The developed economies as a whole will still benefit hugely from trade with emerging economies. Increased competition and greater economies of scale will boost the growth in productivity and output. Consumers will enjoy lower prices and a greater variety of products, and shareholders will enjoy higher returns on capital. Although workers will continue to see their pay squeezed, they can still gain as consumers or as shareholders... [G]lobalisation is benefiting America's economy... But in practice the average family has not seen such a gain because much of it has gone to those at the top or into profits. This explains the lack of support for globalisation from ordinary people. Unless a solution is found to sluggish real wages and rising inequality, there is a serious risk of a protectionist backlash. Rather than block change, governments need to ease the pain it inflicts in various ways: with a temporary social safety-net for those who lose their jobs; better education to equip workers for tomorrow's jobs; and more flexible labour markets to encourage the creation of new jobs... More controversially, governments may need to redistribute the benefits of globalisation more fairly through the tax and benefits system.
As long-time readers may know, this sort of rehash of the "free trade" catechism makes my blood boil. Why? Because I am deeply, pro-free-trade and proglobalization, and this sort of palaver threatens to discredit these important projects for a generation, when the current nightmare masquerading as free trade unwinds. As Brad Setser has noted, what is at issue is not the globalization per se, but the form that globalization is now taking that is the problem. Under this globalization, not some Econ textbook idealization, The Economist's case simply does not hold. For example:
Consumers will enjoy lower prices and a greater variety of products, and shareholders will enjoy higher returns on capital. Although workers will continue to see their pay squeezed, they can still gain as consumers or as shareholders.
These statements have simply been untrue, empirically, for American workers in the last five years, and the future looks even bleaker. Despite remarkable efforts of Wal-Mart and heavily subsidized Asian exporters, the median US worker has not seen lower prices, relative to the value of her labor. Living as a typical American has grown more expensive, when measured in median-worker-hours, not less, despite that worker's apparently increased productivity. And this during a period in which supply chain innovations and an artificially strong dollar (vis Asia) have blown strong, disinflationary headwinds. Should the US dollar reprice, the road will only get harder.
The median worker, having been unable to benefit from globalization as a consumer, can hardly be expected to do so as a shareholder. A rising real cost of living implies less savings, or what we observe in fact, dissaving. At the same time workers are losing the purchasing power of their labor, they are losing the ability to participate in increasing returns to capital.
I could rant on and on about the patronizing incoherence of The Economist piece. [*] But enough. Let's get to the root of the problem: This globalization has proceeded in a manner that violates the assumptions of the traditional (and correct!) case for free trade. The problem is not that emerging market labor is "too cheap", or that "the global capital-labor ratio" has shifted. It is that advanced countries, especially the United States, are not paying for the goods and services received with the current provision of goods and services in exchange, but instead with promisary notes that may or may not be honored in real terms. The real-economy case for free trade is based on the idea of each nation producing as much and as best as it can in the domains in which it has comparative advantage, and exchanging that production for what others produce well. The exaggerated use of credit in international exchange (visible in the stockpiled reserves of emerging market central banks and national investment funds) has turned this case on its head. Rather than shifting production in "advanced economies" to align with changing comparative advantage, credit-based globalization encourages a retreat from tradables production altogether, as no real goods or services need be exchanged to receive tradables from elsewhere. The traditional case for free trade is simply not compatable with a regime in which some countries persistly provide, and others persistently accept, credit in exchange for real goods and services.
Which leads me to the question that serves as the title of this essay. Advanced economies don't necessarily need tariffs, or subsidies, or any of the traditional arsenal of policies that fall under the rubric and epithet of "protectionist". All they need to do is insist, to others and to themselves, on "paying cash, not credit". Although intuitive, this formulation is strictly speaking meaningless, since modern money is a form of debt. Perhaps a better way of stating this is that advanced economies should, in fact make broadly balanced trade a non-negotiable policy objective, not as a form of protectionism, but in order to uphold the assumptions and preconditions required to ensure that free trade is beneficial.
A balanced trade policy could, and might sometimes need to be, enforced through measures that look atavistically protectionist. But not usually. Policies like the one Warren Buffet has proposed would be reasonable. Or the US Fed's famous "dual mandate" could simply be expanded to a "triple mandate", in which balanced trade is an explicit objective. When Americans, directly or via governments, are buying too much on credit from trade partners — when US trade is deteriorating out of balance — the Fed should increase the cost of taking on more debt. (In the short run, that might conflict with the Fed's other mandates. But in the long run, full employment requires an economy that produces tradables sufficient to pay for wage-earners imports.)
Free trade is a great idea, when it is real goods and services being traded, rather than promises which will either be painfully kept or painfully broken. We should give it a try.
- 19-Sep-2006, 8:30 p.m. EET: Took out some wordiness ("dishonest palaver" becomes palaver; "enormously important" becomes important).
|Steve Randy Waldman — Tuesday September 19, 2006 at 9:00am||permalink|