Tuesday, 10 June 2008

DeLong on Cowen (updated)

Earlier I made a quick comment on a New York Times article by Tyler Cowen on globalization. Brad DeLong has made a much longer, and more insightful, comment on Cowen's piece. Addressing the issue of role of globalization in the rise in inequality within the United States, DeLong notes that Cowen has three arguments as to why globalisation has only a small role. DeLong writes
First, the biggest benefits of globalization for the world as a whole come from bringing more minds up to speed at the technology research frontier and thus from faster global economic growth--something that is not a driver of increasing inequality in the world economy's post-industrial core but instead an all-boats-lifting rising tide. Second, that the distributional impact of globalization for the world as a whole is positive, not negative--it is poor people in China, India, Indonesia, and Mexico who gain the most. Third, that there is something wrong with the Stolper-Samuelson intuition--which Dani Rodrik put best, somewhere I cannot now find--that freeing up trade must create losers and that trade can have big benefits only if it creates big losers.
With regard to the third point, which is the interesting one, DeLong says
In the neoclassical Heckscher-Ohlin-Vanek framework, freeing up trade is good for owners of "abundant" factors of production in the trading country and bad for owners of "scarce" factors. The efficiency gains from trade--the increase in the size of the pie--goes roughly with the square of the differences in factor proportions between countries, but the redistributive gains and losses go roughly linearly with the differences in factor productions. Thus for freeing up trade to be bad for the greater part of the citizens in the country, two things must all be true:

* The bulk of the people must have little "ownership" of the abundant factors which reap the gains from freeing up trade--their income must depend overwhelmingly on the returns to the "scarce" factors of production.
* The differences in factor proportions that generate the possibility of gains from trade must be small in order to make efficiency gains small relative to redistributional shifts.

The argument as applied to the United States cannot be that differences in factor proportions are small: differences in capital-labor ratios across the U.S. in China are on the order of 20-to-1. So the argument must be that the abundant factors of production are things like capital, organization, and technology, which have concentrated ownership. The scarce factor of production is labor. Hence free trade will be bad for the majority of voters because their incomes depend only on returns to the "scarce" factor--and those returns will drop with free trade. This goes against the likelihood that the trully scarce factors of production tend to be, well, scarce. and so not many potential voters will own a lot of them.

But in actual fact to argue that the incomes and living standards of the bulk of Americans depend on the real wages of raw labor and of raw labor alone seems to me to be equally implausible. A very large number of factors give Americans a substantial stake in the returns to--a degree of "ownership" of--the "scarce" factors. First there is the government, which is the property of all but which raises its money by disproportionately taxing the incomes of the "scarce" factors (for that is, after all, where the money is). Second, there are all the degree of formal and informal cross-ownership institutions like labor rent sharing, efficiency wages, local monopolies, and other deviations from perfect competition that give all stakeholders rather than formal equity owners alone a share in the value of the capital, the technology, and the organization: we are all stakeholders in Wal-Mart, if only through the pressure its competition exerts on other businesses' prices.
But the last paragraph is the most interesting as DeLong writes
I suspect that we are, right now, seeing the peak of anti-globalization economic agitation in the United States. The fall in the real value of the dollar against European currencies and its coming real value fall against Asian currencies mean that export and import-competing sectors are likely to be expanding their employment rapidly over the next several years. It would be a pity if a look back deranged our policy going forward, especially if it is because trade is perceived to be a problem by politicians even though it has ceased to be perceived as a problem by voters.
It will be interesting to see if we really are seeing the peak of anti-globalization in the US. One would hope so. But one thing is clear, politicians in the US still think trade is a problem, just look at the anti-trade statements of Barack Obama, the Democratic nominee for President.

Update: At the Free Exchange blog they comment on the Trade debate of the day. There is more from Cowen here. Mark Thoma comments here and here.

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