The Gospel of DeLong

I heartily endorse Brad DeLong's remarks on trade policy at the SIEPR 2008 Economic Summit Conference. The bottom line:

Third: since 1997 or so the link between expanded imports and wage inequality has become real, as our imports now embody a much larger amount of factors competing with our own lesser-skilled than they used to. How large? I don't think we know. Paul Krugman is now writing a paper for the Brookings Institution in which he essentially throws up his hands at the question. But there are two points worth noting: (a) the effects of trade on pre-tax wage inequality are much smaller than the effects over the past generation of changes in the tax system on after-tax income inequality; (b) the effects of trade on inequality of opportunity are much less than the effects of educational inequities on inequality of opportunity.

Fourth, to the extent that we in the United States begin thinking of trade restrictions as a way to fight inequality, we are setting ourselves up for extraordinary trouble late in this century--extraordinary damage to our long-run national security.

Now if the next progressive administration decides that in the total universe of tough political fights they want to take on, they'd rather have fights over withdrawal from Iraq, expanded access to health car, and curbing America's carbon emissions than have a tough fight over further lowering of trade barriers that would strike me as an eminently sensible way to proceed. In retrospect, it seems a bit perverse of the Clinton administration to have gone forward with NAFTA before health care and without even getting their allies-on-NAFTA in the business world to support them on health care. That, however, is about priorities and sound coalition-management, a different thing from saying that the opponents of trade liberalization are correct on the merits.

Comments

In retrospect, it seems a bit perverse of the Clinton administration to have gone forward with NAFTA before health care and without even getting their allies-on-NAFTA in the business world to support them on health care.

This is where Obama ought to hit Clinton hard. Especially in PA. He should have done it in Ohio, but he can win PA if he attacks Clinton about this. This also goes to the crux of the matter why I can't stand the Clintons. It tells me they aren't as sharp politicians as people like to think they are.

Posted by Joe Klein's conscience | March 8, 2008 2:35 PM

Fourth, to the extent that we in the United States begin thinking of trade restrictions as a way to fight inequality, we are setting ourselves up for extraordinary trouble late in this century--extraordinary damage to our long-run national security.

What, he's afraid the Chinese are going to come after him if we try to cramp their style?

I'm guessing that 80 years from now whether we're protectionist now isn't going to matter squat.

Posted by Tim | March 8, 2008 2:44 PM

"So, while I can't actually prove that the current style of 'trade' agreements are beneficial for the society, I will continue to note that probable downsides aren't as bad as some people might have thought and to suggest that anyone who disagrees with me wants to build giant walls around the country and live in stone huts."

Hey, well, as long as we keep letting economic (and "trade") policy be dominated by what the kewl kidz think, we might as well work towards that awesome social safety net which we won't get but will help make up for some mysterious loss of healthy economic development.

Posted by El Cid | March 8, 2008 2:45 PM

Here's the key bamboozlement in this piece

Fourth, to the extent that we in the United States begin thinking of trade restrictions as a way to fight inequality, we are setting ourselves up for extraordinary trouble late in this century--extraordinary damage to our long-run national security.

Which trade restrictions? Obviously some trade restrictions are good and some are bad. Nobody's proposing open borders or the free traffic in poppy derivatives. Nobody's proposing the free movement of skilled labor. What's proposed are particular loosenings of restrictions that allow for the freer movement of capital, large manufacturing, and highly subsidized farm products - all of these things function to undercut labor power in US and its partners.

An honest commentator would acknowledge which trade restrictions he's talking about and explain why those particular trade restrictions are good or bad, and note which restrictions are and are not included in recent US trade deals that DeLong supports.

A hack out to sell a failed policy would rely on a false dichotomy between those who support trade restrictions and those who oppose them.

We're all in support of some trade restrictions. The question is which ones.

Posted by DivGuy | March 8, 2008 3:04 PM

Here's another classic DeLong bamboozlement:

There is nothing more dangerous for America's future national security, nothing more destructive to America's future prosperity, than for Chinese schoolchildren to be taught in 2047 and 2071 and in the years after 2075 that America tried to keep the Chinese as poor as possible for as long as possible.

Here's Brad DeLong on the effects of NAFTA on Mexicans. (youtube)

To summarize, the effects of NAFTA for ordinary Mexican workers have been: a stagnation of wage growth for urban workers, and a significant decline in wages for rural workers.

At the same time, union power has been weakened, leaving fewer options for ordinary Mexicans to better their lives - leading in part to the increases in illegal immigration.

But DeLong assures us that this time, "free" trade will have the effects that neoclassical models project it will. Who needs to bother with what actually happened in actual countries when we have equations! (And please pay no attention that none of the success stories of recent industrializing countries followed the neoliberal consensus on the free movement of capital and trade "liberalization". Again, we have equations on this. Equations.)

Posted by DivGuy | March 8, 2008 3:18 PM

DeLong is out of his mind on trade policy.

He's worried about the foreign implications of all this? If we have 20 more years of ripping down our industrial base, it'll be the local environment that truly will be scary.

Democracies don't take well to extended periods of bad times.

Posted by leo | March 8, 2008 3:26 PM

The "Gospel of DeLong" goes on to urge that America's main national security strategy should be to embrace China as the new global superpower and leading nation of the world, so that in a few decades when they become that anyway, they'll be our friends and let us trade with them.

Uh...yeah.

Posted by Mr. Noah | March 8, 2008 3:42 PM

The DeLong philosophy: Let's give the Chinese our lunch money so they won't beat us up on the playground. A true nerd ideology.

Posted by Tim | March 8, 2008 4:10 PM

But the health care debacle was 1993 while NAFTA went down 1995ish, or am I nuts?

Are you saying Hillarycare should have been re-raised as a precondition to all other domestic agenda items?

Posted by Mike | March 8, 2008 4:38 PM

Eh, turns out I'm nuts. Oh well.

Posted by Mike | March 8, 2008 4:49 PM

Mike:
His point is that Clinton did a terrible job as a politician. If you are going to do a big corporate favor, like NAFTA, then package deal it. That way you have something to sell the voters.

Posted by Joe Klein's conscience | March 8, 2008 4:52 PM

NAFTA was negotiated under Bush Sr. and finalized under Clinton, and it was voted on in November of 1993, coming into force in January of 1994. It was passed with a majority of Republicans over a majority of Democrats in both House & Senate.

Hillary was correct that NAFTA would force health care back on the priority list, but considering that NAFTA was a major, major goal for a huge list of corporations and investors, its prioritizing was not surprising.

A subsequent (1995 - 1998) attempt to copy the NAFTA model worldwide to an even more exclusionary, investor-designed model of undermining the democratic republic form of government ('sovereignty') called the Multilateral Agreement on Investments was exposed in draft format and abandoned.

http://en.wikipedia.org/wiki/Multilateral_Agreement_on_Investment

Anyway none of this matters because somebody somewhere feels that as long as the people in charge of various nations' economic policies (sometimes called "trade") can make vague arguments backed by economic models that after some time period economic policies which clearly transfer wealth upwards and undermine citizens' earnings still ensure that more people benefit on average than lose, it makes all sorts of hip people feel better than fringe-y nut liberal extremist types, who live in caves and believe we should all make our internets run on home-schooled soybeans.

Posted by El Cid | March 8, 2008 5:00 PM

It's not just competition that drives the price of labor down. The rules have been changed. The Uruguay Round which gave birth to the WTO was (in my view) largely an attempt to rewrite the rules so that the new manufacturing powerhouses would have to pay the West for licenses (in exchange for access to Western markets). This is similar to the selective protectionism of the industrial revolution, which enabled the West to charge high prices for manufacturing, while paying extremely low prices for raw materials. When Eastern Asia caught up with this game, the rules were simply changed to decrease the value of manufacturing and increase that of licenses. When Asians have more licenses than we have, the rules will be changed once again to make expensive whatever it is that we produce and they don't.

The most famous example is of course Nike, which pays Asian laborers 3 € for the manufacture of a pair of shoes costing the end consumer 100 €. Eighty years ago it was the inverse: British clothing factories charging the Indian consumer high prices for their products while paying next to nothing for the cotton.

But this downgrading of manufacturing, and upgrading of intellectual property (that is invention and design), doesn't only hit Asian producers, it hits blue collar workers everywhere including in the West.

In sum I don't believe it is competition that is creating inequality. Rather, it is the repeated changing of the rules to prevent the lower classes from ever winning the game.

Posted by Hans B | March 8, 2008 5:09 PM

In sum I don't believe it is competition that is creating inequality. Rather, it is the repeated changing of the rules to prevent the lower classes from ever winning the game.

Exactly. "Free" trade is merely a particular set of restrictions on trade - in general, restrictions that ensure the free flow of capital and the easy movement of manufacturing while restricting labor organizing and certain forms of free movement of labor.

The whole notion of "free" trade which is opposed by "restrictions" functions to obscure the actual state of trading and economic regimes toward the interests of particular corporate interests.

Posted by DivGuy | March 8, 2008 5:24 PM

I'm still not sure Matt actually read Krugman's draft paper yet.

One of Krugman's two main conclusion was that so-called "trade" now often includes one corporation dividing its own labor and services processes over different nations depending on labor and service costs and quantities, and Matt has not yet mentioned this, I don't think.

Still, I am heartily and 100% in agreement with Brad DeLong because He is an Economist, and the World is Changing and We Must Change Too Or Be Left Behind or something.

Posted by El Cid | March 8, 2008 5:30 PM

It seems to me that what he's saying is that both taxation and education policy have a bigger impact on working class fortunes than trade does. Considering the direction that taxes have gone in real terms since 1980, it's no suprise that the working class is worse off now than it was then... and you can make a decent argument that the pyramiding of the US class structure (caused largely by tax policy) is also a large part of the reason why the US is losing influence and power... the elites have decided that they'd rather be big fish in a small pond. The only problem is that when something bad happens to the pond, it's the big fish that die off first.

Posted by Jack | March 9, 2008 4:03 AM

Re: Now if the next progressive administration decides that in the total universe of tough political fights they want to take on, they'd rather have fights over withdrawal from Iraq

If the next president decides to withdrawn from Iraq why how he have a political fight over it? As commander in chief he would simply do it and there would be nothing that even a hostile Congress could do to stop him. Sure, he wuld face criticism from those who thought he was making a mistake but it would be impotent criticism. Unlike, say, trying to get a healthcare plan passed or anything else that requires action from Congress.

Posted by JonF | March 9, 2008 9:44 AM

Sorry Matt. You are just wrong on this. You should either (a) admit your wrong or (b) do research and make arguments to support your position based on reality - i.e. what is actually happening on the ground as a result of "free trade" (which would surely lead you to discover just how wrong you are, assuming you support progressive policies/politics worldwide, not just in our nation). Yet, you do neither, instead posting uninformed crap like this.

BTW, I really, really like you as a blogger. That is why it is so troubling to read your views on this subject.

Posted by duffy | March 9, 2008 10:48 AM

I've wondered for a long time about the logical consequences of the notion that "the effects of trade on inequality of opportunity are much less than the effects of educational inequities on inequality of opportunity." I suspect that the reason that educated elites are better of than high school dropouts has to do with a rationing system which keeps those elites in a small minority. The corollary to the proposition is that everybody should get an advanced education and then we'll all be well off. What is the magical thing we would all be doing then to produce those great wages that will replace the blue collar jobs that went elsewhere?

Posted by gordonminor | March 9, 2008 2:41 PM