April 4th, 2009


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.

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