Gains from Trade Once Again
Mark Thoma muses about relative income--that perhaps much of American unease about globalization is the fact that the ability to buy cheap goods at Walmart doesn't balance out the belief that somebody somewhere is unfairly becoming immensely rich as the result of the process:
Mark Thoma: If they deserved $25 but only received $10, they might object. Thus, while trade may have benefited lower income households by lowering prices on the goods they are likely to consume... that doesn't mean they won't be frustrated if they aren't receiving what they view as a fair share of the gains from globalization.... Couple that with the rise in inequality, loss of health care and retirement benefits, decreased job security, etc., and it's easy to see why workers might not feel as though they have been adequately compensated for the change in labor market conditions and economic security that they have endured...
He is commenting on James Surowiecki, who writes:
The Free-Trade Paradox, by James Surowiecki, The New Yorker: [The Democratic] primary race... has looked like a contest over who hates free trade more... The candidates are trying to win the favor of unions and blue-collar voters in states like Ohio and West Virginia, of course, but their positions also reflect a widespread belief that free trade with developing countries, and with China in particular, is a kind of scam perpetrated by the wealthy, who reap the benefits while ordinary Americans bear the cost.... [I]t’s safe to say that the main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans. So standing up to China seems like a logical way to help ordinary Americans do better. But there’s a problem with this approach: the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries... free trade with poorer countries has a huge positive impact on the buying power of middle- and lower-income consumers--a much bigger impact than it does on the buying power of wealthier consumers. The less you make, the bigger the percentage of your spending that goes to manufactured goods--clothes, shoes, and the like--whose prices are often directly affected by free trade. The wealthier you are, the more you tend to spend on services—education, leisure, and so on--that are less subject to competition from abroad.... [T]he reality is that if we toughen our trade relations with China the benefits will be enjoyed by a few, since only a small percentage of Americans now work for companies that compete directly with Chinese manufacturers, while average Americans will feel the pain--in the form of higher prices--far more quickly and more directly than rich Americans will...
We teach the 2 goods, 2 factors of production, 2 countries model because it is easy--but it has never been clear to me that the intuitions generated there transfer over to the more complicated real world at all.
