Wednesday, March 28, 2007

Blinder on Free-ish Trade

Via Greg Mankiw, we find Alan Blinder qualifying his support for free trade. Greg seems to be taking it personally. Rather, we should just take his suggestion (my emphasis below) to its natural conclusion:

Mr. Blinder's answer is not protectionism, a word he utters with the contempt that Cold Warriors reserved for communism. Rather, Mr. Blinder still believes the principle British economist David Ricardo introduced 200 years ago: Nations prosper by focusing on things they do best -- their "comparative advantage" -- and trading with other nations with different strengths. He accepts the economic logic that U.S. trade with large low-wage countries like India and China will make all of them richer -- eventually. He acknowledges that trade can create jobs in the U.S. and bolster productivity growth.

But he says the harm done when some lose jobs and others get them will be far more painful and disruptive than trade advocates acknowledge. He wants government to do far more for displaced workers than the few months of retraining it offers today. He thinks the U.S. education system must be revamped so it prepares workers for jobs that can't easily go overseas, and is contemplating changes to the tax code that would reward companies that produce jobs that stay in the U.S.
Fantastic. We can be a nation of barbers, gardeners, and custodians, and we can enforce this nirvana by favoring it in the tax code.

Jobs have many characteristics. It is true that for the purposes of talking about jobs in trade policy, economists often collapse these characteristics into a single characteristic, the wage at a point in time. Blinder is correctly pointing out that another characteristic is the risk associated with that wage in the future. That risk could come from a number of sources, of which foreign competition is just one.

When people choose jobs, they have the freedom to trade off among the characteristics embodied in each job. Standard economic analysis would suggest that, for jobs that require the same degree of skills, those that offered more risk would also have to offer higher average wages to compensate. Starting from an equilibrium in which workers have information that is no worse than the government about the terms of this tradeoff, a policy that favored less risky wages would necessarily generate lower expected wages. What's the compelling interest by the government to justify this shift in outcomes?

I can think of two. First, one could assert that the government has better information than the public about relative risks and rewards. Second, one could assert that the social cost of risky jobs is higher than the private cost, i.e. that the government bears a fiscal cost of people being employed in jobs with higher compensation risk. I am skeptical in both cases, but I would be interested in hearing other perspectives.

7 comments:

Edward Charles Ponzi Jr. said...

As we cannot export much of our "service economy" -- how are we supposed to pay for what we import without chronic borrowing?

Fritz said...

You Wrote: Second, one could assert that the social cost of risky jobs is higher than the private cost, i.e. that the government bears a fiscal cost of people being employed in jobs with higher compensation risk.

That would be our agriculture policy.

The US economy has evolved back to an equivalent of an 18th century agrarian economy; we are all farmers now. The economy is a rolling field of cash crops in various sectors. Tax policy to encourage worker risk taking, income averaging, 100% deductibility of capital loss, treat equity compensation only at the point of sale, not receipt.


I agree major changes are necessary in the public delivery system of K-12 education is vital.

Lord said...

a policy that favored less risky wages would necessarily generate lower expected wages

I do not think this is true. In investment, the returns to lower priced stocks exceed that of high flyers even though high flyers are expected to produce greater returns. Overinvestment in high flyers lowers their actual returns. In a similar manner, overinvestment in riskier wages leads to a wider scatter of results, but to lower, not greater expected wages. This is the result of the psychological lure of winning the lottery.

Fritz said...

Lord,
That defies why Union membership has declined. Workers are willing to take lower wages for job security. Prior to Reg D's removal, people worked for lower wages at banks for job security. The at-will white collar workforce we have today is paid far more than in the past.

Lord said...

The wider dispersion of incomes can increase arithmetic means at the same time as decreasing geometric means. Since wellbeing is best measured by geometric means, this means increased risk has made us less well off.

Fritz said...

Lord,
Not necessarily an objective truth. In education such a pronouncement would be true, the objective of education is expected academic achievement. In income such arguments are subjective. The most important economic goal is to maximize potential GDP. Where the income falls is irrelevant. Having total wealth smaller to fit a geometric fairness, does not assure the poor would be better off than in what would appear as a less equitable distribution.

Lord said...

Ah, but that is the fallacy. It is the belief that wider dispersion maximizes GDP that leads to overinvestment and lower totals when in fact less dispersion leads to lower peaks but more sustained totals. It is really a case of measurement error, not looking at the most appropriate and relevant criteria. That this fallacy is widely believed and adopted is very clear in the data.