Kudos to Brad DeLong
By David Henderson
Paul Krugman has recently written some incredibly critical things about free trade. Co-blogger Scott Sumner has responded admirably.
That said… the elite case for ever-freer trade, the one that the public hears, is largely a scam…. [The] claims [are] that trade is an engine of job creation, that trade agreements will have big payoffs in terms of economic growth and that they are good for everyone. Yet… the models… used by real experts say… agreements that lead to more trade neither create nor destroy jobs… make countries more efficient and richer, but that the numbers aren’t huge….
False claims of inevitability, scare tactics (protectionism causes depressions!), vastly exaggerated claims for the benefits of trade liberalization and the costs of protection, hand-waving away the large distributional effects that are what standard models actually predict…. A back-of-the-envelope on the gains from hyperglobalization — only part of which can be attributed to policy — that is less than 5 percent of world GDP over a generation…. Furthermore, as Mark Kleiman sagely observes, the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins–but we now have an ideology utterly opposed to such redistribution in full control of one party…. So the elite case for ever-freer trade is largely a scam, which voters probably sense even if they don’t know exactly what form it’s taking….
Here’s part of Brad’s reply:
So I guess it is time to say “I think Paul Krugman is wrong here!” and fly my neoliberal freak flag high…
On the analytics, the standard HOV [Heckscher-Ohlin-Vanek] models do indeed produce gains from trade by sorting production in countries to the industries in which they have comparative advantages. That leads to very large shifts in incomes toward those who owned the factors of production used intensively in the industries of comparative advantage: Big winners and big losers within a nation, with relatively small net gains.
But the map is not the territory. The model is not the reality. An older increasing-returns tradition sees productivity depend on the division of labor, the division of labor depends on the extent of the market, and free-trade greatly widens the market. Such factors can plausibly quadruple The Knick [?] gains from trade over those from HOV models alone, and so create many more winners.
Moreover, looking around the world we see a world in which income differentials across high civilizations were twofold three centuries ago and are tenfold today. The biggest factor in global economics behind the some twentyfold or more explosion of Global North productivity over the past three centuries has been the failure of the rest of the globe to keep pace with the Global North. And what are the best ways to diffuse Global North technology to the rest of the world? Free trade: both to maximize economic contact and opportunities for learning and imitation, and to make possible the export-led growth and industrialization strategy that is the royal and indeed the only reliable road to anything like convergence.
So I figure that, all in all, not 5% but more like 30% of net global prosperity–and considerable reduction in cross-national inequality–is due to globalization. That is a very big number indeed. But, remember, even the 5% number cited by Krugman is a big deal: $4 trillion a year, and perhaps $130 trillion in present value.
UPDATE: Krugman responds to DeLong.