Bernie Sanders Sure Doesn't Know Much About Trade
Bernie Sanders sat down with the New York Daily News to talk about this and that and the part where he talks about trade is quite literally jaw dropping. Bernie seems to have no concept of how and why trade works at all. And in doing so he appears to almost entirely rule out trade with poorer countries: something of a problem as the way poorer countries get richer is by trading with us. And it’s certainly possible to claim to be working in the interests of the poor, as Bernie does, but it’s then most odd to go off and insist that the poor should remain poor as a consequence of our activities affecting the poor. Further, we know, absolutely, that trade does make the poor richer. Chinese manufacturing wages have risen from some $1,000 a year in 2000 to some $6,500 or so now. And China as a country has risen since 1978 from about how poor my native England was in 1600 to today, about how poor Britain was in 1950. That’s three and a half centuries of economic development packed into a few short decades: yup, trade sure does seem to benefit the poor.
Here’s then heart of what Sanders says which is so wrong:
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Daily News: Another one of your potential opponents has a very similar sounding answer to, or solution to, the trade situation — and that’s Donald Trump. He also says that, although he speaks with much more blunt language and says, and with few specifics, “Bad deals. Terrible deals. I’ll make them good deals.”
So in that sense I hear whispers of that same sentiment. How is your take on that issue different than his?
Sanders: Well, if he thinks they’re bad trade deals, I agree with him. They are bad trade deals. But we have some specificity and it isn’t just us going around denouncing bad trade. In other words, I do believe in trade. But it has to be based on principles that are fair. So if you are in Vietnam, where the minimum wage is 65¢ an hour, or you’re in Malaysia, where many of the workers are indentured servants because their passports are taken away when they come into this country and are working in slave-like conditions, no, I’m not going to have American workers “competing” against you under those conditions. So you have to have standards. And what fair trade means to say that it is fair. It is roughly equivalent to the wages and environmental standards in the United States.
We’re only going to have fair trade and fair trade is only with people who have about the same wages and environmental standards as the US. Which is to say, we’re going to just stop trading with the poor world altogether. (Note: An earlier version of this piece incorrectly attributed this paragraph to Bernie Sanders due to a formatting error.)
Which is, of course, absurd, for not only does trade with those poorer people benefit us it benefits those poorer people too. It’s their way out of being in that destitution of abject, absolute, poverty. I don’t for a moment believe that trade reduces the general standard of living in the US but even if it did I would still say that trade with the poor is a moral duty. Simply because if we do look around the world today the greatest of all economic injustices is that hundreds of millions are trying to live on less than $2 a day. Yes, $2 at today’s, full, American, retail prices: we really do mean walk into Walmart and try to house, feed, clothes, heat, provide health care and a pension, for one person out of that $2. But yes, that’s a moral argument, not an economic one, that perhaps the rich should be paying for increasing those living standards. The rich being, by the way, all of us lucky enough to have been born into the rich countries. That thing which is by far the biggest determinant of your economic fate in this life.
But Sanders’ position is worse than that. A poor place should have lower environmental standards than a rich place. This is the flip side of the environmental Kuznets Curve: as economic development starts then the environment gets worse. But as we all get richer then we’re willing to put more of our new found wealth to matters environmental. That flip side being that poor people aren’t going to worry about that environment, they’re going to worry about trying to make that second meal of the day. And they ought to be doing that too. California may be rich enough to protect the snail darter: Bangladesh isn’t.
However, it’s those similar wages which are the real problem. As Paul Krugman’s excellent essay has it:
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But this expectation is utterly disappointed. What is different, according to Goldsmith, is that there are all these countries out there that pay wages that are much lower than those in the West — and that, he claims, makes Ricardo’s idea invalid. That’s all there is to his argument; there is no hint of any more subtle content. In short, he offers us no more than the classic “pauper labor” fallacy, the fallacy that Ricardo dealt with when he first stated the idea, and which is a staple of even first-year courses in economics. In fact, one never teaches the Ricardian model without emphasizing precisely the way that model refutes the claim that competition from low-wage countries is necessarily a bad thing, that it shows how trade can be mutually beneficial regardless of differences in wage rates. The point is not that low-wage competition never poses a problem. Rather, what is significant is that despite ostentatiously citing Ricardo, Goldsmith completely misses one of the essential lessons of his argument.
Right from the beginning of our study of the advantages of trade we have known that “pauper labour” is not a problem. This next is not quite so true of the more recent decade and a half or so: there has been a (modest) change in the labour and capital shares of the economy (one which I argue elsewhere has been distinctly overstated but that’s another matter):
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“Many advocates of free trade claim that higher productivity growth in the United States will offset pressure on wages caused by the global sweatshop economy, but the appealing theory falls victim to an unpleasant fact. Productivity has been going up, without resulting wage gains for American workers. Between 1977 and 1992, the average productivity of American workers increased by more than 30 percent, while the average real wage fell by 13 percent. The logic is inescapable. No matter how much productivity increases, wages will fall if there is an abundance of workers competing for a scarcity of jobs — an abundance of the sort created by the globalization of the labor pool for US-based corporations.” (Lind 1994: )
What is so remarkable about this passage? It is certainly a very abrupt, confident rejection of the case for free trade; it is also noticeable that the passage could almost have come out of a campaign speech by Patrick Buchanan. But the really striking thing, if you are an economist with any familiarity with this area, is that when Lind writes about how the beautiful theory of free trade is refuted by an unpleasant fact, the fact he cites is completely untrue.
More specifically: the 30 percent productivity increase he cites was achieved only in the manufacturing sector; in the business sector as a whole the increase was only 13 percent. The 13 percent decline in real wages was true only for production workers, and ignores the increase in their benefits: total compensation of the average worker actually rose 2 percent. And even that remaining gap turns out to be a statistical quirk: it is entirely due to a difference in the price indexes used to deflate business output and consumption (probably reflecting overstatement of both productivity growth and consumer price inflation). When the same price index is used, the increases in productivity and compensation have been almost exactly equal. But then how could it be otherwise? Any difference in the rates of growth of productivity and compensation would necessarily show up as a fall in labor’s share of national income — and as everyone who is even slightly familiar with the numbers knows, the share of compensation in U.S. national income has been quite stable in recent decades, and actually rose slightly over the period Lind describes.
And finally, Sanders isn’t getting why those poor people in poor countries are getting low wages:
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Associated with this problem is the misunderstanding of what international trade should do to wage rates. It is a fact that some Bangladeshi apparel factories manage to achieve labor productivity close to half those of comparable installations in the United States, although overall Bangladeshi manufacturing productivity is probably only about 5 percent of the US level. Non-economists find it extremely disturbing and puzzling that wages in those productive factories are only 10 percent of US standards.
The reason that those workers get low wages is because, in general, those workers are not very productive. It is thus not true to start arguing that American labour cannot compete against Vietnamese (say). Because what is important about the cost of labour is the price that must be paid in labour costs per unit of output. And more productive workers, which Americans are, will produce more in an hour than less productive ones, which Vietnamese are. It simply isn’t a head to head of $15 an hour against 65 cents an hour. It is, perhaps, $50 of output an hour as against $10 or output an hour. And that’s a battle that American workers can indeed win: as the 161 million who have jobs are proving each and every time they pick up a paycheck.
It really is worth reading that Krugman essay in full. Ricardo’s Difficult Idea. It’s a masterpiece of clear and intelligent writing on trade economics. It’s also from the 1990s and it entirely skewers the mistakes that Bernie Sanders is making about trade today in 2016. Someone might even want to suggest that Bernie himself should read it.
Our three major points being: poor countries should have lower environmental standards because they are poor. We’re not in a head to head battle of American wages against poor world ones because what matters is productivity. And the reason poor places are poor is because they have low productivity and that’s why higher cost labour can compete: because of higher productivity.
Our final, third point is a moral one being added by myself. Even if trade weren’t beneficial to Americans (it is) then free trade with those poorer places would still be the correct public policy. Because it makes those poorer people richer and that’s what economic policy should be directed to. For, to my mind at least, the biggest economic problem today is that there’s those hundreds of millions still stuck in the destitution of absolute, peasant, poverty. That we stand still for a bit, that rich world workers live on “only” $25,000, or $30,000 a year doesn’t bother me in the slightest if the effect of their doing so is that those living on $600 a year climb the ladder a bit to the bourgeois pleasures of three squares a day and a roof over their heads.
http://www.forbes.com/sites/timwors...-doesnt-know-much-about-trade/2/#49236bd56e4f
