Monday, 7 April 2008

Minto on trade (updated x2)

Is it possible to know less about economics than John Minto? I am really beginning to think not. His recent piece in the Christchurch Press on the China free trade deal is a good example as to why I think this. Minto writes
The government claims New Zealand will benefit from millions of dollars in extra trade which will grow our economy and make us richer.
On this point the government is right in the sense that trade will increase the average national income. That means, there will be winners and losers from trade but the winners win more than the losers lose. Hence on average we gain. Another way to look at this result is that the winners can compensate the losers and still be better off.

Minto goes on to note that
Back in the late 1980s New Zealand enjoyed a trade surplus with China. We exported more than we imported.
Enjoyed? He goes on
This reversed dramatically when import tariffs were removed or phased out. There was a flood of cheap imports from China which turned the trade surplus into a billion-dollar deficit
Why would we care about a trade surplus (deficit) with anyone? Mr Minto has a trade deficit with his supermarket I'm sure, but does he care? Does he lie awake at night trying to work out ways to "fix" his deficit with the supermarket? If not, why does he worry about a deficit with China? This imports bad, exports good line of thinking is little more than mercantilism. One must ask why the mercantilist myth is still alive today. After all Adam Smith showed the errors inherent in mercantilist thinking more than 200 years ago. Is Minto really that far behind the times?

Later Minto tells us that
The Ministry of Economic Development has estimated 16 jobs are lost for every $1 million of imported products we could make here.
A meaningless number if every there was one. To follow this "logic", does it mean that the South Island loses 16 jobs for every $1 million of products imported from the North Island? If so then the South should stop trading with the North. But would this really help the South?

It should be pointed out to Mr Minto that the effect of trade on the total number of jobs in an economy is approximately zero. As Paul Krugman has written,
Constant employment is a reasonable approximation: The standard textbook version of the Ricardian model assumes full employment in both countries. But in reality unemployment is constantly a concern of economic policy -- so why is this the usual assumption? There are two answers. One -- the answer that Ricardo would have given -- is that international trade is a long-run issue, and that in the long run the economy has a natural self-correcting tendency to return to full employment. The other, more modern answer is that countries have central banks, which try to stabilize employment around the NAIRU; so that it makes sense to think of the Federal Reserve and its counterparts acting in the background to hold employment constant. This is not at all the way that non-economists think about the issue. Both supporters and opponents of free trade normally claim that their preferred policies will create jobs; free-traders are forever warning that the Smoot-Hawley tariff caused the Great Depression. And the alternative view does not come at all naturally. During the NAFTA debates I shared a podium with an experienced, highly regarded U.S. trade negotiator, a strong NAFTA suppporter. At one point a member of the audience asked me what I thought the effect of NAFTA would be on the number of jobs in the United States; when I replied "none", based on the standard arguments, the trade official exploded in anger: "It's remarks like that which explain why people hate economists!"
Trade will move jobs around an economy but has little effect on the total number of them.

It should also be noted that in a similar way jobs could be created by stopping the use of modern technology. Just imagine how many more jobs there would be in New Zealand in the production of radios, or any good for that matter, if only manufacturers would destroy all of their computers and other technology and replace assembly line production with handicraft manufacturing! Trade displaces (and creates) jobs in the same way as technology does. So if you don't want trade, you also don't want technology improvements.

Professor of Economics at George Mason University, Russell Roberts, makes these points in the context of NAFTA in this blog posting
The most well-known think tank that views NAFTA negatively, the Economic Policy Institute, argues that between 1993 and 2004, Ohio lost 49,886 jobs because of NAFTA.

Not 50,000, but 49,886.

For the U.S. as a whole, EPI estimates that 1,015,290 jobs have been lost. Not a million, but 1,015,290.

But it's not just the precision of the estimate that makes the calculation ridiculous. It's the methodology that measures jobs displaced (the verb the EPI study usually uses) by assuming that imports destroy jobs and exports create jobs. With this methodology, a trade deficit reduces the number of jobs.

By this logic, America would have fewer jobs if foreigners suddenly decided to give us cars rather than selling them to us. Free foreign cars would destroy jobs in the American car industry. Inexpensive foreign cars do the same thing. So do cars made by Americans that are produced with robots instead of human welders. If you believe that imports destroy American jobs, so does better technology that makes workers more productive.

If the EPI was as anti-technology as they are anti-trade deficit, they could go out and measure the number of buggy manufacturing jobs destroyed by the auto industry and the number of eyeglass manufacturing jobs destroyed by lasik surgery or the number of jobs in the medical profession destroyed by pharmaceutical innovation. Surely those numbers could be estimated with some rough accuracy.

And surely they would tell us nothing about whether the world is a better place because of those innovations. And they would tell us nothing about the impact of those innovations on total employment.

But most of us understand that higher productivity doesn't mean fewer jobs in the United States overall. There are two ways to see it. One is to see the increase in the total number of jobs over time as we have replaced people with machines in every corner of the economy where it's possible. So this suggests that technology doesn't destroy jobs.

The same is true of the apparent effect of trade deficits. Manufacturing employment was shrinking as a share of the total employment between 1950 and 1975 when the trade deficit was essentially zero. We run a trade surplus in agriculture. Yet agricultural employment shrinks rather than rises.

There appears to be no relationship between the number of jobs in America (or in Ohio for that matter) and the trade deficit or increased productivity.
May be the MED should be looking into the number of jobs lost due to the use of technology which has made New Zealand's workers more productive.

Minto then says
Is it free trade when New Zealand workers are expected to compete with workers paid less than $1 an hour for 16-hour days?
The short answer being yes. It doesn't matter what the difference in wages is as long as the difference in productivity is greater. So long as the New Zealand-China productivity difference is greater than the New Zealand-China wage difference New Zealand workers can, and will, compete.

Mr Minto should enrol in a first year economics course, he would learn much. But he would then have to buy the textbook ... and that is most likely to be imported.

Update: Not PC makes the point that Even free-ish trade is a good thing

Update 2: Kiwiblog outlines the China FTA Details and adds a Well done Helen & Phil.

1 comment:

Anonymous said...

If Mr Minto needs a course in economics, then you certainly need a course in national and global peace, justice and human rights. I think you can get these 'Outside the Square:For Dummies' and 'Empathy: For Dummies' books at any good bookstore. Hey, you might be able to get a discount if you buy both!

economic cost versus human cost
think about it