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May 01, 2007

I Asked, The Chairman Answered

A post removed from this one I was responding to the most recent blogland debate on free trade with this lament:

The missing ingredient in this most recent installment of the free-trade discussion is evidence in favor of one story or another, a task that is a good deal messier than writing down models.

As luck would have it, Ben Bernanke has stepped in to fill the void.  Mark Thoma has the whole thing, so I'll stick to the highlights:

According to one recent study that used four approaches to measuring the gains from trade, the increase in trade since World War II has boosted U.S. annual incomes on the order of $10,000 per household (Bradford, Grieco, and Hufbauer ["The Payoff to America from Globalization"). The same study found that removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household. Other research has found similar results. Our willingness to trade freely with the world is indeed an essential source of our prosperity--and I think it is safe to say that the importance of trade for us will continue to grow...

If trade both destroys and creates jobs, what is its overall effect on employment? The answer is, essentially none... To see the irrelevance of trade to total employment, we need only observe that, between 1965 and 2006, the share of imports in the U.S. economy nearly quadrupled, from 4.4 percent of GDP to 16.8 percent. Yet, reflecting growth in the labor force, employment more than doubled during that time, and the unemployment rate was at about 4-1/2 percent at both the beginning and end of the period. Furthermore, average real compensation per hour in the United States has nearly doubled since 1965...

A recent study of twenty-one occupations that are most likely to be affected by outsourcing found that net job losses were concentrated almost exclusively in the lower-wage occupations and that strong employment gains have occurred in the occupations that pay the highest wages [Catherine L. Mann,  "Globalization of IT Services and White Collar Jobs: The Next Wave of Productivity Growth"]...

As I suggested in my earlier post, my instinct is to believe that the issue is not whether trade is a net gain but how to think about distributing those gains, which will almost surely arrive unevenly across the population.  Here, it seems that Bernanke and Alan Blinder find some common cause.  Blinder, via the Wall Street Journal:

Mr. Blinder's answer is not protectionism, a word he utters with the contempt that Cold Warriors reserved for communism. Rather, Mr. Blinder still believes the principle British economist David Ricardo introduced 200 years ago: Nations prosper by focusing on things they do best -- their "comparative advantage" -- and trading with other nations with different strengths. He accepts the economic logic that U.S. trade with large low-wage countries like India and China will make all of them richer -- eventually. He acknowledges that trade can create jobs in the U.S. and bolster productivity growth.

But he says the harm done when some lose jobs and others get them will be far more painful and disruptive than trade advocates acknowledge. He wants government to do far more for displaced workers than the few months of retraining it offers today. He thinks the U.S. education system must be revamped so it prepares workers for jobs that can't easily go overseas, and is contemplating changes to the tax code that would reward companies that produce jobs that stay in the U.S.


Restricting trade by imposing tariffs, quotas, or other barriers is exactly the wrong thing to do. Such solutions might temporarily slow job loss in affected industries, but the benefits would be outweighed, typically many times over, by the costs, which would include higher prices for consumers and increased costs (and thus reduced competitiveness) for U.S. firms. Indeed, studies of the effects of protectionist policies almost invariably find that the costs to the rest of society far exceed the benefits to the protected industry. In the long run, economic isolationism and retreat from international competition would inexorably lead to lower productivity for U.S. firms and lower living standards for U.S. consumers (Bernanke ["Trade and Jobs"] ).

The better approach to mitigating the disruptive effects of trade is to adopt policies and programs aimed at easing the transition of displaced workers into new jobs and increasing the adaptability and skills of the labor force more generally...

Actually, Blinder's prescription is for a sort of labor version of industrial policy.  Again from the WSJ:

He thinks the U.S. education system must be revamped so it prepares workers for jobs that can't easily go overseas, and is contemplating changes to the tax code that would reward companies that produce jobs that stay in the U.S.

Bernanke does not indicate if he would favor so interventionist a strategy.  I would not, but it still looks like about the same page to me, and that page has more and freer trade written all over it.

May 1, 2007 in Trade | Permalink


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There is nothing bad about attempts to improve the educational system - any government should strive for it, regardless of competition from abroad. Targeting preparation for specific jobs that "can't easily go overseas" is more problematic, since who knows which jobs will be under heavy competition in say 15 years. There should be rather a intensive push for overall provision of strong general skills (look at how many kids are poor at reading and writing after leaving schooling), so that you eliminate the bottom segment of extremely low-skilled people. By providing strong general skills, you make the workers much more adaptive to changing conditions.

Rewarding companies for producing jobs that stay in the U.S. is just opening the gates to mass-scale abuse. Any newly open job can then be claimed as a one "that was saved and not transfered abroad".

Posted by: pinus | May 01, 2007 at 11:37 PM

This comment is not totally thought out, but I've always wondered about the benefits of free trade. And I'm pro free-trade by and large. Though I find arguments about fair trade convincing in order to prevent a possible global race to the bottom.

The argument that free trade increases productivity--and wealth--of the entire system makes total sense. Whether it increases productivity and wealth of the components of that system is debatable (as noted above and elsewhere). Components not benefiting may include countries, sectors, or individuals within countries. This is the issue of how benefits of free trade are distributed.

Here's my quandry: I think the benefits should be distributed somehow. But that creates the possibility of a welfare mentality in those receiving the benefits. Whether it be education benefits, unemployment benefits, or otherwise, they could have the opposite effect of what we desire--those not benefiting from free trade indirectly benefit by receiving welfare in one form or another. And it's not clear how effective or efficient this welfare will be.

(Note: to use the term welfare may seem loaded--it's not meant to be, it just seems that redistribution, not matter what form it takes, can be considered a form of welfare).

I'm not sure what to do about it, but this idea bugs me. We've increased the productivity of the entire system by wiping out an entire sector of jobs, for example, and then give welfare benefits to those affected. And those affected are demoralized in some cases.

Is this better than a lower productivity world in which there is less redistribution and less welfare of the form I discuss above? I'm not sure, but it is something I've pondered off and on.

Posted by: T.R. Elliott | May 02, 2007 at 02:17 PM

I am disgusted, utterly disgusted, with this despicable conflation of highly trained people with educated people.
It is the work of the poorly educated numskulls who were trained to write and say any stupid little thing they were paid to blurt out.
As if this disparity in income distribution had anything to do with education; as if those traders and CEOs were geniuses who were making contributions to society that will be remembered beyond the date of their last paycheck; as if the European traders didn't need those canons as they traded freely with the spear chuckers in those otherwise Empty Lands; as if comparative advantage were set in a world free from exploitation...that pits highly trained numbskulls with their canons and directions, against...us, the educated, the Last of the Mohicans.

Posted by: calmo | May 02, 2007 at 02:26 PM

“A recent study of twenty-one occupations that are most likely to be affected by outsourcing found that net job losses were concentrated almost exclusively in the lower-wage occupations and that strong employment gains have occurred in the occupations that pay the highest wages”

Isn’t that exactly what a protectionist would expect? In the short run, there are more jobs for rich people and fewer jobs for poor people. In the longer run, wages adjust, and the rich get richer, while the poor get poorer. That’s what comes out of the Heckscher-Ohlin model with skilled and unskilled labor as the factors, and that’s exactly why people like Paul Krugman are finding trade harder to defend than in the past. I would suggest that the solution involves not just retraining but broader redistributionist policies.

Posted by: knzn | May 02, 2007 at 05:11 PM

The EITC substitute for a decent job? LOL.

"Training" for the middle aged with a family to support? LOL.

This is America. We do prisons better than we do redistribution. Redistribution is a hoax.

The elites wanted their candy, their trade pacts, their union busting, their Congress, their minimum wage, their wars. Now their credibility is shot, in so far as what they've delivered to the American people. "The business of American is business": HAH. Poor, poor richies. So hard to be 'envied'. So hard to wake up to the consequences of the spree.

Posted by: dissent | May 05, 2007 at 09:42 PM

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