Monday, December 13, 2004

Stupid Economists

Economists will tell you "free trade good for all countries." Now, theoretically at least, that's somewhat (though not actually entirely) true. But, too many implicitly, though they know better, make the additional rhetorical leap that "free trade good for all people." It shouldn't actually be a big deal for a news magazine to point out that freer trade doesn't actually benefit all people.

The basic issue is that, theoretically (depending on the model), the gains from free trade offset the losses. In other words, the size of the pie increases unambiguously. And, as long as the size of the pie increases, in principle the winners could compensate the losers (because they're so generous, or through forced redistribution, or whatever).

But, given this what can we make of the idiotic quote from Dartmouth economist Matthew J. Slaughter. He says:

I'm worried that rising anxiety among higher-skilled workers will erode support for continued globalization in the U.S.

By anxiety we of course mean "concerns about loss of jobs and income." So, Slaughter seems to take a fetishist's view of globalization/free trade. It's good in and of itself. But, if significant numbers, or even a majority, of voters are made worse off by 'globalization,' then we would expect them to vote their self-interest -- less free trade.

Or, let's put it another way. Suppose "free trade" increases GDP by 100 billion overall. However, 60% of the population actually lose a total of $50 billion income, while the other 40% gain a total of $150 billion. For a majority of the population this is a bad deal. Is it good economic policy? Well, that depends on your social welfare function. The problem we have these days is that the default social welfare function is simply equal to "GDP." Policies which make a majority of the population worse off shouldn't be enacted simply because they get Tom Friedman excited.