29 December, 2007

What do Paul Krugman and left-wing radicals have in commmon?

This sentence:

trade between countries at very different levels of economic development tends to create large classes of losers as well as winners.

The left-wing radical (I jest, of course) would say that the losers are the poorer countries and the winners are the richer countries. Krugman argues from economic theory that the winners are consumers in both countries, capital and educated workers in the rich country, and uneducated workers in the poor country. The losers are capital and educated workers in the poor country and, importantly, uneducated workers in the rich country. Moreover, if you sum the effects in each country, the "country as a whole" is better off, in some sense.

I suggest reading the whole column. He grapples with a very hard truth of American politics. Open trade is good for labor in poorer countries (a vast number of people), but bad for labor in this country (relatively fewer people). As a liberal, you could take a number of positions:

1. US policy should maximize total welfare in the US: Free trade.
2. US policy should maximize the welfare of the worst-off (or minimize inequality) in the US: Protectionism.
3. US policy should maximize total welfare in the world: Free trade.
4. US policy should maximize the welfare of the worse-off (or minimize inequality) in the world: Free trade.

If you care about total welfare (plain efficiency), you're a free trader. On the other hand, if you want to include some measure of inequality in your social goals, then you have to decide whether or not you care about people in the rest of the world. Personally, I'd choose option (4).

1 comment:

Cassady said...

Agreed. I've never been a protectionist--at least, not since taking Economics 121 last year. I suppose as a person who claims to have a conscience, I would vote for option 4 as well.