Can the wrong answer in the classroom be the right answer in public debate?

I don’t think so, but it looks like we may be disagreeing with Greg Mankiw here.

In an interesting comment on my previous post dealing with the effect of trade on the price level, Greg notes that I am right “in theory,” but that he is “more sympathetic to the ‘lower prices’” view than I am for a couple of reasons. He writes:

1.  Defenders of free trade rarely are in a position of having to defend exports, because people think that exports create jobs. When people complain about trade, it usually about the alleged job-destroying effect of imports. This partial-equilibrium complaint naturally encourages a partial-equilibrium retort: imports lower prices for consumers. The losses to producers in these markets are more than offset by gains to consumers from lower prices. True, the full story can only be told in general equilibrium, where it is relative prices that matter for the allocation of resources. But the distinction between the absolute price level (determined by monetary forces) and relative prices (determined by numerous market supply and demand curves) looms larger in the minds of economists than laymen. The reason is related to my second point.

2. People sometimes instinctively treat the nominal wage as the numeraire. That may be because it is one of the stickier prices around. So maybe when we hear people say that trade lowers prices, we should interpret the statement as meaning that trade lowers the price of a basket of consumer goods for a given price of labor. That is, trade raises real wages. This is one simple way of translating the basic Ricardian model (in which trade expands both trading partners' consumption opportunities) into a language that is a bit more familiar to the general public.

Now, neither of Greg’s arguments is exactly right. On his first point, there is no theorem that guarantees that the partial-equilibrium losses to import-competing producers “are more than offset by gains to consumers from lower prices.” My wheat-and-beef example in Argentina is exactly an instance where this supposition fails. And on his second, trade theory does not guarantee that real wages of workers rise as a result of free trade, as Stolper and Samuelson showed long ago. (Greg knows this of course, which is why he qualifies his statement by referring to the basic Ricardian model, which is a highly special model where labor is the only factor of production and gains from trade have to show up as higher real wages.)

But the real reason for this post is different. I want to take issue with the general philosophy behind Greg’s argument, which is that a less than full (and possibly misleading) story in support of your argument is OK as long as it helps disarm your opponents in public debate.  His position seems to be this: Look, these anti-trade guys don’t understand comparative advantage anyhow, and it is pointless to waste our breath trying to explain it to them. So let’s instead argue our case in “their” language and within “their” framework. Never mind that Professor Greg Mankiw would flunk us if we ever gave the same answer in Ec. 10.

I am not sure I like this stance very much.  For one thing, it goes against the grain of what I think is the most important job of economists in public debate--to educate and not simply to be an advocate.  Second, it is bound to backfire, and ultimately undercut the credibility of economists.

Here is an apt example. Years ago, when NAFTA had just been negotiated and was being debated heatedly, the Institute for International Economics (now the Peterson Institute) put out a study that tried to counter widespread fears that the Agreement would destroy U.S. jobs. How did it do so?  By calculating the jobs that would be created by additional exports to Mexico.  And since Mexico had a whopping trade deficit with the U.S. at the time (in 1993, just before the peso crisis), it was relatively straightforward to show that more jobs would be created than lost!  Unfortunately for the IIE, soon after NAFTA was signed, the Mexican peso collapsed (no claim of causality here), and Mexico’s trade deficit turned into surplus. Anyone who used the same methodology could now calculate that NAFTA was in fact bad for U.S. employment.  Try now to explain to members of Congress that trade is all about efficiency in resource allocation and not about employment… 

There is a broader and potentially quite useful discussion to be had here on the manner in which economists should engage in the public debate.  Many of my colleagues are of the view that economists should just stick to their bottom line, and not "confuse" the public with the caveats and limitations of their arguments. Moreover, since anti-market views have enough supporters out there, economists often see their role as one of unqualified advocacy of the opposite position. I tend to disagree with this, which is why I am often accused of "giving ammunition to the barbarians."

To be continued ...

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