Professor Blinder’s views on free trade

Apr 11 2007

When the news broke (WSJ, subscr. req’d for fulltext, preview otherwise) several weeks ago that Dr. Alan Blinder had become skeptical of the benefits of free trade, I was quite disappointed to hear about it. As intimated elsewhere on this site, I can’t find a way to agree with trade protectionism of any kind, and Dr. Blinder’s writings, among many others, have provided the basis for my views on the matter. For a particularly succinct statement of his views as they stood at the time, see the (undated) article entitled “Free Trade” at the Library of Economics and Liberty. An excerpt:

Americans should appreciate the benefits of free trade more than most people, for we inhabit the greatest free trade zone in the world. Michigan manufactures cars; New York provides banking; Texas pumps oil and gas. The fifty states trade freely with one another, and that helps them all enjoy great prosperity.

{…}

A slogan occasionally seen on bumper stickers argues, “Buy American, save your job.” This is grossly misleading for two main reasons. First, the costs of saving jobs in this particular way are enormous. Second, it is doubtful that any jobs are actually saved in the long run.

Many estimates have been made of the cost of “saving jobs” by protectionism. While the estimates differ widely across industries, they are almost always much larger than the wages of the protected workers. For example, one study estimated that in 1984 U.S. consumers paid $42,000 annually for each textile job that was preserved by import quotas, a sum that greatly exceeded the average earnings of a textile worker. That same study estimated that restricting foreign imports cost $105,000 annually for each automobile worker’s job that was saved, $420,000 for each job in TV manufacturing, and $750,000 for every job saved in the steel industry. Yes, $750,000 a year!

(ellipsis mine)

The WSJ article that started all the huffing and puffing even included this snippet:

“Like 99% of economists since the days of Adam Smith, I am a free trader down to my toes,” he wrote back in 2001.

I’ve earned no MS Econ from LSE, I possess no PhD from MIT, and I’m clearly no professor of economics at Princeton, but pardon me anyway for the conceit of agreeing completely with his thinking above. He, like most in his profession, has both logic and past history on his side when taking the side of free trade over protectionism.

The WSJ article in question, entitled “Pain From Free Trade Spurs Second Thoughts”, has occasioned much chatter in the media and elsewhere (~37,900 articles as of this writing, many-though-not-all of which thinking they’ve found fodder for protectionist acts) about the fact that he’s changed his mind on free trade, and has embraced “fair trade” (as defined by its proponents). There was so much glee from those whose short-term view of economies leads them to believe ours should be closed that I was almost unable to avoid shouting into the void (here, with my still miniscule readership) about the stupidity and wrong-headedness of it all.

Picking just the one article from the first page in a Google search for “Alan Blinder”, I found a posting at Dr. Brad DeLong’s site. I haven’t followed his most recent site, but have read DeLong’s writing in the past, and while we’re at opposite ends of the political spectrum (he claims to be “100% Reality Based”, with all the silly things that connotes), he’s an unquestionably intelligent gentleman. His post on Dr. Blinder’s pronouncement, simply entitled Alan Blinder on “Offshoring”, really does nothing more than excerpt the WSJ article, and then throws the floor open for comment. The vast majority of his commenters offer a hearty “Amen!” to Dr. Blinder’s move to the protectionist’s side of the aisle. Though I choose to infer agreement on his part with the views of many of his commenters, Dr. DeLong’s views are largely left unwritten, aside from a lead-in comment to the excerpt that Dr. Blinder

“…has very smart things to see about “outsourcing”

No less illustrious “student of economics” than Dr. Greg Mankiw took the time to write, in “My Father is Darth Vader” (about how Blinder has been “lured by the dark side of the force”), that he

…believe[s] Alan is terribly wrong-headed about this topic.

His article is no hatchet job, of course, and contains some valid criticisms, but seems slightly to be missing the point.

Unlike the commenters at Dr. DeLong’s site, the very first respondent at Mankiw’s got right to the point:

Someone please correct me if I misunderstood the article, but I didn’t take Blinder to be saying that globalization is detrimental on the whole to America. I don’t see the controversy.

Having read the WSJ article myself, though somewhat after the fact, I’m forced to agree with the commenter at Mankiw’s site, excerpted directly above. Most controversially, Blinder “guestimated” in an article at Foreign Affairs, that because of the changes wrought by the onset of the electronic communication age, and the increase in the number of “tradeable” goods and services, “between 42 million and 56 million jobs were potentially offshorable.” More than a year after the Foreign Affairs article, he’s now the toast of the Democratic Party establishment, who, I think, see something different in his message than what he actually said.

Reading the WSJ article again, it seems quite clear that the arguable points he’s made are related to magnitude of the potential change, and the societal response required to deal with what he sees as the fallout. Note well that he doesn’t propose anything like protectionism, but instead wants consideration of a better safety net (retraining, etc.) for workers with displaced jobs, as well as the urgent improvement of the US education system to prepare workers for the jobs of the future. Specifically, he said in his paper:

Most obvious is what to avoid: protectionist barriers against offshoring. Building walls against conventional trade in physical goods is hard enough. Humankind’s natural propensity to truck and barter, plus the power of comparative advantage, tends to undermine such efforts — which not only end in failure but also cause wide-ranging collateral damage. But it is vastly harder (read “impossible”) to stop electronic trade.

Sorry, but to me, that doesn’t sound like a guy who’s gone over to the dark side.

Of the two “arguable points”, the only one worth serious thought seems to be the first – is the magnitude really as great as he says? The most concise argument (though not necessarily the best, or even the most true, but it could be both) I’ve seen is encapsulated at Daniel Drezner’s site:

…Blinder assumed that any job that could be done over the electronic transom:
a) Will be done electronically;
b) Will be done electronically by someone living outside the United States;
c) This job shift will happen incredibly quickly;
d) The U.S. economy will fail to create new jobs or job categories in response.

I agree with Drezner, perhaps simply because I’ve got faith in the US market’s ability to adapt, as it always has. And yet I still don’t think all the fuss made over Blinder’s original comments was justified, other than by people reading it to fit their existing biases against free trade.

Aside from what I think are the excellent counterpoints to Blinder’s potential overestimation of the problem scope, listed just above, there’s another issue people seem to forget; one that can be seen simply by looking at US history. As we grew richer (from trade, by the way), our standards increased – living standards, occupational standards, development standards, and perhaps most importantly, income standards. Is it outrageous to think that those exact same pressures will occur in India, China, and elsewhere as their wealth grows? Of course it’s not. And when such standards change, so too will the comparative cost advantages those markets presently enjoy for some (not all) tradeable goods and services.

Take for example this excerpt, from Tyler Cowen’s “Marginal Revolution”:

I think that China is due for a crack-up and India will soon bump up against its horrible legal and educational systems. I saw that economists are listed as among the most threatened groups, but I doubt if the United States can look forward to the liberation of so much talented and witty labor. I also think that corporate welfare is a bad idea, and that universities should not train everyone to be a small town divorce lawyer. Teaching reading and writing would be a good start.

Admittedly, everything after the first sentence above is included not because it supports my point, but because I enjoyed reading it. But China has issues related to managing its growth, and also managing the expectations of its billion+ people related to the quality of their lives.

Likewise India, including issues not mentioned by Cowen above, as seen in the article by Vish Goda entitled “Open Market Choking Roads” at AlwaysOn:

…what concerned me most during that visit was the uncontrolled proliferation of automobiles on Indian roads, so much so that nearly every street in Bombay or Pune was full of parked cars unable to go anywhere at all. And the visibile pollution extended way past the city, dumping clouds of soot and dust onto fields of rice and wheat.

I’m instinctively leery of his suggestion that government get involved and clamp down on the free market in India, forcing an earlier solution to the massive infrastructure problems in that country than the market would on its own. However, the sooner India starts paying the price in societal underpinnings required to match their prominence in the world economy, the sooner the flow of investment and purchases from the US to India will regain balance.

Ditto China, and the Philippines, Vietnam, Russia, or any other country about which, one day soon, China and India will be complaining for having hollowed out their service industries. In economics, as in many crucial spheres of human interaction, the world neither begins nor ends this week, this month, or even this decade. Not for nothing are they called “economic cycles”, and they’re quite a bit longer than the blink of an eye, so they should be examined and dealt with over the long haul.

Oh, and apropos nothing much, in case it seems odd that, two weeks after the initial uproar about this issue, I’d be pontificating on the matter, I’d like to add that the impetus for my rousing the effort to put my thoughts into words was an interview I heard on my way to the gym this evening, on the local PBS station’s broadcast of Marketplace.

In the fifth segment of that show, entitled “We may be taking some hits from free trade”, the host, Kai Ryssdal interviewed Dr. Blinder. (audio & transcript available at link above). The important clarifications I heard from the professor included:

BLINDER: Electronic communications means that a whole range of services that we used to think of as not tradeable between countries now is becoming tradeable. And India is the . . . it’s not the only one, but it’s a major source now of skilled, English-speaking labor.
{…}
So far, this is still a relatively small phenomenon — although for the people that are already impacted by it, it doesn’t seem very small at all. But I believe that as the electronic communications continue to improve, as they’ve been . . . and as countries like India, China, the Philippines and many others educate more and more people and get more and more businesses involved in this off-shoring process, it’s gonna be a very big deal indeed.

RYSSDAL: You know, if you go to an economists’ convention and you survey a room full of ‘em, they’re probably gonna say, most of them anyway, that free trade is a good thing. And that it generally advances the economic well-being of most of the people in the world. Are they all wrong?

BLINDER: No, no, they’re all right — and I’ll be in that convention voting the same side. Absolutely. Let me give you a large-scale analogy: suppose you were privileged in the year 1802 to walk into President Jefferson’s office and say, “You know what, President Jefferson? Right now, 83 percent of Americans earn their living on farms. In 150 years, that’ll be about 3 percent.” You know, Jefferson might have asked you, “Well, what will the other 80 percent do?” And of course, you wouldn’t have known, and nobody would have known. But they found better things to do than working on farms. And so in the end, I think we’re gonna have huge gains from this process. What I’m worried about is getting from here to there.
{…}
…I think we have to get used to the idea that if we want to stay the richest country in the world — which I presume we do — we can’t try to hang on to sunset industries. We have to specialize in sunrise industries. That’s again, not a news story, it’s been the story of the United States for decades now. And we’re pretty good at it, frankly.

(ellipsis mine)

And that’s all this is about – getting from here to there. Dr. Blinder is right to remain a free market economist, and is also right be talking about that journey.

Addendum – For the record, according to Arnold Kling, another MIT Econ PhD:
Alan Blinder is not Boring
Alan Blinder is Not Stupid

Just in case you were still forming an opinion.


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