Month: June 2008

Rodrik writes:

So the "us" and "them" characterization that Tyler attributes to irrational nativism perhaps has more to do with the absence of a common set of international rules on labor standards, environment, consumer safety, and so on.

Tyler responds ably here, I will add a few more comments.  A testable implication of Rodrik’s hypothesis is that people will be more upset about international trade than immigration since foreigners in foreign countries obey different rules but immigrants obey the same rule as us.  In reality, people are more upset by immigration than by trade and as a result we are much closer to free trade than to free immigration.

Rodrik has a very Ivory-tower view of what people care about.  Rodrik may be upset that people in other countries have poor on-the-job safety but (for the most part) workers who lose their jobs to foreigners really don’t give a damn.  What U.S. workers are upset about is losing their job and if asked to name the problem the U.S. worker will almost certainly say it’s the low wages of foreigners not their poor working conditions.  Moreover, the worker’s diagnosis of the problem (problem to him or her that is) is correct and Rodrik’s diagnosis is wrong.  Why?  Because higher safety standards in foreign countries would cause foreign wages to fall and thus would not much reduce competition from abroad, which is what the worker cares about.  I assume that Rodrik knows this even if the worker does not. 

Rodrik’s deeper argument is also peculiar, especially for a liberal economist.  A liberal economist should understand that for the most part labor, environmental and consumer safety standards are chosen not imposed (not always, of course, but for the most part in the long run).  In the United States we have a lot of job safety because we are wealthy and are willing to pay for job safety with a reduction in our (already high) wages.  In other words, Americans buy a lot of on-the-job safety for the same reasons we buy a lot of smoke alarms and DVD players.  (OSHA has very little effect on job safety.)  Job-safety is thus a choice Americans make about what to consume – we use some of our wealth to buy safety both at home and at work and some of our wealth to buy DVD players.  Thus, to argue that we shouldn’t trade with foreigners because they don’t have the same job safety as Americans makes about as much sense as arguing that we shouldn’t trade with foreigners because foreigners don’t buy as many DVD players as Americans. 

Warren Buffett recently bet an ambitious hedge fund operator $1 million that
they won’t beat the returns of S&P 500 after their extremely hefty fees are
accounted for. Buffett claims investors will do as well with a no-load index
fund over the ten years of the bet. He has long been critical of the performance
claims of hedge funds, and his bet is intended to put his money where his mouth
is.

Details here.  Of course, my money is with Buffett.  Even if he doesn’t win the bet he is correct about the advantages of index funds.  The academic research on this topic is voluminous and the lesson is straightforward – mutual fund managers don’t beat the market on average.  Note that this doesn’t mean the market is perfectly efficient but it does mean that *you* are unlikely to beat the market.  For more see my earlier post and also one of Tyler’s.

Tanzanian albino body parts.  They are supposed to bring good luck.  Unfortunately they are killing and mutilating the albinos to get them.

Here is my NYT column on globalization, excerpt:

Despite all these gains, the prevailing intellectual tendency these
days is to apologize for free trade. A common claim is that trade
liberalization should proceed only if it is accompanied by new policies
to retrain displaced workers or otherwise ameliorate the consequences
of economic volatility.

Yes, the benefits of a good safety net
are well established, but globalization is not the primary source of
trouble for most American workers. Health care problems, bad schools
for our children or, in recent times, bad banking practices have all
produced greater disruptions – and these have been fundamentally
domestic failings.

What’s really happening is that many people,
whether in the United States or abroad, are unduly suspicious about
economic relations with foreigners. These complaints stem from basic
human nature – namely, our tendency to divide people into “in groups”
and “out groups” and to elevate one and to demonize the other.
Americans fear that foreigners will rise at their expense or “control”
some aspects of the economy.

One approach is to appease these
sentiments by backing away from trade just a bit, or by managing it, so
as to limit the backlash. Giving up momentum, however, isn’t
necessarily the right way forward. If we are too apologetic about
globalization, we can feed core irrationalities, instead of taming
them. The risk is that we will frame trade as a fundamental source of
suffering and losses, which would make voters more nervous, not less.

Do read the whole thing.  A few further points of note:

1. Virtually all of the "second best worrying" about trade could be applied also — in fact more so — to technical progress.  Or to trade across the fifty states.  Yet when it comes to foreigners, the worries acquire a more dangerous credibility.  That is the real second best problem, not any theorem you might derive about trade and externalities.

2. I don’t see the evidence that marginal strengthenings of the safety net will diminish anti-foreign statements.  Yet this has become an article of faith among the globalization "middle roaders."  A crude look at the cross-sectional evidence does not indicate a clear pattern.  France and Germany have a strong safety net but they are skeptical about economic globalization; Sweden and the Netherlands are more sympathetic.  Switzerland, with a weaker safety net, is pro-globalization for the most part.  Like Will Wilkinson and unlike Bryan Caplan, I am for a safety net but often a bigger safety net makes people even more fearful of loss and change.  Note it is the Bismarckian welfare state, the world’s most advanced at the time, which turned to The Dark Side during the 1930s.  I’m hardly suggesting causality here but it didn’t halt the process either.

3. Yes I know about Denmark but job retraining programs in the U.S. hardly have a stellar record.

4. When it comes to improving the quality of economic adjustment, the overwhelming priority should be to delink health insurance from having a job.  I doubt if that will decrease skepticism about foreigners, however.

5. Most of the world’s wealthy economies are, if only because they are smaller and less diversified in terms of resources, more open than is the United States.  They do just fine and by no means do they all spend more on social welfare than does the United States.

6. Cite Samuelson and Stolper all you want, here is yet another paper showing that outsourcing has not been placing significant downward pressure on American wages.

7. China is now the world’s leading supplier of photovoltaic cells. 

But it is really the first point that is the key.

Addendum: Brad DeLong comments extensively.