A Note on Income Inequality, Its Social Cost, and the Political Economy of the Second Gilded Age

Must-Read: Noah Smith: Americans Get Free Trade's Dark Side - Bloomberg View: "Mankiw is failing to give his readers much credit...

...For one thing, some of the opposition to the TPP comes from people who support free trade, and who worry that the treaty’s intellectual property provisions amount to a restriction of trade. As Krugman points out, Mankiw ignores this. Mankiw’s second problem is that this same old case has failed again and again to persuade the general public. Yes, economists overwhelmingly favor the idea of free trade. But the public remains stubbornly skeptical. Is this because they are just not smart enough to get the Econ-101-David-Ricardo thing even after hearing it a hundred times? Or is it because people are irrational and biased?

In his article, Mankiw lists three biases that he blames for people’s refusal to accept the free-trade argument. These are ‘anti-foreign bias,’ ‘anti-market bias,’ and ‘make-work bias.’ Essentially, Mankiw is telling you that you don’t believe the simple truth because deep down within you lurks a xenophobic socialist. Call me crazy, but I don’t think this is a beneficial, constructive way for economists to engage with the public. Maybe the public is neither xenophobic nor socialist. Maybe people are perfectly smart and rational enough to understand the David Ricardo idea, and also smart enough to understand something else that economists have known for 200 years -- international trade doesn’t necessarily benefit everyone within a country. That’s right -- trade creates winners and losers. Econ 101 says that the winners outnumber the losers in dollar terms, but not necessarily in people terms -- if the richest 1 percent of Americans gain $1 billion from a trade agreement and the other 99 percent lose $900 million, then Ricardo’s theory says the country benefited overall. That outcome is perfectly consistent with Econ 101.

Most pro-free-trade economists, if you confront them with this fact, will say that this problem can be solved if we use redistributive taxes to compensate the losers. This ignores that we often don’t know who the winners and losers are from any particular trade deal -- this is why you can’t buy insurance against the possibility of losing your job to a trade agreement. This also ignores that the tax system wasn't set up to carry out this compensation. And on top of that, many pro-free-trade economists, Mankiw included, are almost always opposed to tax increases. In other words, Mankiw is giving the public a pro-trade argument that, even on its own merits, might be bogus. Econ 101 says that it’s possible that free trade might hurt the majority of Americans, and yet Mankiw doesn't seem to think the public needs to hear that fact.

Like I said, I am in favor of the TPP. And, like most economists, I think free trade has, on balance, been a big net positive for most Americans over the past century, relative to any alternative we might have pursued. But I think the American people are intelligent and grown-up enough to hear the basic case against free trade, as well as the case in favor. Yes, Mankiw is smarter than most of us. That doesn’t mean we’re dummies.

http://www.bloombergview.com/articles/2015-04-28/free-trade-aids-growth-even-though-some-people-lose

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