Beat the Press

Dean Baker's commentary on economic reporting

6/13/2006

Is Alan Blinder a Protectionist?

Washington Post columnist E.J. Dionne is a decent person, whose views on many issues I share, but his column today is almost a caricature. It perfectly demonstrates why liberals/progressives are so lost on economic policy.

Dionne notes the collapse of good-paying jobs in the auto industry, the manufacturing sector, and increasingly other sectors due to trade and outsourcing. He then cites a recent article by Princeton University professor and former Fed Vice-Chairman Alan Blinder (identified as “no protectionist”) warning that the trend toward declining wages due to competition with the developing world is likely to spread to more sectors in the future. The implicit question that Dionne then poses is “how can we maintain middle class living standards without being hoary protectionists?”

The answer of course is that Alan Blinder, Bill Clinton and the other “free traders” referred to in the article are in fact protectionists. They just don’t own up to it. The competition that our manufacturing workers face from low-paid workers in the developing world is the result of trade policies that were explicitly designed to place them in competition with workers in the developing world. Trade pacts like NAFTA did not just reduce tariff barriers (these were already low) they established a whole set of rules that made it very simple and secure for U.S. corporations to set up manufacturing operations in developing countries and to ship their products back to the United States.

Instead of placing U.S. manufacturing workers in direct competition with low-wage workers in the developing world, our trade negotiators could have designed trade pacts that placed doctors, lawyers, economists and others in the highest paid professions in direct competition with workers in the developing world. This would mean standardizing licensing and education requirements so that smart kids in Mexico, India, and China could train to work as doctors in the United States just as do kids in New York or Los Angeles. (We can tax the earnings of professionals from developing country professionals working in the United States. Sending this revenue back to the country of origin would allow them to train 2-3 professionals for every 1 that works in the U.S., thereby reversing the “brain drain.”)

This pattern of trade would have two effects. First, there would be enormous gains from trade as the price of medical care and other services provided by highly paid professionals plummeted, raising living standards for all but those in the directly affected professions. Second, this pattern of trade would lead to increased equality rather than increasing inequality.

But, the designers of U.S. trade policy (both Democrats and Republicans) chose not to go this route. While they profess to be free-traders, they are in fact protectionists when it comes to the jobs of people in the highest paying professions. Until people like E.J. Dionne can recognize such basic facts, it will be difficult to design economic policies that benefit broad segments of the population.

24 Comments:

  • At 10:50 AM, Anonymous howard said…

    why would E.J. Dionne recognize such a thing? i agree that Dionne is one of the best op-ed pundits out there, but i'm sure that like so many economically sucessful people, he can't imagine there is a social component to his success.

     
  • At 11:15 AM, Blogger Mitchell J. Freedman said…

    Thank you, again, Dean, for setting things straight about the propaganda called "free" trade. I linked to you at my blog and wrote the following:

    1. There is no "free" lunch because someone always pays the cost of that lunch.

    2. There is no "free" trade because someone always pays the cost of that trade.

    3. There is no "free" market because someone always pays the cost in that market.

    4. There is only trade, markets...and lunch.

    In other words:

    Putting "free" in front of those words are just so much propaganda. Instead, the analysis should be to determine who is paying the cost in a structure or system and what, if anything, should be done to fine tune or make fundamental changes to the structure or system at various times. There is no utopic correct answer for all time.

    Ultimately, there is no left, no right and no libertarian "do without government" nonsense. Instead, we need an awareness as to how institutions work in both government and business at a more micro level, not with a mere theory about which is supposedly more efficient or other such theories. Instead, we need factual audit and anaylsis. If there is an ideology to be followed, it should be, as Lincoln said in his address to Congress in 1861:

    "Labor is the superior of capital, and deserves much the higher consideration."

    Why did Lincoln say that? Because he knew it was about people first, not capital. This is not anti-capital, just a recognition of balance with government providing support for superstructures and research and development--and the need for capitalists to give more back to the community (for example, pharmeceutical companies).

    MF Blog

     
  • At 11:29 AM, Anonymous Anonymous said…

    Dean, this is helpful and interesting, but you need to lay your cards on the table here. Would you in fact support a lowering of barriers of all sorts--for proles and professinals alike, or are you simply telling the professionals "you won't like it when it hurts you"--? Or are you saying (this seems a stretch) that you favor a lowering of barriers for professinals but no lowering (a raising) of barriers for proles?

     
  • At 11:31 AM, Anonymous Anonymous said…

    As a variant, we could probably save a bundle on Medicare if we could outsource it. That retirement home in Crete would start to look like a a pretty attractive option.

     
  • At 12:24 PM, Blogger meri said…

    I am aware of the basic argument, however I think it is not really the issue in the context of current "free trade" debates as services trade is clearly evolving to make space for trade in higher trained professionals as well.

    Trade in professionals and especially health professionals is currently a part of debate and promoted by the "free traders" of services. Just read some of the research papers of the World Bank or the recent contributions in the Health Affairs where health insurance is considered as a barrier to trading prospects.

    I think, in contrast, one should bring up well argued reasons that, for example, health care should not be part of trade and trade-related considerations. We compiled a book about commercialisation of health care. The first chapter is available in the following address:
    http://www.palgrave.com/pdfs/1403943494.pdf

     
  • At 3:57 PM, Anonymous S Brennan said…

    If you want to see what it is going to be like when they come for you...your profession...take a look at engineering:

    Warning some PDF

    http://iis-db.stanford.edu/pubs/
    20993/Dossani_Kenney_BRIDGE_2005.pdf

    What I find odd, US employers who regularly use engineering services from overseas will not consider telecommuting in the USA, so US engineers MUST live near their workplace and not someplace where reduced salaries would go farther. Odd that.

    Here's more:

    http://www.prism-magazine.org/dec03/
    global.cfm

    http://www.washingtontimes.com/
    functions/print.php?StoryID=
    20050423-104818-2947r

    http://www.cspo.org/products/
    lectures/061803.pdf

     
  • At 5:12 PM, Anonymous Anonymous said…

    meri wrote, I am aware of the basic argument, however I think it is not really the issue in the context of current "free trade" debates as services trade is clearly evolving to make space for trade in higher trained professionals as well.

    Hardly. The simple fact is that you cannot practice law in the US without a credential recognized by the US bar association. Similarly for medicine.

    I think, in contrast, one should bring up well argued reasons that, for example, health care should not be part of trade and trade-related considerations. We compiled a book about commercialisation of health care.

    What does a stance against excessive commercialization of health care have to do with the issue of rent-seeking by physicians?

     
  • At 5:18 PM, Blogger George Fiala said…

    It seems to me (as someone who has just finished Kindleberger's book on the Depression) that the more trade the better it is for everyone. IBM's Palmisano just had a piece in the Financial Times about how they are utilizing not just cheap manual labor, but collaborative intellectual efforts from people all over the world in advancing their enterprise.

    In the end, protectionism protects people who needn't be protected, and provides for a lesser public good for all. You just have to be able to tolerate the longer look. The alternative, at least in the 1930's, was a world war.

     
  • At 6:38 PM, Anonymous Anonymous said…

    In the end, protectionism protects people who needn't be protected, and provides for a lesser public good for all. You just have to be able to tolerate the longer look. The alternative, at least in the 1930's, was a world war.

    Would putting a few reins on "American" corporations and limiting their offshore outsourcing of production really lead to war? Or is this just a scare tactic? For someone with my views it's heartening to see such desperation.

    Also, like the other Anonymous asked, what is Dean Baker's position anyway? Does Baker think that labor arbitrage is a net plus if it hurts white collar Americans?

    With our current living standards so high relative to the rest of the world, just what advantage does Baker think many (most?) American workers have in a single global labor pool? Is there something in our water that always allows us to stay on top? Is this true even if investment in domestic production dries up?

     
  • At 10:51 PM, Anonymous Nancy Brigham said…

    I agree with the basic point that free trade is a set of rules that actually protects the privileged, and is free only in terms of freely allowing exploitation of the most vulnerable people in the world. The rules that protect investment and intellectual property are just that, protectionism.

    But growing numbers of professionals are also subject to this cut-throat international competition that other workers experience -- a.k.a. race to the bottom. Just look at the huge high-tech centers going up in China and India, with high-tech jobs also moving to low-wage places like Russia. The vast majority of these jobs are not for local development, but are handling work outsourced from the U.S. by American companies. And the number one reason is because it's cheaper. High-tech workers may not be losing as many jobs as five years ago, but high-tech job opportunities aren't growing in the U.S. either.

    Fewer and fewer students are even bothering to try to get educated in computer-related skills that have made us a technology leader in the past and could make our economy strong in the future.

    For details (which I'll update this year), see http://www.cpsr.org/pubs/workingpapers/1/Brigham

     
  • At 1:27 AM, Blogger Camille Roy said…

    I continue to think that the real crisis of globalization is political. I'm disappointed that the examples supplied in this post were not helpful in pointing out how to deal with these political stresses. Here is a more useful comment from Morgan Stanley's resident bear.

    "I found the globalization debate to be the most stimulating aspect of this year’s conference -- in large part, because it shed considerable light on the denial that was to surface in the investment picks at the end of the conference. Of course, I’m letting my own biases come though here, having fixated over the past several years on the interplay between globalization, ever-mounting global imbalances, and world financial markets. We had the benefit of a great provocateur this year, historian Naill Ferguson of Harvard and Oxford, who has just completed his latest opus on contemporary global history, The War of the World: History’s Age of Hatred (Penguin, London, 2006 -- not available in the US until September 2006). Inasmuch as I only received my copy the night before the session, I will confess to only having read about half this 700-page tome. But I will also tell you it is as close to a page-turner in history as you will find -- I have a hard time putting it down. Ferguson treats the 1914 to 1953 era as a critical continuum in modern world history -- punctuated by two related World Wars but also involving brutal cross-border and internal conflicts in Asia, sub-Saharan Africa, and the Middle East. He dates the end of the world’s bloodiest era of conflict with the conclusion of the Korean War in 1953. But he leaves you with the gnawing sense of concern that this endpoint is still very much an open question.

    Ferguson’s gift is not to describe -- although he does plenty of that -- but to analyze. In a provocative introduction to The War of the World, he suggests that this lethal period in contemporary history is an outgrowth of a combination of several powerful forces -- namely, ethnic conflict, extreme volatility in economic conditions, and declining empires. He tied it to our debate by noting two obvious bookends to this devastating conflict -- the globalization of 1880 to 1914 and the new era of globalization we are living through and investing in today. This led to the burning question of the hour: Do the apparent self-destructive tendencies of that earlier era of globalization offer important lessons as to what to expect this time around? For those fully invested in the great secular stories of this globalization -- China, India, commodities, and big-cap multinationals -- this is the question. The overlay with the debate on the global liquidity cycle makes it all the more relevant in the current financial market debate.

    Ferguson offered four hypotheses as to why the first globalization met its demise: The failure of central banking; financial crises due to defective market structures; populist backlashes against globalization; and geopolitical crises. He leaves you with the uncomfortable feeling that he fears a similar outcome this time around."

    link
    http://www.morganstanley.com/GEFdata/digests/20060612-mon.html

     
  • At 12:41 PM, Blogger Mitchell J. Freedman said…

    The consensus from US economists is that the leading cause of the Great Depression of 1929 into the 1930s was the protectionist laws passed in the US, particularly Hawley-Smoot Tariff of 1930.

    Joseph Schumpeter, in his major book from the late 1930s (can't recall name), said this was nonsense. Gus Tyler, around 1986, in the New Leader, wrote a great essay on the subject debunking the main economists' conclusions. The GNP decline was less after passage of the Hawley-Smoot Tariff in 1930 than before it passed. Tyler also showed that the tariff affected very few goods and a very smal percentage of the US economy.

    So let's stop the garbage that a protectionist policy, which the US followed from the days of Alexander Hamilton up through the 1920s, only hurts the US economy. The US was built on the pillars of tariffs. The difference is that this time, we should want tariffs to protect working people, not business executives.

    And yes, I know the late JK Galbraith believed high tariffs caused the Great Depression. All I can say is every once in awhile, the late great Galbraith was wrong, too.

     
  • At 12:51 PM, Blogger flevoman said…

    It would certainly be fair to free up professional trade. But the global labor arbitrage opportunity would still exist, indeed, it would expand. That opportunity is measured by the difference between US labor rates and foreign labor rates. If there are 100m people here making $50k, and the comparable wage elsewhere is $3k, then the arb is $4.7T annually, probably the largest business opportunity ever. All you have to do is to form your business to exploit the delta.

    I keep thinking back to a village where doubtless some would have more capital than others. But should one of these find a way to do this arb between his home village and another one, he might find unfriendliness at home. So it seems this kind of investment behavior is pathological. Yet we have rules defining our free market which encourage it. I do not know what the rules should be to reverse the arb.

     
  • At 2:32 PM, Blogger George Fiala said…

    "I keep thinking back to a village where doubtless some would have more capital than others. But should one of these find a way to do this arb between his home village and another one, he might find unfriendliness at home."

    Not if the money saved is passed on in the form of lower prices to the natives of the first village and increased investment in innovative new projects that can produce something the other village cannot yet.

     
  • At 5:25 PM, Blogger James M. Jensen II said…

    I don't think supporting lower barriers for professionals need be coupled with either supporting low or high barriers for the labor market. These have two different situations as far as effects of trade go, and what's good for one isn't necessarily good for the other.

    If salaries dropped for doctors and economists, they would have to live in less luxury, but few if any would be on food stamps. A drop in the median salary for low-wage jobs would likely leave many people on welfare or charity.

    There may be some high-overhead private practitioners who might be genuinely hurt by the price drops, however, and it may be necessary to set up grants to ensure their services can remain available if they are necessary.

    There may also be a difference in ability to retrain for a different vocation. I suspect that educated men and women would be much more flexible than those training for the first time.

    In addition, the additional professional immigrants would not be nearly as many as the additional laborers.

    So I think it's perfectly reasonable to support lower barriers for professionals but not for workers.

    Perhaps Dean isn't sure?

     
  • At 9:35 PM, Anonymous Anonymous said…

    I often hear people making comments that "America was built on the pillars of tariffs" but if you look at the actual numbers for most industries, you see this simply isn't the case.

    The interesting thing about Blinder's article (and interview) is that he understands technological change and says it will only continue to shrink the world. Yet he doesn't seem to understand how far this will go in 20 years.

    He mentions that heart surgeons won't be threatened by off shoring in 2025, yet doctors are already performing operations using remote control.

    Even better for us, and worse for heart surgeons, is that there will be little need for their services as drugs maintain us to the extent where pre heart attack conditions are almost entirely eliminated.

     
  • At 8:49 AM, Blogger flevoman said…

    I may not have been clear.

    The labor arbitrage results in a pure transfer of income from the arb'd laborer to the smart investor who uses the tilted playing field. Just suppose that the arb investment is not merely a plant transfer or simple substitution of labor. Suppose that the investor creates goods and services at lower prices and that the standard of living of the local labor actually rises as a result even thought their wages decline. In terms of the resulting distribution of income, the investor, who was already large, becomes huge. Remember it's something on the order of 90% of labor's income that is at risk of the arbitrage and resulting concentration in the distribution. Potentially the concentration we see now could turn out to be mild.

     
  • At 4:04 PM, Anonymous save_the_rustbelt said…

    "...This pattern of trade would have two effects. First, there would be enormous gains from trade as the price of medical care and other services provided by highly paid professionals plummeted, raising living standards for all but those in the directly affected professions...."

    This would lower the incomes of medical professionals by diluting the patient base, but given our healthcare payment system it would have little impact on pricing.

    I never look for a cheap doctor or a cheap lawyer.

     
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