Vanity Fair has published a short article by Joseph Stiglitz on how the top 1% aren’t merely taking way more than their fair share, but how they are increasingly organizing the world to make that into a self-perpetuating system. After debunking the idea that the new economic order is a function of merit, as opposed to socialism for the rich and rent extraction, he turns to its destructive features, including:
….perhaps most important, a modern economy requires “collective action”—it needs government to invest in infrastructure, education, and technology. The United States and the world have benefited greatly from government-sponsored research that led to the Internet, to advances in public health, and so on. But America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead…..
The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs. The rich don’t need to rely on government for parks or education or medical care or personal security—they can buy all these things for themselves. In the process, they become more distant from ordinary people, losing whatever empathy they may once have had. They also worry about strong government—one that could use its powers to adjust the balance, take some of their wealth, and invest it for the common good. The top 1 percent may complain about the kind of government we have in America, but in truth they like it just fine: too gridlocked to re-distribute, too divided to do anything but lower taxes…
Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent.
Needless to say, the shift in income distribution and wealth looks to be so badly entrenched as to be pretty much impossible to reverse ex a very concerted push by the great unwashed 99% (but sadly, the top 10% to 20% of that cohort incorrectly sees its interests as aligned with those of its betters).
I hate picking on individuals to illustrate broader phenomena, but in light of the reality depicted by Stiglitz, arguments in support of policies that worsen distribution and leave the economy net no better off are simply indefensible. But instead we get rationalizations and calls for the Distribution Fairy to wave her magic wand.
Consider this post by Menzie Chinn at Econbrowser, “Gains and Losses from Trade with China“. He discusses a new paper by David Autor, David Dorn, and Gordon Hanson, “The China Syndrome: Local Labor Market Effects of Import Competition in the United States“. It looks at the impact of trade with China on US communities (defined as commuting zones) from 1990 to 2007, parsing out how exposed the various localities were to trade with China. They find that competition with Chinese manufacture had a negative impact on labor markets (quelle surprise!):
Our results suggest that the strong focus of previous literature on wages misses important aspects of labor-market adjustment to trade. We find that increased exposure to low-income- country imports is associated with rising unemployment, decreased labor-force participation, and increased use of disability and other bene ts, as well as with lower wages. Comparing two CZ’s over the period of 2000 through 2007, one at the 25th percentile and the other at the 75th percentile of exposure to Chinese import growth, the CZ at the 75th percentile would be expected to experience a differential 4.1 percent fall in the number of manufacturing employees, a 0.8 percentage point fall in the employment to population rate, a 0.8 percent fall in mean log weekly earnings, and increases in per capita unemployment, disability, and income assistance transfer benefits on the order of 2 to 3 percent. Hence, federally funded transfer programs, such as Social Security Disability Insurance (SSDI), implicitly insure U.S. workers against trade-related employment shocks. Import exposure also predicts a large but imprecisely measured increase in benefits from Trade Adjustment Assistance (TAA), which is the primary federal program that provides nancial support to workers who lose their jobs as a result of foreign trade. However, TAA grants are temporary, whereas most workers who take-up disability receive SSDI benefits until retirement or death (Autor and Duggan, 2006). For regions affected by Chinese imports, the estimated dollar increase in per capita SSDI payments is more than forty times as large as the estimated dollar increase in TAA payments.
The paper also finds (and its authors say they were surprised) that these effects netted out in the medium term against gains to consumers.
And what does Chinn say? Rather than question free trade orthodoxy (can’t do that or you will be dismissed as a heretic) since the paper shows that trade produced no net economic gain and adversely affected hapless families and communities, he instead argues:
I think it’s important to remember, when comparing costs and benefits, that this is the welfare levels with China under (relatively) free trade against the welfare levels without China, and not against autarky.
Further, as the authors note, over time some of the costs (transfers and associated dead weight losses) disappear, so the benefits eventually outweigh the gains.
Note the paper did NOT say the benefits outweighed the losses. This is what it said:
Growing import exposure spurs a substantial increase in transfer payments to individuals and households in the form of unemployment insurance bene ts, disability bene ts, income support payments, and in-kind medical bene ts. These transfer payments are two orders of
magnitude larger than the corresponding rise in Trade Adjustment Assistance bene ts. Nevertheless, transfers fall far short of offsetting the large decline in average household incomes found in local labor markets that are most heavily exposed to China trade. Our estimates imply that the losses in economic efficiency from trade-induced increases in the usage of public bene ts are, in the medium run, of the same order of magnitude as U.S. consumer gains from trade with China.
The article argues that the short term hits to efficiency of GOVERNMENT PROGRAMS to compensate for the negative impact on workers nets out in the intermediate term against consumer gains. But it also clearly states those programs do not fully compensate for the income losses consumers suffer. Moreover, the analysis cannot capture second order effects of employment and income losses (as we now know, when workers lose good manufacturing jobs, they were not likely to find replacement jobs at comparable levels of income even before the crisis) in term of effects on mental health as well as the more general, society-wide adverse effects of increased income disparity (for instance, even the wealthy suffer from shorter lifespans in less equal societies).
So then we get this:
Even when the benefits outweigh the costs, the tabulation of gains and losses by groups highlights the facts that international trade has distributional consequences. That realization should not induce policymakers to hinder trade via protectionist measures. Rather it reminds us that transfers from gainers to losers is a prerequisite for trade to be Pareto improving.
Earth to base. Those transfers weren’t adequate over the last 15 years. If they were, Stiglitz wouldn’t be writing about the increased concentration of wealth and power in the top 1% (not that trade is the only or main driver but it is part of the equation).
And treating the only policy options besides redisribution as protectionism is a straw man. We live in a world of managed trade, not open trade. Our trading partners are far more astute in agreeing to trade policies that protect or at least don’t worsen the standing of their workers. We, by contrast, have big corporate friendly policies and have promoted the view that anything that results from “market” activity, no matter how many distortions there are in that market, must be virtuous. And the result is that we have economists who really ought to know better taking their scripts from Dr. Pangloss.