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Net losers with "free trade" - King Rat
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Net losers with "free trade"
King Rat - April 4, 2009 8:26 am
Container Ship

Container Ship

I’m currently reading The Myth of the Rational Voter: Why Democracies Choose Bad Policies (New Edition) (watch for a review over at Rat’s Reading eventually). While I love reading about economics, too often economists simplify things when arguing.

One area that frequently comes up is free trade. Libertarian and market-religion economists love to push free trade over all. I’m generally a fan of free trade, but one argument in favor of it bothers me: free trade improves everyone’s wealth/income/economic standing. This is not true. A better phrasing is that free trade improves a nation’s net wealth. But within the nation, some individuals will become net winners and some will be net losers. Under free trade over the long run, the gains from the net winners will be more than the losses for the net losers. But there will be net losers, particularly in the short run.

To illustrate, I shall pick a commodity. I’ll call the commodity airplanes. We might have one maker of planes in the country. For this illustration I’ll call that manufacturer Boeing, and I’m going to assume it has one owner. We might have one manufacturer because of protectionism from the government. (And in reality, Boeing receives significant subsidies from the U.S. government in several forms.) The protectionism will result in higher costs for airlines and thus higher prices for consumers, both for personal travel as well as for good shipped via airplanes.

If the U.S. were to eliminate the favored status for Boeing, as a whole we’d be better off. Foreign competition (and perhaps domestic as well) would lower the prices of airplanes. Travel would become cheaper and goods shipped via airplane would as well. We’d save a lot of money in small amounts that add up.

There would be one big loser though: the owner of Boeing. He’d lose lots of money.

Overall, the U.S. would be better off because the savings from all those cheaper goods and travel would (more than likely) be more than what the owner of Boeing lost. As a whole, we’re better off. But not everyone sees the same benefit and in particular the Boeing owner sees a huge loss relative to his former position.

Too often I read economists glossing over this fact that some folks are net losers from free trade. We are not all better off because of free trade. A better phrasing would be that most of us are better off because of free trade. There’s lots of different ways that can be framed. It could be looked at as protected industries stealing from the public and deserving nothing. It could be that the public should compensate the formerly protected in return for removing protection. But there isn’t any magic that turns everyone into winners.

Some economists believe that this distinction shouldn’t be made publicly. If free trade isn’t promoted as being a winner for everyone, the losers will band together and become special interests and could convince voters to be protectionist. In order to keep us on the march towards libertarian free trade with gains for most of us, we have to ignore the losers. One clue that an economist believes the distinction shouldn’t be made is if the economist has a position with the American Enterprise Institute or the Cato Institute. Often folks making such arguments aren’t economists at all, but pundits with some economic knowledge. (Yes, I fully realize I am a non-economist making economic arguments.)

In the early parts of the book, Bryan Caplan uses some phrasing that falls into this trap. I don’t think he’s one of the everyone’s a winner crowd. He’s a professor at George Mason University where folks like Tyler Cowen and Alex Tabarrok also teach (they run Marginal Revolution, an excellent econ blog). My view of GMU is that it is a home for non-dogmatic economic libertarians. Which is kind of where I find myself on the economic political spectrum. Kind of.

Now, back to The Myth of the Rational Voter.

Image Container Ship by Nedster78 used under a Creative Commons Attribution Non-Commercial ShareAlike 2.0 license.

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Comments
From: (Anonymous) Date: April 6th, 2009 12:38 am (UTC) (Link)

We'd all lose!

In your Boeing example, you say we'd all benefit by the loss of Boeing because air fares would become cheaper. You're making the same mistake made by all supporters of unfettered free trade - forgetting that consumers are also workers. The loss of those thousands of Boeing jobs, casting all those people back into the labor pool, would put downward pressure on everyone's wages across the country. The cheaper air fares would be more than offset by lower wages (or wages that fail to keep pace with overall inflation).

Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the wealthiest nation on earth into a skid row bum, literally begging the rest of the world for cash to keep us afloat. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.2 trillion. What will happen when those assets are depleted? Today's recession is the answer.

At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. trade policy. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world's population.

While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)

Pete Murphy
Author, "Five Short Blasts"
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