in its current form because it doesn’t provide that level playing field,’ Portman said…

Must-read: Peter A. Petri and Michael G. Plummer: “The Economic Effects of the Trans-Pacific Partnership: New Estimates”

Must-Read: Peter A. Petri and Michael G. Plummer**: The Economic Effects of the Trans-Pacific Partnership: New Estimates: “The new estimates suggest that the TPP will increase annual real incomes in the United States…

…by $131 billion, or 0.5 percent of GDP, and annual exports by $357 billion, or 9.1 percent of exports, over baseline projections by 2030, when the agreement is nearly fully implemented. Annual income gains by 2030 will be $492 billion for the world. While the United States will be the largest beneficiary of the TPP in absolute terms, the agreement will generate substantial gains for Japan, Malaysia, and Vietnam as well, and solid benefits for other members. The agreement will raise US wages but is not projected to change US employment levels; it will slightly increase “job churn” (movements of jobs between firms) and impose adjustment costs on some workers.