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November 06, 2006
Model Politics In Action
In the previous post I lamented the free trade movement's nifty trick of arguing theory rather than policy:
They've transformed debates over specific legislation (NAFTA, CAFTA) into debates over abstract theory. So the economists line up against protectionism, the pundits explain the pitfalls of restricting trade, and nobody actually reads or analyzes the likely outcomes of the particular trade changes proposed by the bill. It's a neat way to pass legislation, but not quite optimal. Congress passes bills, not models.
Brink Lindsey brought this to mind in his quite smart, but slightly off-point, reply to my recent writings on the inequitable distribution of growth. Rather than argue over how the pie is being distributed, or how incomes can be boosted, or what our society will look like if wage stagnation sustains itself, he wants to argue over whether there's "something wrong with labor markets." In other words, am I on the right side of the economic consensus on labor markets, or the wrong one? But that's the wrong question: Just because the labor market is working right doesn't mean it's working well.
As Lindsey would tell you, there's plenty wrong with labor markets. The minimum wage, for one. Government regulation, for another. Unions also. And frankly, he's right: labor markets work a lot better when they're unfettered by goo-goo interventions. But such smoothly-functioning markets aren't good for our economy or our society. Vastly inequitable distribution isn't good for our economy or our society. And yes, something is rather awry in the labor markets when the top one percent is so rapidly and vastly outpacing the top 10 percent. Can someone explain to me what the market is seeing in that slice of the income distribution that so sets them apart from the minor Master of the Universe right below them? And why that judgment is desirable or beneficial or efficient?
This focus on discrete bits of economic theory can work out very poorly in the end. Back during the NAFTA fight, Undersecretary of Commerce Jeffrey Garten predicted 6%-12% growth for Mexico during the next decade. His estimates, while a smidge optimistic, were basically in line with the economic consensus because they were basically in line with the economic models. So what happened? The real growth number was 3.6 percent, about half Garten's low end prediction. Wages went up 15 percent, and accelerating inequality assures that median wages went up by far less than that. In other words, the model's prediction failed (which is different, to be clear, than saying that NAFTA was "bad"). Mexico's trade policy may be better, but their society hasn't much improved. And that, in the end, should be the metric. It's one I'd like to hear Lindsey say a bit more about.
November 6, 2006 | Permalink
Comments
Worker Security, Social Insurance, and Protectionism ...Mark Thoma excerpts three separate articles on the issue. As a neo-liberal, MY comes out for free trade with the usual redistributionist caveats.
I can't argue against free trade. I can't. But I think it probably needs to be balanced in its liberal proponents by a fierce and unyielding populism or class-war politics.
Posted by: bob mcmanus | Nov 6, 2006 12:39:06 PM
dp
Posted by: DRR | Nov 6, 2006 2:29:17 PM
thats just bullshit. When you have people with unequal bargaining power, the market can't function well.
Posted by: dan | Nov 6, 2006 2:31:54 PM
Bob said -
I can't argue against free trade. I can't.
I can't either, I believe in free trade. I just also believe that companies doing business with the U.S. should also be required to follow the laws that govern business in the U.S.
If the playing field is even then free trade is a reasonable proposition. But if it is just a method by which corporations can get around U.S. labor and environmental standards, it can only be an abysmal failure for most Americans.
Posted by: DuWayne | Nov 6, 2006 2:34:06 PM
My favorite quote from Lindsey is this: "It’s one thing to be concerned generally about inequality: to hope that all people can participate in the blessings and opportunities that modern capitalism affords, and to look for policies that help those who are lagging. It’s quite another when that concern curdles into a belief that the capitalist system is fundamentally unfair – that workers are failing to get their fair share of the value they create because people at the top are hogging the gains from growth. It’s the difference between being an egalitarian liberal and being a collectivist. Or, in other words, between being a progressive and being a reactionary."
The quote once agains blurs the line between the ideological adherence to capitalism premised on our metaphysical status as "individuals" and the pragmatic adherence to capitalism based on results. The problem is once you start to talk about "the blessings and opportunities" that a market-based economy creates, it makes little sense to than frame the argument in terms of "fair share[s]." If, in the end, robbing Peter to pay Paul benefits Paul and a thousand other people, and in the long run may even benefit Peter, than aren't those shares fair?
Posted by: Paul | Nov 6, 2006 2:36:09 PM
"In other words, am I on the right side of the economic consensus on labor markets, or the wrong one? But that's the wrong question: Just because the labor market is working right doesn't mean it's working well."
Huh?
"As Lindsey would tell you, there's plenty wrong with labor markets. The minimum wage, for one. Government regulation, for another. Unions also. And frankly, he's right: labor markets work a lot better when they're unfettered by goo-goo interventions."
Didn't you learn anything from your recent discovery that a lot of economists of the type that might be inclined to post at Cato are more than slightly out of the mainstream?
You seem to be working off the premise of interventions that make justice out of the perceieved unjust distribution of the market. And those no doubt exist. But plenty of "government regulation", rather than impeding markets, is there to make sure they run smoothly and efficiently.
The minimum wage of course being an exception, but one for who's entire justification (notably by you) was that it's existence had a neglible affect on the labor market. And you rest assured that list of 500 mainstream economists who signed on for a minimum wage hike, wouldn't have done so if they thought it would have a detrimental effect on the labor market.
Posted by: DRR | Nov 6, 2006 2:38:48 PM
I think you're mistaking some things, DRR. A labor market works better as a labor market unfettered. Employees are paid precisely what they're "worth," or what their emplyoers think they're worth, which is the point. But whether the market is working and whether the economy is good are different choices. We generally intervene to make the economy better, not to make the market more markety.
Posted by: Ezra | Nov 6, 2006 2:44:22 PM
Posted by: bob mcmanus | Nov 6, 2006 9:39:06 AM I can't argue against free trade. I can't. But I think it probably needs to be balanced in its liberal proponents by a fierce and unyielding populism or class-war politics.
What do you mean by free trade? Unfettered wealth flows, with trade the tail being wagged by the wealth dog? Ricardian free trade, with balanced trade all around (and balanced trade and capital accounts all around)?
We certainly won't have the latter from the former, and so the rhetorical device of treating NAFTA as if it was primarily a trade deal, to avoid bringing attention to the difference between the two.
Posted by: BruceMcF | Nov 6, 2006 3:17:36 PM
"What do you mean by free trade"
I will let you and DeLong and Krugman and Thoma work that out. I think there can be legislated fiscal and monetary advantages given to capital that I haven't quite worked out yet, or understand in detail; like tax breaks on overseas investment etc. I don't know if this kind of is built into GATT and WTO.
It is a Marxist thing to favor free trade; and an alternative socialism could involve some degree of nationalism and tariffs. Austria. Not sure anout Scandanavia.
I can't argue against free trade. But I can argue for an aggressive labor movement. With the card thing, closed shops, sympathy and general strikes, sit-ins, incendiary and inciting rhetoric, sabotage, violence, arson, confiscation of all wealth, guillotines, mass terror, war. But I won't argue against free trade.
I don't expect Brad DeLong to accept that entire arsenal of tactics.
Posted by: bob mcmanus | Nov 6, 2006 4:22:17 PM
Very happy to see this addressed, Ezra, and particularly your conclusion. I notice that a lot of conservative and libertarian arguments are conducted in a sort of self-induced autism. Health care's particularly rife with it ("we have 47.5% more machines that go ping, and you wait 2.3% less time to have the lower left ventricle jacked and given chrome hubs...what? infant mortality, longevity, percent of life spent healthy, citizen satisfaction? we've got nothing to say about that"), but it's all over. Trade policy, like all the rest, is a means to an end, not an end in itself.
Posted by: Bruce Baugh | Nov 6, 2006 5:16:22 PM
[i]"A labor market works better as a labor market unfettered. Employees are paid precisely what they're "worth," or what their emplyoers think they're worth, which is the point. But whether the market is working and whether the economy is good are different choices. We generally intervene to make the economy better, not to make the market more markety."[/i]
For another perspective on this question, one can follow Polanyi and argue that the notion of labor as commodity is a fiction to begin with, and that pure labor markets make no sense. In The Great Transformation, he describes what such a market would be like: "To allow the market mechanism to be sole director of the fate of human beings and their natural environment indeed, even of the amount of purchasing power, would result in the demolition of society. For the alleged commodity 'labor power' cannot be shoved about, used indiscriminately, or even left unused, without affecting also the human individual who happens to be the bearer of this peculiar commodity. In disposing of a man's labor power the system would, incidentally, dispose of the physical, psychological, and moral entity 'man' attached to that tag."
Posted by: Tarwater | Nov 7, 2006 3:01:11 AM
Posted by: bob mcmanus | Nov 6, 2006 1:22:17 PM I can't argue against free trade.
I argue, and I'm confident that Krugman will pay not the slightest bit of attention, that the NAFTA deal and others along the same lines have nothing to do with free trade in the Ricardian sense. Free trade, in the Ricardian sense, if unfettered and balanced exchange of finished goods and services between economies that all have the capacity to produce each good traded. It is taking a given position as a free-standing economy and improving it based on the opportunities offered by comparative advantages, with the freedom to refrain from unattractive trades being the assurance that all trades represent an improvement over the free-standing position.
The benefits of Ricardian free trade stand on much firmer theoretical ground than the benefits of neoclassical unfettered trade, where establishing the benefit requires very strong assumptions that are not actually satisfied in the real world. It is therefore a common sleight of hand to use the Ricardian argument to "introduce" the concept of benefits of trade, and pass over the very substantial differences between that kind of trade and the kind of wealth transactions that are the focus of the NAFTA treaty.
I'm not 100% sure, but I this seems likely that Ricardian free trade is also free trade in the classical Marxian sense, given Marx's standing as the Classical Political Economist that turned English Classical Political Economy on its head.
Posted by: BruceMcF | Nov 7, 2006 9:01:43 AM
If NAFTA were truly about free trade, its Chapter 11 would not exist. Period.
Posted by: Ken Houghton | Nov 7, 2006 1:04:32 PM
