This post first appeared on May 8, 2007
The debate among Serious Economists about the benefits of free trade continues, and Dani Rodrik continues to take a dispassionate look at the data and the models.
This post, although a bit geeky, is intriguing because Rodrik dissects an analysis cited by Bernanke in a recent speech, which found that the benefits of free trade per US household since World War II are roughly $10,000, and full liberalization would generate another $4,000 to $12,000 per HH. Rodrik finds those numbers to be “grossly inflated” and explains why in “The Globalization Numbers Game.”
At the end of the post, Rodrik chides his peers for goosing numbers to make their case:
What puzzles me is not that papers of this kind exist, but that there are so many professional economists who are willing to buy into them without the critical scrutiny we readily deploy when we confront globalization’s critics. It should have taken Ben Bernanke no longer than a few minutes to see through Bradford et al. and to understand that it is a crude piece of advocacy rather than serious analysis. I bet he would not have assigned it to his students at Princeton. Why are we so ready to lower our standards when we think it is in the service of a good cause?
There is a simple answer: because with honest numbers, the case may not be compelling. These models (as I understand them, which admittedly may not be perfectly) rest on certain assumptions, many of which do not operate in practice. Thus, there is the real possibility that adjusting any model’s results to more closely approximate real world conditions may reduce (or improve) the theoretical benefits to open trade. Give that many observers believe that America’s free trade deals tend to favor its corporations rather than the population as a whole, it seems more likely than not that any rectification of theory to reality would lower the level of benefits.
If the economic benefits of trade are less than compelling, it then becomes fair to talk about intangibles: job losses, destruction of communities, loss of capabilities. I say intangible not in the sense that one can’t assign dollar values to some of them, like employment losses, but that there are also non-monetary considerations too. For example, we consider home ownership to be a good thing. Why? Well, presumably because it’s of economic benefit to the owner. Yet, as we have observed, when you factor in lowered labor mobility, and the fact that some buyers may not get the tax bennies (either by being in low income cohorts or by the operation of AMT), the financial benefits aren’t always as clear cut as the party line suggests. One of the big, often unstated reasons to encourage home ownership is that it (presumably) promotes stable communities. If that value is an important part of government policies to foster home ownership, shouldn’t it also be a consideration in weighing the pros and cons of trade liberalization?
That’s why the free trade advocates don’t want to put forward more honest numbers. They might not win the debate.
From Rodrik:
Many many years ago …, I heard Gary Hufbauer tell an anecdote at a conference on international trade. A government economist is called in by his superior, who tells him “Look, I have to make a case for this policy in front of Congress, and I need a number real bad.” The economist responds, “well, I haven’t done a proper analysis, so I can give you a real bad number.” Perhaps it was a true story based on Gary’s own government experience.
I am reminded of this story by Mark Thoma’s post, which focuses on the magnitude of the gains from globalization. He says “there’s something important that’s generally missing from the attacks on globalization’s supporters, actual evidence.” He refers to a Bernanke speech and at length to a paper which Bernanke cites by Bradford, Grieco, and Hufbauer (yes, the same Hufbauer). The Bradford et al. study argues that removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household (or 3.4-10.1% of GDP). That is a whole chunk of change! Thoma writes:
Whatever the theory says, the evidence in this paper and the evidence more generally is pretty clear, globalization has large net benefits….
If you disagree that trade benefits the US overall, what are the problems with the econometric methodology used to produce these results or the results in other papers coming to similar conclusions? Saying the results must be wrong because they don’t support your point is not an argument. What specifically in the data, estimation procedures, etc., do you think is problematic and leads to the wrong result? Are there other notable academic papers that come to different conclusions? If so, what is the source of the difference in the estimates? Is it the data, the estimation technique, the theoretical assumptions, or what? Help us to understand why we should be doubtful about the results Bernanke cited, or about the results of other papers reaching similar conclusions.
As Thoma says, we cannot dismiss “evidence” just because we disagree with it. …[W]hile I would not quarrel with the assertion that globalization increases the size of the pie for the U.S., I do have a big quarrel with the kind of numbers presented by Hufbauer and company. They seem to me to be grossly inflated. Let me take up Thoma’s challenge and explain why.
First a reality check. The standard partial equilibrium formula for calculating the gains from moving to free trade is 0.5 x [t/(1+t)]^2 x m x e, where t is the tariff rate, m is the share of imports in GDP, and e is the (absolute value of the price elasticity of import demand). In the U.S. average tariffs stand in low single digits and imports are less than 20% of GDP. There is no way of tweaking this formula under reasonable elasticities that would get us a number anywhere near the Bradford et al. estimates. For example, using the generous numbers t = 0.10, m = 0.2 and e = 3, the gains from moving to complete free trade are a meager 0.25% of GDP (compared to Bradford et al.’s lowest estimate of 3.4% of GDP).
Now of course this is a back-of-the envelope calculation, and in particular it ignores general-equilibrium interactions–both across sectors within the U.S. and among countries. What if we take those into account? There is a cottage industry of computable general-equilibrium models which attempt to do just that. … The most accomplished work along these lines takes place at the World Bank and at Purdue. A representative recent estimate comes in a paper by Anderson, Martin, and van der Mensbrugghe–hardly a bunch of rabid anti-globalizers. Their bottom line for the U.S.: full liberalization of global merchandise trade would eventually increase U.S. income by 0.1% by 2015 (see their Table 2). No, you did not read that wrong. The gain amounts to one-tenth of one percent of GDP! (And the bulk of it comes not from the liberalization in the U.S., but from the terms-of-trade effects of other countries’ liberalization.) Is this number right? I have no clue. But at least it passes the test that it is consistent with first principles.
So how come Bradford et al. get wildly different numbers? Some of the difference is due to Bradford et al.’s attempt to take into account liberalization in services as well as in merchandise trade. But that is only a small part of the story. The real action is in the non-standard methodological choices made by Bradford et al.–choices which are designed to generate large numbers.
Bradford et al. report three different methods of arriving at their estimates. One is based on a University of Michigan computable general-equilibrium model with increasing returns. As I have already discussed (see point 5 in this post), increasing returns greatly enlarge the range of possibilities from trade opening. You can easily magnify the gains from trade, as well as produce losses, depending on how you build your model. The model Bradford et al. rely on is designed to do the former (surprise, surprise!). The results are entirely model-driven, and it is hard to see how they could count as “evidence.”
The second approach is based on estimating the gains from price convergence. The basic idea is that removing remaining restrictions on trade in goods and services should equalize prices at home with those abroad (making due allowance for transport costs). The difficulty with this is that the bulk of these price discrepancies today arise not from trade restrictions per se, but from jurisdictional discontinuities that arise from differences in legal regimes, regulatory systems, and currency arrangements across countries. If you want to believe that globalization will yield full price convergence, you must also believe that it is practical and desirable for the U.S. to harmonize its laws and regulations with those of its trading partners and to join a currency union with them. (To imagine what this might look like, you may want to think of the contortions that the EU is going through–with its common currency, European Court of Justice, 80,000-plus pages of regulations, and huge inter-regional transfers–in order to achieve a “single market” on a much smaller scale and among an already like-minded set of countries.)
The final calculation is based on an econometric estimate by Andy Rose of how much a regional trade agreement raises the volume of trade. At least that’s what Bradford et al. say. When I checked out Rose’s paper, I could not find the number that Bradford et al. use. (Rose says “belonging to a regional trade agreement raises bilateral trade by (exp(1.17)-1»)222%,” whereas Bradford et al. use 118%, without explanation). In any case, Rose explicitly discounts his own estimate (pp. 9-10), saying that it is too large to be credible and too large by the standards of other findings in the literature.
I don’t really mean to pick on Bradford et al. (although as a particularly egregious example, their paper fully deserves it). But as Thoma rightly says, we can move the discussion forward only when we present specific critiques of the work out there that disagrees with our own conclusions. So consider this an exercise in that vein.
What puzzles me is not that papers of this kind exist, but that there are so many professional economists who are willing to buy into them without the critical scrutiny we readily deploy when we confront globalization’s critics. It should have taken Ben Bernanke no longer than a few minutes to see through Bradford et al. and to understand that it is a crude piece of advocacy rather than serious analysis. I bet he would not have assigned it to his students at Princeton. Why are we so ready to lower our standards when we think it is in the service of a good cause?
Come to think of it, did I not write about this earlier?
Thoma comments:
I can’t say whether Bradford et al. intentionally made “non-standard methodological choices … designed to generate large numbers” in order to sell their case rather than the choices they believe give us the best answer to the question. They will have to speak to that themselves. But let me emphasize that we are not debating whether benefits from trade exist for the U.S., but rather about the size of the gains.
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This sums up the lies of the neoliberal ideology well, and does so far beyond what Rodrik explicitly discusses.
The point is well made that alleged pro-globalization “evidence” like in a shabby paper like this always depends upon cherry-picking alleged benefits while eliding costs, doing both based upon usually concealed ideological assumptions. As he points out with the example of “home ownership” policy, the ideological cherry-picks and elisions of the globalizers where it comes to “free trade” itself usually directly contradict the policy those same cadres support in other contexts.
But the problem is far more elemental than that. Every quote in the piece is riddled with the Big Lie that there’s such a thing as “the US” whose “economy” can be measured to benefit from “free trade”. But as Yves points out, but both Thoma and Rodrick intentionally cover up with implicit lies, there’s no such thing as “the US economy” which can be said to benefit or suffer from any particular policy. The question in everything is always, cui bono?, Who benefits? Any number in any “study” like this will be fraudulent by design, since it’ll have been compiled with the deliberate goal of submerging the true class war data in a fraudulent pseudo-aggregate.
In the case of 40 years of globalization the answer is an empirical fact: The rich benefited, big corporations benefited, the rest of us were plundered and had our quality of lives ravaged, and we’re now being liquidated completely. This was always the goal of neoliberalism, and the only possible result.
A criminal like Mark Thoma was by 2007 reduced to the exact position of the classical totalitarian liar who could only keep repeating the Big Lie, “We have to keep suffering and sacrificing now so we’ll have Utopia 20 years from now.” That’s the only way he can explain the fact that everything he ever claimed would happen not only failed to happen for 40 years, but by every measure the opposite happened.
Needless to say, “20 years” is always intended to remain 20 years, forever. Tomorrow never brings us closer to the goal, but only becomes the next starting day for the countdown which never actually starts. That’s the way all totalitarian promises work. That Big Liar position is now the position of every extant supporter of globalization, “free trade”, and every other element of neoliberalism and trickle-down.
How do you spell “Lou Dobbs”? He had this problem nailed years ago (long before the above essay was published) and got nothing but grief from the neoliberals.
It is very true that a few people get rich from globalization, many people get cheaper consumer goods, and many people lose their jobs or have wages cut. There are winners and losers. In my mind this is one of the strongest arguments for progressive taxation. Since we have decided to pursue globalization we should at least take some money from the winners to provide a modicum of economic security to the losers. Otherwise we really can’t say the ‘U.S.’ benefits.
You certainly have to look at the distribution of losses and benefits. This net household benefit figure seems absurd, why isn’t it broken down per quartile for example.
Those most capable of adapting to free trade, in specific highly competetive industries, with the size and market power to drown out competitors certainly or those with skills that can only be done locally (eg your plumber), will likely benefit.
The most vulnerable members of society those with low skill levels are likely to take a net loss, even if the price of goods that they purchase regularly goes down their low skill labor in most cases (except those where they have a captive market due to location, eg services) will be drowned out by competition from cheaper foreign low skill labor. Or sometimes by the mere illusion that that labor costs less abroad since in some cases sending work overseas is not going to save money due to higher transaction costs.
But what will likely happen, and what has happened in general. Is that this process will be further distorted per the political process to the benefit of domestic elites participating in the trade rounds. The concerns of the vulnerable and chronically unrepresented will not be dealt with and the individuals with the most power will get the greatest benefit from agreements liberalizing trade.
For example, I can’t exactly buy pharmaceuticals from Canada living in the USA, or generic pills from other countries. Because the Pharmaceutical companies have arranged to have a captive market (the USA) to subsize their R&D and marketing costs.
All trade agreements are likely to have the political element in them, and will be subject to domestic and international power imbalances. So 1) liberalization will probably hurt the vulnerable the most and 2) it is unlikely to happen without distortions based upon power relationships.
Mark Thoma – “let me emphasize that we are not debating whether benefits from trade exist for the U.S., but rather about the size of the gains”
S Brennan – “let me emphasize that we are not debating whether [individuals] benefit from trade, but rather about the size of the gains for these individuals”
Mark Thoma runs a webs site where he freely admits that any facts/opinions he does not agree with can be deleted the same as he would eject anybody from his household who did not agree entirely with his world view.
Yes, that’s his right to censor views/facts as Stalin & Hitler did…but why would anybody take him seriously as a learned man?
I’m not an economist, but I have a nagging question about free-trade. As I understand it, the theory is that if we let other countries with lower wages manufacture goods, we lose our manufacturing jobs, but in return we get cheaper consumer goods, which is supposedly a net benefit. Even if you believe that it doesn’t seem to be a good deal.
What I wonder is does anyone ever take into account the quality of the goods or the necessity of having them? We have far more junk these days than ever have before, but most of it is either of such poor quality that we throw it away and buy a new one, or it is something we didn’t need in the first place. Do we really benefit by buying a cheap washing machine if it is going to break after 3 years? Is the purchase of an inexpensive Billy Big Mouth Bass really worth the loss of American manufacturing? Has anyone ever incorporated these factors into the models? Or how about the environmental costs of both allowing countries without environmental safeguards to manufacture everything and the cost of throwing everything away because it is poorly manufactured or cheaper to buy a new one?
The globalizers and their economist academic whores don’t recognize those as valid questions.
It’s just like if a Walmart destroys 50 self proprietors and jobs paying middle class wages, and “creates” 100 minimum wage zero benefit “greeter” jobs, to the economist it’s a QED, “jobs were created”.
All the numbers in “studies” like this are the same such frauds.
Alex, I would add in the huge carbon footprint that’s inflicted on the earth in order to ship the cheap goods around the world.
Good point, also the cost of squandering a finite resource (oil) to ship crap 3,000 miles away.
S Brennan said: “Mark Thoma runs a webs site where he freely admits that any facts/opinions he does not agree with can be deleted the same as he would eject anybody from his household who did not agree entirely with his world view.”
I’ve personally experienced some of his deletions. I don’t post there anymore.
And, “but why would anybody take him seriously as a learned man?”
I don’t. He is another worthless economics professor who knows just enough to be dangerous.
If free trade is so wonderful, why can’t professors in economics have their jobs outsourced or taken by someone in a visa program? If professors in economics had their salaries lowered, would that help lower college tuition (wage-price spiral)?
The site appears to have succumbed to a peculiar sort of insanity. We have been told in recent months that states should run their own currencies. How much better off Greece and Ireland would be, if they did that. Presumably Belgium, Illinois, California and Rhode Island also?
Then we were told that these states, now running their own currencies, with the aid of something called Modern Monetary Theory, could and should run large deficits without any need to sell government bonds. Exactly how, has never been clear.
Next, and I suppose this is a logical conseqence of this approach, we seem to be being told that something called globalization is bad. Tariff barriers and less trade, one supposes this means, are good.
Yes, it is at least somewhat starting to make sense as a whole, in that measures only possible in a world of autarkic self sufficient states with non-convertible currencies and very limited trades are being advocated, and the end result of them all, if countries all adopted them, would indeed be to produce such a world.
It would be very like the Britain of 1957. Foreign currency hard to come by, foreign travel difficult, imports expensive or in many cases simply not available.
Don’t underestimate the consequences though. This is not a recipe for Eden. This is a recipe for a world with very considerable inequalities and rigidities, with ruling elites, with limitations on personal and intellectual freedom. Those who want most nostalgically to go back to 1957 are for the most part people who never lived through it. It may not be fun today, but it most definitely was no fun back then.
But we don’t have free trade now. We have free trade when those who clearly don’t benefit—people in manufacturing and non-credentialed professionals like computer programers—don’t have much political power.
Free trade in protected professions like medicine and law? Not so much.
Huh. I could have sworn that actual, measured income inequality in the US has exploded in the past few decades. Not saying that it’s due to trade, but the evidence that trade has ameliorated it is about zero.
And I have this admittedly very strange, I-can’t-put-my-finger-on-its-origin feeling that we have ruling elites. Maybe it’s because we’ve committed trillions of dollars to bailing out the banks, and have presidential commissions arguing that we have to curb the social insurance net, I don’t know.
Back then 12 years of schooling, through high school graduation, was a good education, sometimes an excellent education in the liberal arts that contributed to US prosperity and business leadership in the world.
Your elites are the ivy league who have majored in superiority and networking [cronyism] with a taste for excessive entitlement and criminal domination. Bush the Idiot son of a CIA spook, straw man for the 2000 US coup d’etet is just the highest profile of the breed.
A word like ENTITLEMENTS twisted into a slur to describe the earned benefits of a prosperous nation in support of its retired elderly is a projection of a severely compromised group of poorly educated fools.
And, there being nothing new under the sun, least of all GLOBALIZATION, the word itself is proof of a crime in search of an ideology.
Trade has been the driver of human activity and emigration from the beginning of recorded time.
Having no respect for the best of its own culture, it is no accident that US leadership under Bush, Cheney created the conditions for and stood by as the Iraqi visual arts in the “cradle of civilization” were sacked.
I’m another who refuses to post at Thoma’s site because of his habit of deleting comments. DeLong is another. I think an ability to accept negative (but polite) criticism strongly correlates with one’s ability to think critically. So my conclusion is that Thoma and Delong are in-the-box thinkers, who are unable to accept a challenge to what they say, and one should only read their blogs with a lot of skepticism. And kudos to Yves, who has never, to my knowledge, deleted polite comments.
Absolutely. Eventually I got overwhelmed with disgust and quit reading his site.
BDL deletes comments of people he disagrees with, both on the right and on the left. One time he had a post which IMHO slandered Noam Chomsky. Some commenter made about eight very reasonable (i.e., no expletives, well-argued, not repetitive etc) comments. BDL deleted all but one, saying something like “You get one reply, not eight!”
Regardless of what you think of Chomsky, that’s simply the actions of a douchebag.
Maybe, but I think it more strongly correlates with one’s being an a$$hole. I don’t know Thoma well enough, but BDL certainly qualifies. In addition to the bulls$it comments policy, IIRC he’s had kind words for Alan “Number 1 Person Responsible for the Bubble” Greenspan.
The economics profession generally seems to not comprehend a fundamental problem with their attempts to reduce all aspects of ‘social metabolism’ to mathematical formulas…
and this has encouraged politicians (and the electorate) to escape the political necessity of ‘judgment.’
It’s not that logic and math aren’t important… I’m a great believer in the Enlightenment.
But what any good logician understands is that formulas only work where the factors of the equation cover ALL variables and conditions of the reality the equation is attempting to represent.
Economics ignores massive social variables in pursuit of a fantasy of ‘perfectible’ equations that all too often… and especially over time… lead to intolerable distortions of the true ‘metabolism’ of a civilization.
This is why ultimately economics and politics must be RE-recognized as tightly bound (as they are at their roots – they are social decision systems).
And they require a very difficult to quantify metric… Wisdom!
Our decision systems are NOT selecting for either… our economic/political markets have been heavily weighted in favor of the individual and collective lizard-brain.
Wisdom has been a neglected strategy for too long. It’s not much rewarded.
Money and the Machinery of Representation
http://culturalengineer.blogspot.com/2010/07/money-and-machinery-of-representation.html
Personal Democracy: Disruption as an Enlightenment Essential
http://culturalengineer.blogspot.com/2010/06/personal-democracy-disruption-as.html
LinkedIn http://www.linkedin.com/in/culturalengineer
History is NOT going to view this period of self-governance in a very positive way. Self-governance requires an informed, involved and empowered citizenry.
It’s not clear the tax benefits are all there even for those in the right income brackets. Why? Because much of the value of a “home” is the land underneath the house, and the fundamental market value of land is the NPV of the future stream of after-tax land rent.
To that extent, tax breaks for home ownership inflate the price of residential land at the time the tax breaks are created, but not after. (Of course, the picture is more complicated than that—particularly I suspect in terms of how future returns are discounted by buyers.)
Btw, cheaper goods have a negative impact on GDP correct? (In fact I believe that an earlier post on this blog mentions that GDP numbers in the US are adjusted to account for this?)
If one of the major benefits is cheaper and more diverse goods it makes looking at free trade through a purely GDP/individual earnings lens slightly moot.
Also, what is the current thinking on whether our current global supply chains and interdependencies make wars more or less likely?
Eventually Global Free Trade (GFT) will be as discredited as Communism is today.
The proponents of these philosophies share an idealistic view of the world which ignores massive problems with any implementation. They are more like priests than scientists
Individuals gamed Communism to any extent possible to bend it to their advantage. (The final judgement as delivered by a Russian worker was “They pretend to pay us and we pretend to work.”) Nations and their corporations have gamed GFT to bend it to their advantage. (Currency manipulation and theft of intellectual property attack the underlying assumptions of GFT.) Any attempt to prevent this gaming of the systems is futile.
In addition those who have the power to implement the philosophies also have the power to twist the philosophy’s intent to their advantage, and they will. (I always assume that human beings are less than saints.) So communist party members faired better than the general population and corporations have been the primary beneficiaries of GFT.
American workers/consumers have noticed the depressed wages, job losses, and shoddy goods. American corporations are starting to notice some problems with their assumptions about the rule of law in other countries.
Did the mathematical formulas include any variables for these problems?
Our economy would be much healthier today, if economists had remembered that mathematical formulas are just tools and not a substitute for reason.
“American workers/consumers have noticed the depressed wages, job losses, and shoddy goods.”
Not too much argument from me about the first to, increased supply of labour leads to a decrease in the price of labour(Being very simplistic here, yes). However on the shoddy goods thing I would like to point out that the totemic manufacturing industry in the US, the car industry, has long had a reputation for producing poorer quality products than its rivals.
Foreign manufacturers aren’t purely competing on price, they are also competing on quality.
I don’t understand this anti-free-trade rhetoric. A fundamental tenet of economics (and common sense) is that in a world of free exchange, both parties benefit (otherwise they wouldn’t exchange). Why does it matter if the person I am exchanging with is on the other side of some imaginary line?