Several commenters on yesterday’s post have asserted (in every case without evidence or argument) that the benefits of free trade — that is, lower prices for consumption goods — tend to accrue disproportionately to the wealthy.
Okay, the people I see shopping at Wal-Mart don’t strike me as particularly wealthy, but maybe I’m mistaken. Maybe the commenters are right and it’s the rich, not the poor, who care the most about affordable goods. Maybe Bill Gates would be devastated if he had to pay 50% more for a washing machine, but Joe Sixpack would just kind of shrug it off. I guess that makes sense if Bill spends his million dollars a month as fast as it comes in, while Joe always seems to have half of his thousand-dollar monthly paycheck left over.
Could be. But I hope the people who say they believe this will have the decency never to tell me that we can stimulate the economy by transferring income from the rich to the poor, because the poor are more likely to spend it.
If you are a Wal-Mart shelf-stacker who was formerly a highly-paid manufacturing worker but whose job got shipped to China, then the fact that you can now buy stuff 10% cheaper isn’t going to make up your income shortfall.
Re: “If you are a Wal-Mart shelf-stacker who was formerly a highly-paid manufacturing worker but whose job got shipped to China, …”
Can that really happen? The main reason a firm pays a worker a high wage for a long term is to prevent them from taking a job at another firm for a wage almost as high. The fired worker can take one of those other jobs. If those jobs aren’t there, the firm can give the employee a wage cut anyway and not bother shipping the job to China.
Advo: If your argument is that someone, somewhere, might be a net loser from a particular free trade pact (though surely still a net winner from free trade generally, as is essentially everyone) then you’re surely right but who cares? If you’re opposed to any change that creates even one net loser, then you’re opposed to all policy changes, everywhere and always. I don’t think that’s a viable stand.
The question here was not: Is there even a single loser from a free trade pact? The question was: Do most of the gains accrue to people who are richer than average or to people who are poorer than average? And if the gains go mostly to poor people, why am I supposed to care about those particular poor people any less than I care about your formerly highly-paid manufacturing worker?
Steve:
The benefits of free trade are mostly, as you say, small benefits spread over a large number of consumers. The costs of free trade are disproportionately borne by workers in those industries newly subject to greater competition.
If I have a proposal for a policy that cuts Joe’s income from $50,000 to $15,000 while increasing the effective income of 100 other people by $500, do you think it is unreasonable for Joe to object to this proposal? Do you think it is unreasonable for an unbiased observer to object even though the proposal is economically more efficient? Do you think that dollars are the best measure for comparing large income shocks and small changes in consumer prices?
I suspect your model is that — especially since you claim that everyone is a net beneficiary from free trade — yes, Joe loses in this proposal, but we play this game repeatedly, picking a different loser each time, so that after 100 rounds, everyone’s income is on average up $15,000. But even if we are choosing the loser randomly, it’s perfectly possible for someone to lose more than once and end up in the hole pretty badly. And when the same groups have been consistently losing from free trade deals, I find it hard to blame them for not wanting to play the game anymore.
It some version of loss aversion toward other people’s losses. It is more like farm subsidies. If only the farmers supported them they’d not get passed.
I would guess that the anti-traders do not even know who wants those jobs screwing on bolts over and over again all day even at $20/hour but they do not want to see the sad stories about people loosing their jobs. If it were only those who had or really wanted such jobs what percent of voters would it be?
@ Brett #4
Well said comrade. The capitalism engine that depresses the proletariat class must be abandoned. This system that creates losers because of Free Trade, Personal Computers, et. al. by rewarding efficiency and causing people to loose their jobs must be smashed.
Sure free trade seems to have reduced global poverty to its lowest level ever, but how does that help Joe Sixpack?
The Joe Sixpacks of this nation need to rise up against their elite overlords and start pushing more of the worlds population into poverty.
@ Prof. Landsburg
I thought I was the most radical reader of your blog being that I’m a democratic socialist. Nationalist Socialism is even more radical.
Another thing is that the holders were mostly not in the bottom 20%. The bottom 20% never had high paying jobs low paying jobs always existed.
@ Brett #4
If I have a proposal to forbid Bob from working, even though he is a much more efficient worker than Joe, just because Joe was doing the job first, is it unreasonable for Bob, and, more importantly, Bob’s potential customers to object to this proposal?
Well, let’s start with the evidence and argument: Could we quote the specific parties that allege that the benefits of lower prices for consumer goods flow disproportionately to the wealthy? Or anyone making statements about which social class cares more about the price of goods? Cuz I don’t see that.
I see people saying that free trade depresses employment and wages among those at the lower end of the income ladder—and for the affected people, the benefits of lower-cost consumer goods do not offset these losses. The conjecture that rich people would derive 51% of the benefits of reduced prices or 49% of those benefits would not really be relevant to this analysis. Nor do I see how poor people’s marginal propensity to consume would influence this analysis about the effects of free trade on the labor market.
In fairness, I haven’t done any independent analysis of the data, and I’d be delighted to learn that free trade does not depress wages and employment among the lower classes. If anyone has any info on that, please share.
What a much better economy we would have if all of those buggy whip makers were still on the job making buggy whips!
Incidentally, is Braxton-Hicks a contraction of the economy?
I see it that the possibility that the gains could accrue to the wealthy means that the standard 101 analysis is lacking something.
It is obvious that Pareto improvements do not occur in anything other than simple transactions. It is also fairly obvious that just because Pareto improvement does not occur most people believe that we should not do something. We are generally happy to allow the possibility of weighing up winners and losers and striking a balance.
The 101 argument seems to be that nobody can object to Pareto improvement since nobody is worse off. Kaldor-Hicks is essentially the same as Pareto, since transactions could restore Pareto. Therefore nobody can reasonably object to Kaldor-Hicks improvement. The argument against this is that demonstrating Kaldor Hicks is not enough on its own to stifle reasonable objection. It is possible to have a Kaldor-Hicks improvement to which we may reasonably reject.
We then have to thrash out the details. Since we have hypothetically demonstrated that Kaldor-hicks improvement occurs, so there are more wins than losses, the onus should be on the objectors to demonstrate why this should be objected to.
nobody.really @9,
“I see people saying that free trade depresses employment and wages among those at the lower end of the income ladder”
A job isn’t a “benefit”. It’s a cost. If a job were a benefit, then people would work as many hours as they possibly could and would never hope to retire.
Anyone who complains about the “net costs” of free trade and complains about fewer jobs doesn’t understand what a job is, nor the purpose of one (it’s to be able to consume, not to merely have a job; earning isn’t a benefit; the spending is the benefit).
“the benefits of lower-cost consumer goods do not offset these losses”
If that were the case, why would Americans ever choose to freely trade with anyone? If they did, by your assumption, Americans are made worse off, which means they are purposefully trading with people in order to make their lives worse. Who does that? Are you really saying that Americans are just too dumb to know what’s best for themselves, on net? Because I don’t see any evidence of that anywhere.
“The conjecture that rich people would derive 51% of the benefits of reduced prices”
That conjecture can be and has been tested. The results were striking: 98 percent of all profits are realized by consumers, with only 2 percent of profits being realized by producers. In other words, the billions realized by Steve Jobs, and Apple, represents only 2 percent of the profits realized on the products he is responsible for developing and selling to consumers. The remaining 98 percent was realized by the consumers of the products Steve Jobs, and Apple, produced.
“I’d be delighted to learn that free trade does not depress wages and employment among the lower classes.”
Of course, free trade does exactly that. In fact, free trade depresses wages and employment for all classes, unless you oddly think that only the US has skilled laborers and none exist anywhere else in the world with whom skill American laborers compete.
But measuing the health of an economy based on the number of jobs and earnings gets things exactly backwards. The proper measurement for the health of an economy is consumption. People work and earn precisely so they can consume. And any study undertaking to see consumption can easily see that consumption, for all levels, has increased. It is a nice bonus, though, that the growth power of free trade is so great that even with the depression of wages and employment, wages still increase and more so for the “lower” classes.
Nobody.really,
Here’s two highly influential parties which continually argue that free trade – or more free trade – benefit the wealthy:
From the AFL-CIO website:
“The TPP would increase corporate profits and skew benefits to economic elites, while leaving workers to bear the brunt of TPP’s shortcomings.”
Bernie Sanders on free trade:
“The gap between the rich and everyone else is due to our disastrous unfettered free trade policy.”
Brett: “The benefits of free trade are mostly, as you say, small benefits spread over a large number of consumers. The costs of free trade are disproportionately borne by workers in those industries newly subject to greater competition.”
It is not just end consumers who benefit from free trade. Many U.S. manufacturing and service companies – and their workers – enjoy the benefits of lower prices for steel, energy, semiconductors, etc.
Although a few workers do bear the costs of free trade, many millions more workers will bear the costs of free trade restrictions as their companies are unable to compete globally due to higher costs of formerly imported inputs.
Many millions of U.S. Transport workers owe their jobs to free trade. Imposing restrictions on free trade may create jobs for some manufacturing companies but will defintely end some transport jobs.
It is not just the 300 million U.S. end consumers who each benefit in a small way from global trade. It is also millions of U.S. workers whose employers have thrived with increased globalization.
Landsburg:
Nobody.really@9:
John Dewey@13
1. Were either of these highly influential parties commenters on Landsburg’s prior post? If not, then they’re not especially relevant to my comment.
2. That said, I’m not sure what point John Dewey seeks to make here. I challenged the idea that anyone was arguing that the objectionable part of free trade pacts was the distribution of the benefits of low-cost consumer goods among social classes—and not, say, the distribution of layoffs. Nothing in John Dewey’s posts addresses that issue, as far as I can see.
Nor do his statements seem otherwise inaccurate, as far as I can tell.
“[They] argue that free trade—or more free trade—benefits the wealthy.”
Does anyone dispute the idea that free trade, or more free trade, benefits the wealthy?
“The TPP would increase corporate profits and skew benefits to economic elites, while leaving workers to bear the brunt of TPP’s shortcomings.”
I expect that the TPP would increase corporate profits, although I haven’t done any study of that specifically. Would anyone find it surprising if it did?
Similarly, I would expect that, to the extent that the TPP had shortcomings—in this case, I suspect this means US workers losing jobs as corporations shift manufacturing to lower-cost overseas locations—I would expect them to be borne disproportionately by workers. To be sure, lowering trade barriers might also harm some less-competitive US employers, too, but those harms would likely also be felt by workers. Again, I’m not seeing the problem with this statement.
“The gap between the rich and everyone else is due to our disastrous unfettered free trade policy.
Sure, Sanders’s quote suggests that global trade has been the sole cause for the disparity in wealth between “the rich” and everyone else, and I expect that that’s an exaggeration; we see enormous disparities in N. Korea, even in the virtual absence of international trade. But does anyone dispute that the gap between “the rich” and everyone else has grown? Does anyone dispute that global trade has had an effect on that outcome?