Should economists be debating politics?

Tyler Cowen asks me the following question:

We can, in principle, rank policy areas along a spectrum.  Assign a "10" to the most efficient policy-generating areas and assign a "0" to the least efficient.  Don't worry too much about what the scale means, this is Blog Land

Where do you put trade restrictions along this scale? 

His own answer is as follows:

I give them a 1.5, at best a 2.  I think trade restrictions are hardly ever generated by processes which coincide with the general welfare.  I view trade restrictions as almost always motivated by the classic, crude "diffusion of costs, concentration of benefits" logic.

But then again:

If we redefine the problem more broadly, it could be said that trade policy as a whole gets an 8 or a 9.  Most of the wealthier countries, agriculture aside, have fairly free trade, as they ought to. But what if we focus on evaluating only the quality of the trade restrictions?  How good are the restrictions we get in tracking the ideal welfare-improving restrictions?

The question, if I understand it correctly, is whether I think trade policy—and in particular trade policy which departs from free trade—can ever do some good in a world where purely political motives and rent-seeking are rampant. My answer is yes, but let me build my case point by point.

First, let’s notice that Tyler is making a point about the politics of trade policy, not about its economics. In fact he grants (perhaps for the sake of the argument) that there may be social welfare-improving trade restrictions. So he understands that we live in a second-best world. (In a first-best world, trade policy would have absolutely no positive role.) Good.

He also grants that trade policy has worked pretty well in recent years if you tend to like free trade. In fact, the world economy has never had freer trade in goods (and in most services except for labor services). So whatever political problems may exist, they have not prevented the winners from freer trade from imposing their will on the losers.

But what about the pattern of existing trade policies, Tyler asks. Can we really say that they are the result of any process of social-welfare maximization? No, of course not. That is why I do not want to keep them as is. To be clear, I do not believe the economic cost of existing restrictions is all that high (the reasons will have to wait for another post). But I want to change existing policies and make them more consistent with social welfare too.

But is there any chance that we could actually move in the direction that I would like to see (which is not necessarily and always the unconditional free trade direction) without doing more damage than good?

Now, remember the point above regarding the openness of existing policies. The fact that we do not live in autarky is prima facie evidence that we are not at a corner solution where the political-economy equilibrium is concerned. That means that even relatively small changes in institutional design—with corresponding changes in incentives for political agents—can have important implications for the outputs of the political game. We actually have some control over how the political game is to be played, and therefore over the amount of rent-seeking that will be generated in equilibrium.

Here is one example where this generally works to our advantage. To prevent congressional log-rolling in tariff setting, we allow Congress to delegate the details of trade policy negotiations to the President (in the form of trade negotiating authority), with Congress limited to an up-or-down vote on the entire package. It is generally agreed that this delivers better trade policy than in the absence of delegation.

And here is another example where it works to our disadvantage (and does so again by design). Anti-dumping proceedings are explicitly designed to favor import-competing firms and to provide protection where none is really needed on sound economic grounds. That is because the government is instructed to determine whether firms are “injured,” but not whether the imposition of duties would engender greater hurt elsewhere. Their outcomes would be significantly different if we allowed beneficiaries of trade (consumers and downstream firms) to have standing in these proceedings.

The point is that we do not have to throw up our hands and say “politics will screw everything up at the end.” The nature of the political equilibrium depends on the rules we select and the institutions we design.  In my 1997 book and also in a more recent article, I have discussed some of the institutional safeguards that we could consider putting in place to render trade policy both more responsive to social and economic goals and less prone to narrow rent-seeking. But to everyone, their own level of cynicism.   

Let me make a couple of other general points that are relevant to this discussion.

Tyler makes it sound like the debate is about whether we should increase trade restrictions or lower them. That is really the old debate (the “last war,” to use the term from my previous post).  Today’s questions are different. Should the U.S. negotiate more bilateral free trade agreements, or fewer? Should we consider a “strategic pause” in trade negotiations to improve the functioning of the WTO or push hard on the existing Doha agenda? Should core labor standards and environmental safeguards be negotiated jointly with trade agreements? How much “policy space” should the WTO allow for? Should labor mobility be part of international trade agreements? How much quid pro quo should the developing countries offer “in return” for agricultural liberalization in the North? Does competition policy and investment belong in the WTO? Should intellectual property rights protection rules be different for developing nations?  None of these questions maps neatly into the more-versus-less restriction dichotomy.

Finally, let me note the irony in how a discussion on free trade among economists quickly ends up being a debate on its politics—that is, a debate on whether this or that trade policy which on economic grounds is actually desirable can also be politically feasible. We are way beyond our area of expertise. Your hand-waving is as good as mine. 

 
Scratch any strongly-held view about free trade, and you will find (typically) unexamined political assumptions underneath. Even if we do not end up agreeing, the value of the present exchange is that it is getting us to reveal what those assumptions are. And for that I thank Tyler Cowen. 

Comments

[jdrietz]

I'm intrigued by the last paragraph of your post (including the part about thanking Tyler Cowen ;-) ). Would you expand upon it and provide some examples? For instance, I am a fairly "hardcore" believer in free trade. What would you suspect are my unexamined political assumptions?

[TheJew]

The role of economists may be to describe how a particular policy may benefit or hurt whom; this may not be obvious to the lay public.

For example: the reallocation of labor that will occur with a change in trade policies is not always obvious. An economist’s role could be to simply analyze the length of time the effects of any policy will take to occur after the initial change.

Another example could be the case of agricultural subsidies. The effects of agricultural subsidies in developed countries on poor countries are ambiguous. This paper for example, finds that agricultural subsidies usually help the poorest members of society in countries that receive them, regardless of whether that country is an agricultural net importer or exporter. In addition, because they subsidize food costs for industrial labor, reducing the opportunity cost of rural-urban migration (because it’s hard for food from the US to get to you from a seaport unless it travels over a paved road), they may increase the rate of industrialization in both food importing and exporting countries.

http://www.nber.org/papers/w11289

[Torben]

On Tayler's criteria. I think focusing exculsively on efficiency makes little sense as focusing exclusively on equity makes little sense. In may opinion, the war with regard to efficiency equity is not over yet. Obviously effiency is important, but it is not everything. Especially polaraizations have been important for their own sake as well as for the sake of dynamic efficency. I suggest a kind of weighted index of polcies instead of just efficiency.

[Dani Rodrik]

jdrietz asks me to clarify the point in the last paragraph of my post. The unexamined political assumptions I have in mind are a belief in the incapacity of politics to deliver social goods on average, an assumption that economists' preferences fully capture what most people really value, and a certain cynicism about the motives of everyone else out there. I think the right way to think about "political" problems is as one of appropriate institutional design--and I tried to illustrate this in my post. And I was serious when I thanked Tyler. I do think he is helping the discussion go forward.

[Russell Nelson]

Of course trade policy is rife with politics, but our role is to explain that all trade policy is harmful. The world's history can be explained as a battle between politics and economics. If once we accept that political control is inevitable, we have accepted defeat.

[jdrietz]

Dr. Rodrik, thank you for the additional detail.

One other factor I think we need to bring into play is morality. For example, in the protectionist camp, many argue that trade barriers are needed to protect domestic workers' jobs, the economy of a small developing nation, or a certain way of life.

Free traders also have strong moral arguments. There is the belief that government should not interfere in a willing, free exchange of goods between two parties. Many also believe that allowing the government to protect the economic interests of one group of people to the detriment of another based upon nationality or geography is wrong, as ultimately enforcing such economic protection is done by force.

The final point I would like to make is that I believe your "last war" argument is a bit unfair. Perhaps part of Cowen's point is that the "war" SHOULD be about free trade vs. protectionism, rather than to what degree we want to enact and enforce protectionist trade policies.

Oh, and my comment about thanking Cowen was purely inject - no sarcasm intended :-)

[jdrietz]

My last statement should say "Oh, and my comment about thanking Cowen was purely IN JEST - no sarcasm intended :-)"

Stupid spell checker...

[wjd123]

"I don't have answers to this. The moral case for open markets is their importance to poor countries: America would do OK even in a highly protectionist world, but Bangladesh wouldn't. The domestic politics of trade, however, are now very hard, and getting harder."--Paul Krugman on the distribution of the benefits of free trade

There are two different spheres of economic morality that pertain to free trade. Most of those who favor free trade as practiced today are biased toward morality--economic disipline--that comes from the economic sphere itself. This is the morality of the invisible hand. They believe that the necessary evils that it entails are justified by the ends: greater prosperity for the most people.

But there is a moral sphere outside of the internal workings of economics. The economic morality that comes from laws and regulations on how we do business: work safety standards, food inspection, environmental standards, the right to free association.

Those that get their economic morality from the invisible hand would have economic man disciplined by the market. Those who get their morality from outside the economic sphere would have economic man disciplined by social needs and social values.

The invisible hand moralists believes that any outside intervention in the market will cause unforeseen consequences that are more hurtful than helpful. Those that believe in the intervention of the moral sphere outside economics believe the opposite.

For better or worse history has already settled this argument. The evils of the Industrial Revolution were mitigated by a hundred-plus years of social intervention. Those with an economic bias who tend toward the view that the edifices of outside morality can be cast to the winds of free trade and market discipline are on the wrong side of history.

Their view is that protecting the economic morality that arises out of our social values should be just another casualty of the invisible hand. This is justified because the invisible hand by itself will create the best of all possible worlds. The problem is that this isn't what happens in the real world.

Standards that protect us from the necessary evils of the invisible hand, our economic morality of rules and regulations, should be part of any free trade package. We don't have to repeat history.

Better distribution of the benefits of free trade come from the rules and regulations that allow for it and not the internal disipline of the market.