The toughest question about global trade
This year's battle for the White House has put international trade in the spotlight. Donald Trump has led the charge against trade agreements, but Hillary Clinton's reversal of her support for President Obama's Trans-Pacific Partnership (TPP) also reflects the evolving view of the benefits of globalization.
The American public has long been suspicious of international trade, but economists have been much more supportive. However, new evidence in the economics literature has caused a rethinking of how to evaluate trade agreements.
This research documents that the negative effects of globalization on employment and wages are larger than many people realized. In addition, it recognizes that most of the benefits have accrued to those at the top of the income distribution while the costs -- lost jobs, lower wages and fewer attractive employment opportunities -- have fallen mainly on the working class.
One response from many advocates is to point out that international trade has lifted millions of people around the world out of poverty and that reducing the pace of globalization would slow the rate of global poverty reduction.
All of which brings up an important and rather difficult question: Just how should we value international trade?
If we assume that every person in the world counts the same when we tally up the costs and benefits of trade, the benefits would be much larger than the costs. The net benefits are even larger if we assume, as seems reasonable, that increasing the income of a poor person by, say, $1,000 generates more benefits than increasing the income of a rich person by the same amount (or that increasing the income of a person in a poor country by $1,000 generates a benefit that exceeds the cost of reducing the income of a person in a wealthier country by $1,000).
That still leaves important issues to consider concerning how the costs are distributed within the U.S., but net benefits globally would be large.
But what if we adopt the view of politicians who are concerned mainly with the plight of U.S. voters? How would the cost-benefit calculation be made in that case?
For one thing, it isn't clear that the benefits to the poor in other countries ought to be excluded from the calculation. It depends on what voters care about. If people in the U.S. care greatly about lifting the world out of poverty and would penalize a politician who interferes with that goal, then a politician who wants to be elected should take this into account.
But what if people care the most about those closest to them, their families, their co-workers, their local communities and so on? The fact that trade helps the poor in other countries might matter to them, but not nearly as much as how it affects their own futures and the futures of those closest to them.
In this case, the net benefits of trade aren't as clear. If the spoils go mainly to wealthy Americans and the costs fall mainly on the working class, how should we weight the costs and benefits?
If we assume that the costs of a lost dollar in terms of diminished happiness or well-being (what economists call utility) to the working class are much larger than the increase in happiness for a dollar flowing to the top of the income distribution, then it's possible for the net benefits to be negative. (Even if, on a purely dollar basis, the income gained exceeds the income lost, the weight attached to the gains and losses would differ.)
The net result could still be positive, depending on the very difficult problem of determining the correct "utility weights." But even so, the benefits would be smaller than if we simply tabulated dollar gains and losses.
I believe the ability of international trade to lift the poor out of poverty is a very important consideration when thinking about the benefits of trade. If I had my way, the government would use taxes and transfers to ensure that trade makes everyone better off. It should provide ample social insurance to ensure that any Americans who lost their job due to trade would not face the large economic risks they do now.
That would be a much better solution than closing America's doors to the world. But that's far from the reality of how trade has worked in recent decades, and people are correct to assume that the political atmosphere makes hopes for such changes a dream rather than a realistic possibility.
Economists should do all they can to inform people of the costs and benefits of globalization and to provide information on how the costs are distributed. They should also point out things that have been excluded from the discussion of the costs and benefits above, for example, the fact that trade results in lower prices and a greater variety of goods than would otherwise be available.
They should inform people about the ability of trade to lift so many out of poverty. Their calculations of the welfare effects from trade within the U.S. should take all of this into account, and economists should provide this important information so people can make informed choices.
But what economists shouldn't do is tell people what they should care about. It's understandable that people will put the most weight on the welfare of those closest to them, and if they choose to place the welfare of family and their communities above the welfare of the poor in other countries, that's understandable.
My economic future is secure. I have tenure at a university and an income that's more than adequate. I don't know what it's like to face substantial economic insecurity. I don't wonder if I'll have a job in the future or a chance to advance. Or if I'll be able to send my kids to college, afford health care or have a decent retirement.
It's easy for me to put the welfare of the poor in other parts of the world high on my list of concerns.
International trade is a contentious issue, and many politicians exploit fears that people have about their economic security with exaggerated or false claims as a means of generating votes (see Donald Trump). But the fears of many in the working class are very real, and these people deserve to be heard rather than be told they're bad for not caring enough about the poor in other countries.