Inequality As Policy: Selective Trade Protectionism Favors Higher Earners

By Dean Baker, the co-founder of CEPR. Originally published at the Institute for New Economic Thinking website

Globalization and technology are routinely cited as drivers of inequality over the last four decades. While the relative importance of these causes is disputed, both are often viewed as natural and inevitable products of the working of the economy, rather than as the outcomes of deliberate policy. In fact, both the course of globalization and the distribution of rewards from technological innovation are very much the result of policy. Insofar as they have led to greater inequality, this has been the result of conscious policy choices.

Starting with globalization, there was nothing pre-determined about a pattern of trade liberalization that put U.S. manufacturing workers in direct competition with their much lower paid counterparts in the developing world. Instead, that competition was the result of trade pacts written to make it as easy as possible for U.S. corporations to invest in the developing world to take advantage of lower labor costs, and then ship their products back to the United States. The predicted and actual result of this pattern of trade has been to lower wages for manufacturing workers and non-college educated workers more generally, as displaced manufacturing workers crowd into other sectors of the economy.

Instead of only putting manufacturing workers into competition with lower-paid workers in other countries, our trade deals could have been crafted to subject doctors, dentists, lawyers and other highly-paid professionals to international competition. As it stands, almost nothing has been done to remove the protectionist barriers that allow highly-educated professionals in the United States to earn far more than their counterparts in other wealthy countries.

This is clearest in the case of doctors. For the most part, it is impossible for foreign-trained physicians to practice in the United States unless they have completed a residency program in the United States. The number of residency slots, in turn, is strictly limited, as is the number of slots open for foreign medical students. While this is a quite blatantly protectionist restriction, it has persisted largely unquestioned through a long process of trade liberalization that has radically reduced or eliminated most of the barriers on trade in goods. The result is that doctors in the United States earn an average of more than $250,000 a year, more than twice as much as their counterparts in other wealthy countries. This costs the country roughly $100 billion a year in higher medical bills compared to a situation in which U.S. doctors received the same pay as doctors elsewhere. Economists, including trade economists, have largely chosen to ignore the barriers that sustain high professional pay at enormous economic cost.

In addition to the items subject to trade, the overall trade balance is also very much the result of policy choices. The textbook theory has capital flowing from rich countries to poor countries, which means that rich countries run trade surpluses with poor countries. While this accurately described the pattern of trade in the 1990s up until the East Asian financial crisis (a period in which the countries of the region enjoyed very rapid growth), in the last two decades developing countries taken as a whole have been running large trade surpluses with wealthy countries.

This implies large trade deficits in rich countries, especially the United States, which in turn has meant a further loss of manufacturing jobs with the resulting negative impact on wage inequality. However, there was nothing inevitable about the policy shifts associated with the bailout from the East Asian financial crisis that led the developing world to become a net exporter of capital.

The pattern of gains from technology has been even more directly determined by policy than is the case with gains from trade. There has been a considerable strengthening and lengthening of patent and copyright and related protections over the last four decades. The laws have been changed to extend patents to new areas such as life forms, business methods, and software. Copyright duration has been extended from 55 years to 95 years. Perhaps even more important, the laws have become much more friendly to holders of these property claims to tilt legal proceedings in their favor, with courts becoming more patent-friendly and penalties for violations becoming harsher. And, the United States has placed stronger intellectual property (IP) rules at center of every trade agreement negotiated in the last quarter century.

In this context, it would hardly be surprising if the development of “technology” was causing an upward redistribution of income. The people in a position to profit from stronger IP rules are almost exclusively the highly educated and those at the top end of the income distribution. It is almost definitional that stronger IP rules will result in an upward redistribution of income.

This upward redistribution could be justified if stronger IP rules led to more rapid productivity growth, thereby benefitting the economy as a whole. However, there is very little evidence to support that claim. Michele Boldrin and David Levine have done considerable research on this topic and generally found the opposite. My own work, using cross-country regressions with standard measures of patent strength, generally found a negative and often significant relationship between patent strength and productivity growth.

There is also a substantial amount of money at stake. In the case of prescription drugs alone, the United States is on path to spend more than $430 billion in 2016 for drugs that would likely cost one-tenth of this amount in the absence of patent and related protections. While we do need mechanisms for financing innovation and creative work, it is almost certainly the case that patent and copyright monopolies as currently structured are not the most efficient route, even if their negative consequences for distribution are quite evident.

The structuring of trade and rules on IP are two important ways in which policy has been designed to redistribute income upward over the last four decades. There are many other ways in which the market has been structured to disadvantage those at the middle and bottom of the income distribution, perhaps most notably macroeconomic policies that result in high unemployment. While tax and transfer policies that reduce poverty and inequality may be desirable, we should also be aware of the ways in which policy has been designed to increase inequality. It is much easier to have an economic system that produces more equality rather than one that needlessly generates inequality, which we then try to address with redistributive policies.

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  1. Enrico Malatesta

    Perhaps more useful than outsourcing MD’s, how’s about targeting Trade Negotiators and Lobbyists?

  2. Minnie Mouse

    Aren’t trade deals crafted to empower global labor arbitrage against everybody regardless of education, occupation, or industrial sector? Would it not in fact be even more profitable to suppress the relatively higher end of the wage scale? Even scarier is global regulatory arbitrage and ISDS which enables open ended attacks on domestic law. Intellectual property becomes disconnected altogether from the technology development process when it can simply be bought and sold like corn.

  3. Jim Haygood

    Our trade deals could have been crafted to subject doctors, dentists, lawyers and other highly-paid professionals to international competition.

    Quite so. Unlike the European Community, Nafta did not provide for labor mobility.

    In developed economies, the right to work elsewhere is only ever exercised by a minority of people, owing to cultural, family and language ties which make most people unwilling to expatriate.

    Nevertheless, goods trade is only one part of a larger picture involving services trade, labor mobility, and intellectual property. Focusing exclusively on goods trade is a holdover from Ricardian “wine for cloth” thinking.

    1. casino implosion

      Doctors and lawyers deserve their incomes because they got into competitive schools and worked hard.

      1. jrs

        had the right upbringing to make the right decisions very early in life is mostly what it ALL amounts to.

        Although lawyer isn’t always the right decision anymore, and you need a certain kind of personality to hobnob just right in a certain elite way, the education alone, even when top tier, is not enough to fit in that world. But that lawyers will try to write protection into legislation – well who do you think makes our laws? It’s obvious when one thinks about it.

        Doctor ok if you can get through med school the education might be enough to enjoy taking orders from an HMO. Still doing well compared to most though.

      2. Synoia

        You illustrate the problem of student debt, without substantive discussion of the issue. What have the future doctors, dentists and lawyers learned when they graduate with $200,000 to $500,00 in student debt?

        How to care for people, or the necessity of earning a high income?

      3. Tom Skowronski

        Doctors get their income by belonging to a UNION ! It is called the AMA. The American Medical Association which controls the number of residencies given out every year and thus future incomes.

        1. RickM

          Actually, no. Your facts are wrong. The AMA is not remotely equivalent to the ABA, which does have such power (ill-used lately with the proliferation of 5th-tier accredited law schools and the flooding of the market with unemployable lawyers). The Accreditation Council for Graduate Medical Education (ACGME) regulates the number of residencies available in the US, for all MD graduates and most DO graduates. The Liaison Committee on Medical Education (LCME) regulates the establishment and continuing accreditation of medical schools, including the total number of students admitted to each school in each entering class. As one would hope, the processes for establishing a residency program or medical school are quite stringent. The continuing requirements are equally stringent, and you would might be surprised at the list of medical schools and hospitals that have landed on the “probation list.” The total number of slots available for residencies is limited by the number of teaching hospitals capable capable of bearing a considerable burden. Ditto for medical schools.

          Which isn’t to say that an MD or equivalent (e.g., MBBS) from another country who has completed the equivalent of a residency is not be perfectly qualified to practice medicine in the US (a state-level licensing issue; and yes, established physicians on such boards are politically powerful and difficult to move). Or that the effect of the accreditation process doesn’t limit the number of slots available to medical students and newly minted physicians. But the AMA is in no way equivalent to a UNION, as you put it. As a famous teacher at Johns Hopkins one told his class of medical students (with me at the back of the room) immediately after the AMA (aka Boys from Chicago) left after a membership pitch, “Just remember, they need you a lot more than you need them,” before getting on with his tour de force on intermediary metabolism. So, if you want to increase the number of physicians in this country, get busy and change the system from the ground up, which is the goal of the NC Community. The education of health care professionals at all levels is expensive, for the student and the school/hospital. I teach medical students. Most of them graduate with a debt of $250,000 or more, not including debts from their undergraduate studies. Almost all of them would choose to practice medicine in real communities of citizens and residents, who will be their patients rather than agglomerations of medical “consumers,” given the opportunity to do so without the intermediation of the faith-based, neoliberal belief system that can best be stated “The market is the measure of all things!”


        1. JCC

          It didn’t go over my head… and it was not appreciated by me, anyway.

          I don’t know a lot of doctors personally anymore, so I don’t know much about the day-to-day life of the average physician, but I did growing up as my father was a general surgeon in a mid-sized factory town in Rust Belt NY State. Maybe today his sarcasm is apt, maybe not. But in the 60’s, 70’s, and 80’s most of these men and (few) women in similar environments worked their tail ends off.

          As just one example, I never remember him spending as simple a thing as more than 3 or 4 hours on a Christmas Day at home with family, and more than one of those Christmas Days he would be gone, at work, almost the entire day. Other Holidays weren’t much different.

          Yes, he made good money, but 60 to 80 hour work weeks were the norm for him until he was well into his forties, and I’m not sure he ever saw a 40 hour work week until a year or two before he died.

          He had a party with some friends of his when I was in High School celebrating the last of his College Bills paid off, and he was a student through most of the fifties when it was (relatively) cheap to get a medical degree.

          He started college in 1952, went into private practice in 1964 after finishing college, medical school, internship, 2 years drafted into the army, and then residency. The college “mortgage burning” party occurred somewhere around 1970. 28 years of worry about just one debt. Becoming a doctor was never a cheap endeavor in time or money.

          So, yes, Dean Baker points out legitimate problems in that certain professionals in our society are exempt from the results of U.S. style Globalism and Trade Agreements, doctors included, but don’t think means that all of them are getting a cushy job with no responsibilities and a light workload on the cheap.

          As a side note, the industry changed over my father’s 40 year career. He was disappointed with me in my younger days for failing to choose to be a Dr. (I looked at how he lived his life and thought it just wasn’t worth it… I didn’t have that much dedication to the health of my “fellow man”) and he made no bones about his disappointment. However, A few years before he died, when he finally went into semi-retirement, we had a long talk one day about work and life in these United States as it looked in the 90’s, and he told me the smartest thing I ever did was ignore his pushing me into the profession. He strongly dis-liked what it had become by then. I can only imagine what he would think if he were alive today.

          1. jrs

            40 hour weeks are rare for everyone these days (though worth aspiring to!). People’s resentment of doctors pay etc.. is inevitable when they have seen their own incomes decline and decline, as it leaves them in many cases simply UNABLE to pay the cost of these professionals. If you have 10-20% high paid professionals and 80% at least paupers, the paupers will never be able to pay to see those high paid professionals though the high paid professionals could just trade among themselves. A model where the vast majority is reduced to poverty and yet while services they might need (doctors, lawyers etc.) are still well paid and thus out of reach could never work socially, it merely in the end leaves the vast majority without services (it is approaching that with healthcare).

            1. JCC

              The thing that most also don’t realize, in small to medium sized towns at least, is that even though doctors still make a good buck, those in private practice have seen their expenses skyrocket too. It was still a small proprietary business and they faced very high expenses to due education bills, regulations and insurance issues, and normal family household bills on top of that.

              To again use my father as an example, with no court cases against him during his first 20 years or so of practice he saw his insurance rates quadruple and ended up going into a partnership for multiple reasons due to the cost of this insurance and other legal requirements and regulations that required him to hire additional full-time nurses, a part-time accountant, and expensive specialized equipment that he really didn’t want or need since it was available at the hospital across the street from his office, etc.

              Unlike most salaried workers’ kids that I grew up with, we never took family vacations, another example… he couldn’t be away from the office/business for more than a day or two at a time, Community/Business obligations were never ending. It was a major big deal in our house when he and my mother took their very first vacation together, 7 years after he went into private practice and 19 years after they were married, a whirlwind 10 day tour through western Europe.

              This, he explained to me, was one of the main reasons many of the newly graduated physicians ended up going to work directly for hospitals. They couldn’t afford to go to work for themselves.

              Of course because of this, the entire family medical doctor business became thoroughly crapified. No more house calls, no more payments in kind, no more sewing a few stitches (gratis) into the neighborhood kid/friend at the kitchen table due to a minor childhood mishap.

              Although these sorts of things sound silly if not unheard of today, it was common as dirt during my childhood and well into the eighties.

              As an example of payments in kind, when we were kids Christmas time was always interesting in our house, seeing presents from various small business owners, sporting good stores and others, because my father had taken care of their families’ serious illnesses for nothing, just like your neighborhood plumber friend stopping by to help you fix your toilet.

              I’d be willing to bet this sort of thing is unheard of today in most towns in this country. Doctors are no longer a core part of the communities they serve and so they are treated as “the others”.

              Too bad, we have all lost a lot, doctors included.

      4. Dave D'Rave

        What about the Computer Engineers? Why is it that we have been subjected to uniquely destructive foreign slave labor imports?

        Is it because we are politically inert?

        Wrong. Eric Cantor is gone. Jeb Bush is gone. Hillary has found out that the Computer Nerds are both able to read her e-mails and willing to torpedo her campaign.

        H1-B visas are a criminal conspiracy to import Cheap Slave Labor and to then lay off the American workers. Everybody knows that. We now have an algorithm for fixing the problem: Destroy individual political careers.

        At this time, we are only able to destroy one political career per election cycle. This is going to take a while. Think World War I. The Immigration Wars have only started.

    2. Mike G

      I know doctors, dentist, accountants, architects and others in Australia/NZ can practice in the UK with their qualifications fully recognized and vice versa; I’ve heard it’s the same situation for Canada. Nothing similar for immigrants to the US.

      It’s hard not to see it as protectionism when there’s no recognition for the credentials from other countries with similar practices and high standards. The US has always felt it was big enough to say f-u and be parochial and arrogant about interoperability with other countries’ professional standards, that if people wanted to come here they could grovel and beg for recognition because we were so mighty and exceptional.

  4. tricia

    After years of postponing necessary dental work due to inability to pay (the delay causing the problem to worsen, of course), and finally at the point of desperation, I went to Budapest and got all the work done for approximately 1/4 of what my US dentist had quoted (including airfare and hotel and a side train trip to Vienna where I got to spend hours in art museums!).

    I applaud Dean Baker for his tireless harping on this issue – many are painfully aware of these high costs but unaware that it results from a form of protectionism.

    1. Arizona Slim

      Here in Tucson, Mexico is a popular choice for dental work. I know people who’ve gotten great work in Agua Prieta and Nogales.

      1. Paid Minion

        I’m just waiting for some smart guy to set up a clinic in a Mexican resort area, lease an airliner, and start running a shuttle service to the clinic.

        1. Mike G

          An acquaintance went to India for heart surgery that would have cost $200k stateside.
          A Western-standard hospital with Western-trained doctors, and recovery at a medical beach resort — $15k.

    2. PlutoniumKun

      To prove Deans point, one of the more obvious benefits of the expansion of the EU into eastern Europe is that ‘discretionary’ health costs such as dental work and laser eye surgery rapidly declined as people realised they could travel to places like Hungary where you could get perfectly good care much cheaper. Later of course, the doctors and dentists moved around Europe, bringing down costs significantly by breaking up little local monopolies.

    3. Vatch

      I wonder what kind of student debt the dentists and physicians in Hungary and Mexico are burdened with. Probably a lot less than the dentists and physicians in the U.S. Perhaps if medical and dental education in the U.S. weren’t so astronomically expensive, the U.S. doctors and dentists could still have relatively high incomes, but without charging exorbitant fees.

      1. Paid Minion

        Maybe if the doctor’s incomes weren’t so lucrative, and with high barriers to entry ( I’m looking at you, AMA), colleges might not charge so much for the degrees.

        Doctors and nurses can only kill one person at a time. Pilots and mechanics can kill hundreds with one little screw up. But who gets paid better?

  5. a different chris

    My daughter has a confusing condition that has bumped her around “specialists” in different fields — nothing of “Mayo Clincally” type of urgency or danger.

    Thank god, because I have really good insurance and it still is frelling impossible to see these guys. The latest one isn’t really that rare a specialty, but he’s the only “in network” guy. We made an appt in late summer, couldn’t get anything earlier than Dec 28. Yesterday we open an envelope, his staff informing he’s decided for reasons not stated (probably extending his holiday) to not be there and please call to reschedule.

    There’s probably 50 (better) guys in India that would have gladly come here and could have seen her already.

    1. kramer

      in the us, I thought only vets needing care via the VA had to wait to see a doc. At least the VA could be called to account before congress. The rest of us out here in the free market paradice can be told to go pound sand.

    2. Dwight

      Really good insurance would allow you to see an out-of-network doctor for the same price if an in-network doctor is not available within a reasonable period. I say more than one month is unreasonable regardless of the urgency.

  6. Jim A.

    The “normalization” of IP rules across nationalities always seems to work out in the favor of the owners* of the IP, not the owners of the property that it is embodied in. Before the US joined the Berne Convention, we had a few (quite reasonable IMHO) formalities on copyrights. You had to register them, you had to put a notice on the documents with date of publication on them, if you wanted protection for more than 26 years, you had to renew the copyright.
    *and I do mean the owners, not the creators.

    1. TheCatSaid

      I was just about to recommend this, too. Very timely to this post. It’s very clear and it’s building up my understanding of how this system evolved over time, and how the powerful corporations were able to apply pressure to keep switching from one “body” to another to go to where they could wield the most influence–and the strategies applied that resulted in developing countries getting the short end of the stick

  7. Paul Art

    I believe it is standard practice for anyone beginning to run for public office to first get hold of a few good Doctors in their neighborhood to start collecting campaign cash. We must all drop down to our knees, doff our hats and courtesy at the American Medical Association. The have held a stranglehold on the medical profession in this country since 1847. There are Specialists who don’t even know of the existence of this group (my idiot cousin Nephrologist). Such is the subtlety of their touch and control. There are a few million primary and specialty care physicians in India who could be imported here on H1-Bs but not allowing Doctors in is a purely political decision that the AMA engineers. The other ways the AMA makes sure that demand is ALWAYS more than supply is this idiotic insistence that one must complete a 4 year degree before even starting medical school. In India where the medical education system was built by the British, one enters Med school right after high school and finished 4 years later followed by a 2 year House Surgeon stint and you are basically a Primary Care physician after this. In America the AMA has done a masterful job of dividing the populace based on the employer based Government subsidized insurance. I have been in industry for 23 years and not even once have I ever heard even a single fellow worker kvetch about the insurance rates. I am unable to explain it because I know for a fact how little I paid when I started out in 1995 and how much one has to pay now. The only way to explain it is that, today the people who have long term careers in Corporations are the willing and submissive drones and the higher order leeches (Managers, Directors) and they think that this is the price of stability and job security.

    1. Felix_47

      I believe that there are a lot of doctors coming in on H1B visas. In addition there are many medical schools in the Indian subcontinent that graduate students primarily for the American market. The government positions are highly competitive and the others come to the US. There is a much higher proportion of Indian doctors in the US than, for example, lawyers.

  8. TheCatSaid

    An inspiring voice in the world of intangible assets (including intellectual property) is David E. Martin. Two non-profits he’s involved in, Global Innovation Commons and Heritable Innovation Trust, do amazing projects all over the world in a way to make knowledge and creativity more accessible to all, and to protect local cultures’ unique knowledge bases and enable them to profit from their development.

  9. Felix_47

    We have tried to outsource medical care. Have you noticed how many doctors in the US cannot speak English very fluently and appear to have just arrived from India, Pakistan, Afghanistan or Africa? The immigrant physicians are not unlike the distribution of the immigrants to today`s Germany. Immigration liberalization since the early 1970s was supposed to produce exactly the outcome the author expected…..a drop in costs. Since doctors are not that stupid as soon as they try to cut their income they think of ways to maximize it. Medical billing programs are developed to work the system. How about just putting all doctors on salary just like firemen? No one complains if firemen sit in the firehouse playing cards……we dont burn down houses to keep them busy. Fee for service for a service the government has determined is a necessity is the problem.

    1. TheCatSaid

      “How about just putting all doctors on salary just like firemen?”

      What about a combination of all of the following:
      — funding doctors’ educations,
      — adding non-pharma-sponsored elements to the curriculum (food as medicine, herbal remedies, other non-AMA approaches),
      — guaranteed salaried positions,
      — combined with an obligation to practice in a public (!) USA health system for at least 5 years

      The pharmaceutical industry’s creation of the AMA and subsequent control of doctors’ educations since the early 20th century (thanks to Big Oil / Rockefeller) machinations is part of the systemic failings of our current “health care system” illness-promoting insurance industry.

  10. jfleni

    An “operating system” (14K+ choices at last count) is an addition to normal computer software which makes everything work better; but for practical
    purposes there is only ONE! Even the desperate shills for “Steamboat Willie,
    i.e. Disney NEVER gained as much as the 9$ billion value of this company.

    9$ billion times better?? What nonsense! GIMME and devil take the hindmost!

  11. PKMKII

    This upward redistribution could be justified if stronger IP rules led to more rapid productivity growth, thereby benefitting the economy as a whole. However, there is very little evidence to support that claim. Michele Boldrin and David Levine have done considerable research on this topic and generally found the opposite. My own work, using cross-country regressions with standard measures of patent strength, generally found a negative and often significant relationship between patent strength and productivity growth.

    Which makes sense; a patent is functionally a monopoly on a design. If people can only get a certain widget because of your IP hold on it, why bother developing it? Widget isn’t developed, widget doesn’t become more efficient, people using it don’t become more efficient and ergo, don’t become more productive.

  12. Ricardo Quesnay

    Admittedly, there are no easy answers on immigration policy. But Baker’s hope that we should be converging on a single global wage for each job sounds very close to this idea, from billionaire Gina Rinehart, when she warned striking miners to be thankful for what they have:

    “The evidence is inarguable that Australia is becoming too expensive and too uncompetitive to do export-oriented business. Africans want to work, and its workers are willing to work for less than $2 per day.”

    Baker also fails to acknowledge the huge brain drain already afflicting the developing world thanks to our health policies.

  13. Beans

    The education and training doctors and dentists matters, big time when you are the patient. The health profession has been under assault to be remade into the healthcare business for many years. Viewing the solution to the healthcare problems our country faces through the lens of free market competition and lower trade barriers will only result in a degradation of care, much like what we have seen in the quality and selection of goods manufactured abroad. H1b visas are not the answer to high costs – decreasing doctor pay will increase corporate profits. Thinking that the savings will be passed on to patients is flat out foolish.

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