There’s been a lot of criticism from free-market types since President-elect Trump announced the Carrier deal, which will keep around 1,000 jobs in
Ohio Indiana (see the Larry Summers take here). Some of that criticism is warranted–in an ideal world, it would indeed be ideal to let the market decide who the winners and losers are. But there is also a lot of hypocrisy in many of the over-the-top reactions.
As an obvious example, I don’t recall much hand-wringing about the excessive labor market manipulation built into the comprehensive immigration reform legislation that President Obama and Senators Schumer, Rubio, et al, tried to ram through Congress a few years ago. So I thought it’d be fun to illustrate just how visible the invisible hand became in that context.
This screenshot is from bill S.744, describing job categories to be covered by a proposed “agricultural worker program.”
And this screenshot is the section of the bill stating what the salary must be for such jobs–down to the penny and year by year.
It seems to me that if the objective is simply to criticize government intervention in the labor market, the comprehensive immigration reform legislation would have provided ample opportunities. Do we really need Stalinist five-year plans stating precisely what the wage rate must be in particular occupations?
Which brings me to a related question: Who paid whom to get those hourly wage rates written into law?
Responsible nationalism: “The idea that the basic responsibility of government is to maximize the welfare of citizens, not to pursue some abstract concept of the global good. Closely related to this is the idea that people want to feel that they are shaping the societies in which they live” (Larry Summers).
Now that as central a figure in the establishment as Larry Summers has made it respectable to be a “responsible nationalist,” I think it’s time to start delineating the boundaries that would allow a person to be classified as such. So here are a couple of examples that can help us decide if we are a responsible nationalist or a “protectionist-xenophobe.”
Continue reading “Responsible Nationalism: A Quiz”
Many economists are so religiously wedded to their models that it takes an awful long time, and an awful lot of contrary evidence, to shake them from what they learned in graduate school. We are now in the midst of such a reappraisal when it comes to globalization in general, and immigration in particular. Larry Summers’ new oped in the Washington Post illustrates just how much momentum this rethinking has gathered.
It is clear after the Brexit vote and Donald Trump’s victory in the Republican presidential primaries that electorates are revolting against the relatively open economic policies that have been the norm in the United States and Britain since World War II. If further evidence is needed, one need only look to the inability of Congress to pass legislation on immigration reform and the observation that the last four candidates left standing in the U.S. presidential contest all oppose the Trans-Pacific Partnership…Studies are produced about the jobs created by trade agreements, the benefits of immigration and the costs of restrictions on trade. In most cases, certainly including the cases for TPP and against Brexit, the overall economic merits are clear. But in this advocacy there is a kind of Gresham’s Law (the economic principle that bad money drives out good) whereby bolder claims drive out more prudent ones, causing estimates to often be exaggerated and delivered with far more confidence than is warranted. Over time, this has caught up with the advocates of integration.
And it’s about time, I would add!
Continue reading “Promises, Promises”
Paul Krugman had a very interesting blog post about trade yesterday. Here’s some of what he said (but it’s definitely worth reading in full):
Much of the elite defense of globalization is basically dishonest: false claims of inevitability, scare tactics (protectionism causes depressions!), vastly exaggerated claims for the benefits of trade liberalization…, hand-waving away the large distributional effects that are what standard models actually predict…The conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins…But it is fair to say that the case for more trade agreements…is very, very weak.
I sent the copyedited draft of my forthcoming book, We Wanted Workers, back to Norton a couple of weeks ago, and I couldn’t help but have a feeling of déjà vu as I read Krugman’s take on the elite argument for free trade. Sections of my book, particularly the policy discussion in the final chapter entitled Who Are You Rooting For? read just like Krugman’s post–except I need to change a word here and there. Here’s my rewriting, where I’ve underlined my changes:
Much of the elite defense of immigration is basically dishonest: false claims of inevitability, scare tactics (if you disagree, you are a racist or a xenophobe), vastly exaggerated claims for the benefits from immigration,…hand-waving away the large distributional effects that are what standard models actually predict…The conventional case for more immigration relies on the assertion that the government could redistribute income to ensure that everyone wins…But it is fair to say that the case for more immigration…is very, very weak.
We are living in interesting times indeed.
UPDATE: Some people seem to have totally missed the point of this post and interpreted it as saying that Krugman had written something similar to what I had written. Perhaps I didn’t phrase the post carefully, but that is a completely wrong interpretation. Note that I introduce the last quote in the post as my “rewriting” of what Krugman wrote. The point I am trying to make is that the exaggerations that people make in defense of trade (and that Krugman so nicely captured) are the same as the exaggerations made in defense of immigration.
David Autor, David Dorn, and Gordon Hanson have been producing a steady stream of very important papers that examine and measure the labor market impacts of trade. Their latest NBER working paper is a really nice one. Let me quote from the abstract:
China’s emergence as a great economic power has induced an epochal shift in patterns of world trade. Simultaneously, it has challenged much of the received empirical wisdom about how labor markets adjust to trade shocks. Alongside the heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences. These impacts are most visible in the local labor markets in which the industries exposed to foreign competition are concentrated. Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income.
I was struck by how the very slow adjustment reduces the short-run gains from trade to nearly zero:
The mobility costs that rationalize slow adjustment imply that short-run trade gains may be much smaller than long-run gains…Using a quantitative theoretical model, Caliendo, Dvorkin, and Parro (2015) find that in the immediate aftermath of a trade shock, constructed to mimic the effects of growth in U.S. imports from China, U.S. net welfare gains are close to zero.
This reappraisal about the net benefits from trade is happening concurrently with a reappraisal of the gains from immigration, that other aspect of globalization that generates even more controversy. A recent post by Branco Milanovic entitled “Migration’s Economic Positives and Negatives” shows the scope of the rethinking.
Migration, by raising incomes of the migrants…, is the most potent force for the reduction of global poverty, as well as for the reduction of global inequality…
However, I think that this is not so simple. There may be also some negative economic effects to consider. I see three of them. First, the effect of cultural or religious heterogeneity on economic policy formulation…Second, cultural differences may lead to the erosion of the welfare state…Third, migration might have important negative effects on the emitting countries…
We have, I think, to take into account also the negative economic effects of migration.
I am not so sure that Milanovic identified the most important adverse effects that we need to consider, but they are certainly effects worth pondering. It is the possibility that migration has many unintended consequences, and that some of these consequences might not be so beneficial, that I tried to address more formally in my recent JEL paper.
There is a very simple starting point for trying to understand the strange dynamics of the 2016 electoral cycle in the United States (and the ongoing political upheaval in Europe). Why exactly did it take so long for the obvious insights offered by the “new” trade literature and the reassessment of immigration to filter up the food chain and penetrate elite thinking?
By the way, this all reminds me of a very good and prescient book written by my colleague Dani Rodrik back in 1997: Has Globalization Gone Too Far?