An Open Letter to my friends at the Economic Policy Institute:
Guys, you write:
Trade deals accelerate deficits, eliminate jobs: Under NAFTA and the WTO, trade deficits have accelerated rapidly and eliminated a net total of 3 million actual and potential jobs from the U.S. economy
Now I know that you never actually say that "NAFTA and the WTO" caused the growing deficits--the "under" phraseology is carefully calculated. I know that you know that the trade deficit is as much--hell, more!--macroeconomic than it is microeconomic: had Alan Greenspan decided back in 1995 not to risk higher inflation in order to promote growth and hit the economy on the ear with a rock, we could have had a 7 percent-unemployment economy and no trade deficit in the late 1990s. I know that you know that the level of employment is set (with large errors, and with substantial lags) by the Federal Reserve's Open Market Committee meeting in the Temple of Social Technocracy called the Eccles Building--that a NAFTA- and WTO- and trade deficit-free U.S. would have had roughly the same level of employment in the late 1990s as the actual U.S.
So why work so hard to persuade your casual readers otherwise? There are arguments against NAFTA, but the real arguments are not macroeconomic employment-based ones. You may say, "Yes, but we're dealing with a public incapable of perceiving the Forms, so we need to cast the right shadows on the wall of the cave so that they act as they would if they could perceive the Forms." But to that I reply: "We're the good guys. We benefit in th elong run from elevating the level of the debate at every opportunity.
Posted by DeLong at October 23, 2002 12:17 PM | TrackbackOk, two quick points. First, it's hard to make the case, as you seem to suggest, that FOMC unilaterally tries to set the employment level; firms investment strategies aren't tied too directly to the TOST. Second, you're right on target that the problems with Nafta and WTO are not so much macro-employment, although I've never heard of a US corp moving "overseas" to *increase* unit labor costs.
The challenge is to articulate what the two treaties do to Federalism and Democracy and how they impact National and sub-national governments legislative and policy making [relative] autonomy. This needs to be done without appeals to Nationalism; poverty elimination and an ecological,Epicurean cosmopolitanism should be our watchwords. On that score a lot more alliances need to be built between economists and progressive lawyers who find something fishy about smuggling 19th century notions of "takings" etc. and the accompanying bogus distinction of "private versus public" issues into treaties that will have enormous impacts on the 21st century.
Posted by: Ian on October 23, 2002 12:56 PMEPI lists the following folks as financial supporters:
AFL-CIO
AFL-CIO, American Center for International Labor Solidarity
AFL-CIO, Union Label and Service Trades Department
Amalgamated Transit Union
American Federation of School Administrators
American Federation of State, County and Municipal Employees
American Federation of Teachers
American Postal Workers
Brotherhood of Maintenance of Way Employees
Communications Workers of America
International Association of Machinists and Aerospace Workers
International Brotherhood of Boilermakers
International Brotherhood of Electrical Workers
International Brotherhood Painters and Allied Trades
International Union of Electronic, Electrical, and Technical Workers
Laborers' International Union
National Education Association
National Postal Mail Handlers Union
Office and Professional Employees International
Paper, Allied-Industrial, Chemical Employees
Service Employees International Union
Transport Workers Union
Union of Needletrades, Industrial and Textile Employees
United Automobile Workers
United Brotherhood of Carpenters and Joiners of America
United Food and Commercial Workers International Union
United Steel Workers of America
Utility Workers Union of America, AFL-CIO
To expect the institute to promote a notion of free trade at variance with the provincial narrowly defined self-interest of US union members is simply unrealistic.
Posted by: George Zachar on October 23, 2002 01:30 PM"although I've never heard of a US corp moving "overseas" to *increase* unit labor costs."
Of course not. But many companies move because there are advantages despite higher costs (of whatever variety). Did all those Swiss and German banks think labor was cheaper in New York when they moved their investment banking units there?
Posted by: David Margolies on October 23, 2002 01:30 PM"We're the good guys. We benefit in the long run from elevating the level of the debate at every opportunity."
Perhaps. But it isn't obvious to me that the "turn the other cheek" philosophy is the right response to a cynical, dishonest debating strategy. The _only_ argument that the pro-NAFTA, pro-WTO forces have made in the policy arena is that free trade will create jobs. You may think that this is the wrong metric--I'd agree--but it still seems worth making the point that by the pro-NAFTA side's _own_ standards, the net benefits have gone the other direction.
(Yes, I know all about comparative advantage, and about how trade lowers consumer prices. But it seems hard to argue against the proposition that the first-order domestic effect of a NAFTA-like agreement is on the distribution of rents within the economy. Put slightly differently, it is straightforward to show that free trade increases total surplus. But can anyone deny that most or all of the net benefits go to the top half (quarter? tenth?) of the U.S. income distribution? And if not, why should the rest of the population support it?)
Finally, George: Why are no similarly bald-faced ad hominem attacks turned toward the pro-NAFTA forces, who are equally funded by interested parties?
Posted by: Jesse on October 23, 2002 02:13 PMUm, I can certainly deny that the "rents" go to the top whatever of the distribution; If the benefit of free trade is lower prices, those benefits will be experienced moreso by people who spend a greater proportion of their income on goods, that is to say, the poor.
Posted by: Dennis O'Dea on October 23, 2002 03:13 PMTo David Margolies: No, the German and Swiss banks didn't worry too much about labor costs. But Mercedes, BMW etc. have put plants in the US to lower labor costs, meanwhile the costs of their cars did not fall.
To Dennis O'Dea; it's a misanalysis to suggest that because consumer get lower prices for some goods, the Rents don't go to those at the top of the wealth/income brackets who own the means of production. Also many relocations of production don't necessarily lead to lowering prices. As to who get's the greater benefit, well that's the problem with tying "comparative advantage" -which as David Soskice and others have recently pointed out is a problematic concept in an "institution rich" world [see Varieties of Capitalism ed. by him and Peter Hall]- to utilitarian notions of welfare.
Posted by: Ian on October 23, 2002 04:00 PMWhy are no similarly bald-faced ad hominem attacks turned toward the pro-NAFTA forces, who are equally funded by interested parties?
I listed the group's sponsors, and pointed out their clear interest, using no perjoratives.
I was unaware that a statement of fact was a "bald-faced ad hominem attack".
Did I misunderstand you?
Posted by: George Zachar on October 23, 2002 04:48 PMIan- Which rents exactly go to the Rich? Clearly, rents go to the poort, in form of lower prices. What do the Rich get? I suppose that they own domestic firms that are able to lower their costs with foreign labor, and they own firms that are in more productive sectors that grow as less productive sectors shrink. Why these rents be greater than the rents consumers receive? Or more interestingly, how are these not both in the interest of the consumers? Certainly they will not face higher prices, so it can only benefit them. Likewise growth in higher productivity sectors will mean wage growth. Workers in low-productivity sectors lose, but not as much as everyone else gains, so nuts to them. Or rather, we can compensate them and still come out ahead.
I suppose you're arguing that the growth and increase in competitiveness will not translate to lower prices for consumers. But it must; Ineficient domestic producers are driven out of the market precisely because foreigners offer lower prices. A domestic firm that did not offer lower prices as a result of it's reduction of costs is not taking advantage of its new situation. Honestly, which rents are the rich receiving at the expense of the poor? How is free trade bad for the poor? I don't get it.
Did all those Swiss and German banks think labor was cheaper in New York when they moved their investment banking units there?
The all-in cost of doing business in New York is lower than that on the Continent. But proximity to new clients, and expertise unavailable in their home markets, were the real drivers.
Besides, London is the true financial HQ in that time zone, despite staying out of the Euro.
Posted by: George Zachar on October 23, 2002 05:11 PM'Perhaps. But it isn't obvious to me that the "turn the other cheek" philosophy is the right response to a cynical, dishonest debating strategy. The _only_ argument that the pro-NAFTA, pro-WTO forces have made in the policy arena is that free trade will create jobs. You may think that this is the wrong metric--I'd agree--but it still seems worth making the point that by the pro-NAFTA side's _own_ standards, the net benefits have gone the other direction.'
It's highly unlikely that the forces of good can defeat those with dumb arguments on their home turf: making dumb arguments.
Posted by: Jason McCullough on October 23, 2002 07:06 PMI never suggested that the rents the rich receive come at the expense of the poor. Although to the extent the rich externalize the some of the costs of production onto ecosystems and poor communities, they do gain at the poor [and everyone else's expense]
If you're a firm and you move into a 'foreign' competitors market, achieve lower unit costs and can sell your product at the same price as they do, and skim the rents because of constant -or growing- demand, would *you* lower prices?
Personal experience in a high productivity growth industry during the 90's, in a Fortune 500 company that had multiple locations across the planet while denying it's workers raises for 8 years is one simple counterexample to the notion that firms share productivity gains with workers. That's a bargaining power problem and is precisely why the unions in the North have been screwed for decades. Wage growth does not happen like the economic textbooks say, period. One need only look at the Corps. resistance to any kind of Kaldor-Hicks solutions with teeth during the last few skirmishes over "fast track," to get a sense of their motives.
Of course, what's been left out of the discussion is how all those rents can be dashed on the rocks of ForEx markets......
Posted by: Ian on October 23, 2002 07:06 PMGeorge: You wrote "To expect the institute to promote a notion of free trade at variance with the provincial narrowly defined self-interest of US union members is simply unrealistic."
This has two interpretations, in my eyes. One is that these unions give money to EPI because they like what it happens to say. It is hard to draw that interpretation from what you say, but I admit its possible. If that is what you meant, I withdraw my characterization of it as an ad hominem attack, and I offer my apologies.
What I understood you to say is that EPI gets money from several unions, so figures out how to say _something_ that promotes the "provincial narrowly defined self-interest of US union members." Is that not an ad hominem attack? It isn't confronting the arguments, but simply saying that they need not be confronted because of who funds them. There is, of course, perfectly good reason to examine the self interest of political actors, and EPI should not be exempt. But neither should the other side. And one shouldn't pretend that examination of the funding constitutes a rebuttal to the arguments.
Let me return to my point about the distribution of rents. NAFTA is not, primarily, an agreement to lower tariffs. Tariffs on U.S.-Mexico trade were low before NAFTA ever came around, and are now slightly lower. Most of the negotiations around NAFTA were about investor protections. The idea was to ensure that Mexico wouldn't appropriate U.S. firms' capital, wouldn't repudiate Mexican firms' debt, would respect U.S. copyright and patent laws, etc. The "labor side agreement," however, was almost entirely toothless. One could have written a trade agreement that did not substantially change the distribution of rents between labor and capital, but NAFTA is certainly not that. Its first order effect is to discourage high wages on either side of the border, which is not in the long-term interests of unions, their members, or of workers in general.
It is far from clear that savings on labor costs will be passed on to consumers in anywhere near their full amount, as would be required for free trade to even leave workers unharmed. Certainly the corporations who spend large sums of money to lobby for trade agreements must believe that a large part of the benefits will accrue to them as profits.
Posted by: Jesse on October 23, 2002 09:13 PMJesse, if that is the real name, overanalyzes my point.
Our esteemed blogmeister was chiding his pals at EPI for not providing a more sophisticated and balanced approach to this thorny issue. In fact, as their supporters' list makes clear, one of EPI's core missions is marshalling economic data and using it in an advocacy capacity, in a manner supportive of many American labor unions.
It is as silly to berate EPI for doing what it is supposed to do as it would be to hammer the CATO institute for not giving equal hearing and weight to "both sides" of, say, universal single-payer health care.
By all means, debate NAFTA and free trade. But it strikes me as pointless to toss barbs at an organization with a clear promotional role on one side of the discourse.
THAT was my point.
Posted by: George Zachar on October 24, 2002 06:09 AM"Honestly, which rents are the rich receiving at the expense of the poor? How is free trade bad for the poor? I don't get it. "
You are right to be bewildered by such a confused assertion. Free trade ultimately raises all boats. This is why I’m somewhat cynical concerning the Mother Theresa cult. Too many people place an exaggerated emphasize on giving stuff to the poverty stricken. The reality is that it is much more beneficial if the nations of the free world dismantle their economic protectionist measures.
The creative destructive aspects of free trade inevitably destroy the livelihood of many workers. This is an infallible economic dogma. In the long run, the good far outweighs the bad. Admittedly, though, in the short run some folks are going to suffer. What can be done about this problem? I don’t know, and until I acquire godlike powers it’s highly unlikely that I will be able to offer an adequate response.
Posted by: David Thomson on October 24, 2002 06:35 AMGeorge just thoroughly corroborated Jesse's point about his original post (and George's rhetorical tactics are surprisingly blunt: double spacing the names of the unions, to create a longer list; suggesting that Jesse is some nom de guerre, the better to raise doubts about his views...). George's post was ad hominem because it addressed not the argument, but the arguer (and did so with loaded rhetoric - "provincial" indeed); when Jesse pointed this out, George said, You're wrong - that's exactly what I did. Neat trick.
Furthermore, Brad's point was that EPI is not a fundamentally flawed group, but that this quote is pure spin; George's point is that EPI is a fundamentally flawed group. Fair enough, I suppose, but the rest of us were discussing the matter on its merits.
double spacing the names of the unions, to create a longer list
I'm not that clever. My html editor, Arachnophilia 4.0 did that, and I didn't know how to undo it.
suggesting that Jesse is some nom de guerre, the better to raise doubts about his views
Posting caustic comments anonymously naturally arouses suspicion. It's the kind of thing folks at FreeRepublic.com do.
George's point is that EPI is a fundamentally flawed group.
I never said that. I said they were clearly in an advocacy role on this topic.
But I must commend you for your clear understanding of ad hominem attacking.
Posted by: George Zachar on October 24, 2002 09:02 AM"It is far from clear that savings on labor costs will be passed on to consumers in anywhere near their full amount, as would be required for free trade to even leave workers unharmed. Certainly the corporations who spend large sums of money to lobby for trade agreements must believe that a large part of the benefits will accrue to them as profits."
I can only hope that the person who wrote these comments is not a professional economist. If so, the problems in our universities are worse than I previously imagined. The seller of any product or service of course prefers to possess a monopoly. Furthermore, Adam Smith warned that business people are innately inclined to collude against the consumer in order to increase their profits. However, in any viable society where the rules are enforced---any competitive advantage is likely to be only temporary. Sooner or later, and probably a lot sooner, the savings on labor costs will inevitably be passed along to the buying public.
Also, it would behoove someone to provide a working definition of what it means to “leave workers unharmed.” Does this mean a legitimate concern for their physical safety? Or, is this the rhetoric of a powerful union that employs every trick in the book to ensure that their members receive financial compensation far above their market value? Has anybody been reading about our recent longshoreman's strike?
Posted by: David Thomson on October 24, 2002 01:55 PMDavid Thomson's remarks puzzle me.If producers attempt to maximize return, why would reducing a cost component cause them to reduce prices instead of increasing profit? What's in it for them?
And similarly, why would individual workers care about a predicted pie-in-the-sky return for "consumers" as a class, if their own individual incomes are being lowered. Anyone done a time-discounted cash argument that skilled workers who lose their jobs in the US gain an advantage 20 years down the line when the claimed drop in consumer prices brightens up their lot as unskilled minimum wage drudges?
One of the odd things about economism is that the basis is individual greed, yet trade policy seems to require that workers sacrifice their good for a mythical global advantage. A cynic might think the whole thing is a complex mythology designed to obscure naked exercise of power.
“David Thomson's remarks puzzle me.If producers attempt to maximize return, why would reducing a cost component cause them to reduce prices instead of increasing profit? What's in it for them?”
What’s in it for them? Did you fail to read my point that in a fair system, the producers (I prefer to call them sellers) are compelled to compete with each other. Therefore, they will have no choice but to reduce prices. Altruism has nothing to do with it.
“And similarly, why would individual workers care about a predicted pie-in-the-sky return for "consumers" as a class, if their own individual incomes are being lowered. Anyone done a time-discounted cash argument that skilled workers who lose their jobs in the US gain an advantage 20 years down the line when the claimed drop in consumer prices brightens up their lot as unskilled minimum wage drudges?”
The individual worker (I take it for granted that you are tacitly referring to low paid employees) has no right to demand that society protects their income. They must compete just like the “workers” who wear executive suits--or play professional baseball for a living. The infallible dogma of creative destruction cuts no slack for anyone.
“One of the odd things about economism is that the basis is individual greed, yet trade policy seems to require that workers sacrifice their good for a mythical global advantage. A cynic might think the whole thing is a complex mythology designed to obscure naked exercise of power.”
Greed is never good. It is always immoral and highly destructive. Legitimate self interest, rightly understood, though, is entirely justified. Mythical global advantage? The evidence is overwhelming that the enactment of vigorous free trade policies is perhaps the best way to help people out of poverty. Naked exercise of power? Yup, that’s exactly how I would describe the shenanigans of the striking longshoremen. The so-called worker has no right to a particular job. Barry Bonds has to compete to stay in uniform. The far less paid blue collar employee must do likewise.
Posted by: David Thomson on October 25, 2002 09:37 AMPardon me but when in recent history have "skilled workers who lose their jobs in the US" ended up as "as unskilled minimum wage drudges." The vision here seems to have more to do with paranoid mythology than what has actually happened in the US in the last half century.
Posted by: JTreves on October 25, 2002 12:26 PM"Free trade ultimately raises all boats."
Regulated or unregulated?
UNregulated free trade would raise all boats only after the excess unemployed have starved off... which would be a few billion people, wouldn't it?
Free trade WITH guaranteed labor rights, an international minimum wage, environmental protections -- now that's a different story.
Wouldn't it be better for us if the people to whom our jobs are exported were paid enough to be able to purchase goods made by the remaining few U.S. workers?
Issuesguy, your post is almost unintelligible. Free trade is clearly good for everybody. Honestly, it is. the Question is whether we want to trade some of those benefits for things like a cleaner environment, a stronger labor movement, human rights, etc,etc. If you ask me, it is. That is to say, I think building those things into trade agreements is a good idea. But that would certainly reduce some of the benefits of free trade and people currently receive. I think it's clearly worth it, it's the only sensible thing to do. But even if we didn't do it, Free trade would still be a good thing.
Posted by: Dennis O'Dea on October 25, 2002 04:08 PM"Honestly, it is. the Question is whether we want to trade some of those benefits for things like a cleaner environment, a stronger labor movement, human rights, etc,etc. If you ask me, it is. That is to say, I think building those things into trade agreements is a good idea."
We seem to be on the same page. Sigh, there is admittedly no such thing as unrestricted free trade, free speech, or free anything. Laissez faire capitalism is inherently impossible. It's always a matter of the degree of freedom. I also believe in advocating for carefully thought out compromises when it comes to international trade. Please note, however, my emphasize on "carefully." Draconian restrictions will result in great harm.
This discussion reminds me why I prefer Michael Novak's term "democratic capitalism." The political order always has an important rule in regulating the economy. The only legitimate debate is where do we draw the line.
Posted by: David Thomson on October 25, 2002 07:16 PM"Pardon me but when in recent history have "skilled workers who lose their jobs in the US" ended up as "as unskilled minimum wage drudges." "
Actually I was just reading an article today that interviewed a married couple who had been well-paid computer tech support people and are now trying to make it after they both lost their jobs. Their current income level is 75% below what they used to make. Have you actually been paying any attention to what's happening? In at least one field that was supposed to be among the saviors of the American job market, the tech sector, not only are jobs lost because of the over-hyped "dot com" bubble but because tech support and programming jobs are being shipped overseas as fast as many companies can manage.
Fair? The corporations who get whatever they like from our government have no interest in fairness. Consider a recent headline. Abbott Labs makes record profits, up 14% from last year. How do they celebrate this news? They fire 2600+ employees.
Also, don't forget the simple fact that in order for these lower prices you harp on to benefit the poor, they have to actually have money to spend after paying for food, rent and other necessities. And oh, yeah...that little luxury, health care.
Posted by: Jim Satterfield on October 25, 2002 09:32 PM"Actually I was just reading an article today that interviewed a married couple who had been well-paid computer tech support people and are now trying to make it after they both lost their jobs. Their current income level is 75% below what they used to make."
Many of these people were vastly over paid for their skill level. I used to work for a telecom company that paid ridiculously high wages to people who barely knew how to turn on a computer. Those individuals who truly strive to update their knowledge are not starving to death. They are still able to put bread on the table. The free market isn't always pretty, but it's effective. I am confident that the cited couple will still retain a decent lifestyle. Also, the rest of us now pay lower prices for our goods and services.
"Fair? The corporations who get whatever they like from our government have no interest in fairness. Consider a recent headline. Abbott Labs makes record profits, up 14% from last year. How do they celebrate this news? They fire 2600+ employees."
What does this have to do with the proverbial price of tea in China? "Fairness?" There is zero relevance in the fact that Abbott Labs increased its profits and still found it necessary to eliminate 2,600 employees. What is your point? The only valid question is whether these employees jobs were still justified. Is a corporation suppose to keep employees who no longer serve a purpose? What do you say to the stock holders? Why should the general public pay more for the company's products simply to keep these people on the payroll?
Posted by: David Thomson on October 26, 2002 01:21 AM'Actually I was just reading an article today that interviewed a married couple who had been well-paid computer tech support people and are now trying to make it after they both lost their jobs. Their current income level is 75% below what they used to make. Have you actually been paying any attention to what's happening? In at least one field that was supposed to be among the saviors of the American job market, the tech sector, not only are jobs lost because of the over-hyped "dot com" bubble but because tech support and programming jobs are being shipped overseas as fast as many companies can manage.'
This is known as "anecdotal evidence." There's no statistical evidence of a mass movement from the middle class to lower class.
Posted by: Jason McCullough on October 26, 2002 02:04 PMDennis writes of free trade being good for everyone.
"Honestly, it is. the Question is whether we want to trade some of those benefits for things like a cleaner environment, a stronger labor movement, human rights, etc,etc. If you ask me, it is. That is to say, I think building those things into trade agreements is a good idea."
Because of the principle of comparative advantage this is one of the few commonly accepted pieces of macroeconomic advice in the economics profession. But I'm not so sure. In fact I am positive that it is not true, becaue when I look at how nations industrialized, I find almost without exception, that they did so behind trade protections. I also find excessive free trade rhetoric and fact to be associated strongly with empires in decline.
Posted by: Ian Welsh on October 27, 2002 12:45 PM"...I find almost without exception, that they did so behind trade protections. I also find excessive free trade rhetoric and fact to be associated strongly with empires in decline."
James Fallows also argues this point in "Looking at the Sun." He highlights the projectionist theories of Friedrich List. I tend to also believe that such measures sometimes actually did work in the distant past! Today, however, we live in a world of instant communication and easily travelled distances. Protectionism is now the path taken by the losers.
Posted by: David Thomson on October 27, 2002 01:21 PM"...I find almost without exception, that they did so behind trade protections. I also find excessive free trade rhetoric and fact to be associated strongly with empires in decline."
James Fallows also argues this point in "Looking at the Sun." He highlights the projectionist theories of Friedrich List. I tend to also believe that such measures sometimes actually did work in the distant past! Today, however, we live in a world of instant communication and easily travelled distances. Protectionism is now the path taken by the losers.
Posted by: David Thomson on October 27, 2002 01:24 PM"James Fallows also argues this point in "Looking at the Sun." He highlights the projectionist theories of Friedrich List. I tend to also believe that such measures sometimes actually did work in the distant past! Today, however, we live in a world of instant communication and easily travelled distances. Protectionism is now the path taken by the losers. "
I wouldn't call the last 50 years the distant past. Otherwise known as Japan and the Asian Tigers. Agressive exporting, behind protectionist barriers - especially barriers against excess capital flows. And once those barriers were removed - disaster.
Posted by: Ian Welsh on October 28, 2002 08:18 AM"I wouldn't call the last 50 years the distant past. Otherwise known as Japan and the Asian Tigers. Agressive exporting, behind protectionist barriers - especially barriers against excess capital flows. And once those barriers were removed - disaster."
Are we not now living in the age of the Internet? If so, fifty years ago is indeed "the distant past." It takes less than a second to share vital economic information throughout the world. This makes all the difference. Japan's problems have much to do with its silly protectionist policies. It's unwilligness, for instance, to also allow weak companies to go bankrupt has only made matters far worse.
Posted by: David Thomson on October 28, 2002 10:00 AM'Agressive exporting, behind protectionist barriers - especially barriers against excess capital flows. And once those barriers were removed - disaster.'
Ah, but capital controls are a different breed from tariffs.
Posted by: Jason McCullough on October 28, 2002 03:10 PM