Edward Glaeser on Whether Open Markets Contribute to Growth

Harvard economics professor Edward Glaeser reviewed a new book, “Bad Samaritans” by Ha-Joon Chang in the New York Sun (hat tip Mark Thoma). Glaesar focuses on his objections to the book, but nevertheless concedes,

Readers who believe in free trade will not find much in Mr. Chang that challenges that belief, but the book is well written and far more serious than most anti-globalization gibberish.

I take that comment to be a notch better than damning with faint praise.

In the course of his review, Glaeser makes some observations about trade economics:

There is a substantial empirical literature that looks at the relationship between trade openness and economic development over the last 40 years. An early wave of research, associated with Jeffrey Sachs among others, claimed that trade openness increased growth. A second wave of research, led by Francisco Rodriguez and Dani Rodrik (a Harvard colleague), suggested that there was little robust connection across countries between trade and growth. My own research in this area found that openness had little impact on middle income places, but is particularly valuable for the poorest places. Certainly, there is no empirical consensus that openness is either good or bad for growth.

The lack of consensus on the connection between growth and openness does not imply that Mr. Chang’s protectionism is equally attractive as the open borders urged by the Washington consensus. Adam Smith and David Ricardo didn’t urge free trade because trade begets growth, but because trade makes goods cheaper for ordinary people. Smith’s argument is still the strongest case for open borders. Even if protectionism does encourage industrial growth, it only does so by hurting ordinary people, who have to pay more to buy the goods of inefficient domestic producers.

Mr. Chang’s protectionist brief suggests that the costs that tariffs impose on ordinary consumers are worth paying since the government can use tariffs to promote the right industries. Smith would have been skeptical about putting such faith in the government, and today’s developing countries certainly deserve no more trust than the government of George III. Even if an incredibly wise tariff policy could protect future economic dynamos, the history of tariffs suggests that they are used more often to protect less than dynamic cronies.

The best thing to come out of this book is its challenge to the advocates of free markets to explain why England and America did so well despite embracing policies that were not always that free. Mr. Chang has not made the case that those policies were helpful, but free marketers have an obligation to help us understand why those policies did not do more harm.

As we have noted earlier, Dani Rodrik has examined some of the efforts to quantify the benefits of more open trade and found them wanting.

Glaeser’s argument, that inefficient domestic producers are in effect a tax on everyone and hurt average consumers most, ignores the cost side of the equation. The problem is that the benefits are diffuse and per Rodrik, appear not to be as great as many proponents claim, Yet the costs to workers who lose jobs and to those who keep them but may find their ability to bargain for better wages reduced considerably, have (to my knowledge) not been examined in a systematic or rigorous fashion. In other words, a debate that is important to advanced nations as economies and societies is being conducted in ignorance of a solid dimensioning of the gains and losses.

Another problem with the “consumers are better off” argument is that, even if it could be established that the benefits to society of more open trade (however defined) were positive, the process of achieving those gains can run afoul of Keynes’ observation:

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

We don’t have good (more accurately, much of any) mechanisms redistributing some of the gains of trade to those who workers who have suffered significant losses due to trade-induced industry restructurings. Although many economists point out that those policies are increasingly necessary to maintain the public’s support for liberal trade policies, few would bet that we’ll see anything beyond token retraining programs any time soon.

Let me be clear: I am not saying opening markets is a bad thing, However, our current system is not open trade, but one that William Greider calls “managed trade.” I suspect that given the system in which we operate, the US is not playing its cards as well as it could, and also focuses its policies on promoting corporate profits and reach rather than on broader goals.

As Glaeser concedes in his review, even if you don’t agree with protectionists, they do have a point.