Brad DeLong on trade and wages

Berkeley econ professor — and non-conservative — Brad DeLong on the highly controversial topic of how trade with lower-income countries like China affects, or does not affect, US wages:

…To what extent are rich countries obligated to open their markets to poor countries when the consequence is falling wages for the poor in the rich–bearing in mind that the poor in the rich are often wealthier and have more opporunity than the rich in the poor? To what extent do rich countries do themselves well–serve their national interest–by opening their markets to poor countries even when the consequence is falling wages for the poor in the rich?

…First, between 1950 and 1997 trade and wages weren’t an issue: our foreign trading partners raised their own relative wage levels at least as fast as globalization enhanced their influence, and there was no net effect of trade on wages–no link from greater openness to the global economy to greater inequality here at home.

Second, at times between 1950 and 1997 trade and wages became a political issue as a way of distracting attention from true problems. The voters of Michigan in 1985 did not want to hear that the problems of Michigan’s manufacturing industries were home-grown–in the fecklessness of management and in the Reagan administration’s budget deficits that pushed up interest rates which pushed up the value of the dollar and made the goods they made uncompetitive on world markets. They wanted, instead, to hear that the Japanese were doing something clever and illegitimate [certainly a widespread assumption in Wisconsin when I was growing up in the 1980’s -Marc].

Third: since 1997 or so the link between expanded imports and wage inequality has become real, as our imports now embody a much larger amount of factors competing with our own lesser-skilled than they used to. How large? I don’t think we know. Paul Krugman [also a non-conservative -Marc] is now writing a paper for the Brookings Institution in which he essentially throws up his hands at the question. But there are two points worth noting: (a) the effects of trade on pre-tax wage inequality are much smaller than the effects over the past generation of changes in the tax system on after-tax income inequality; (b) the effects of trade on inequality of opportunity are much less than the effects of educational inequities on inequality of opportunity.

Fourth, to the extent that we in the United States begin thinking of trade restrictions as a way to fight inequality, we are setting ourselves up for extraordinary trouble late in this century–extraordinary damage to our long-run national security.

Think of it this way: Consider a world that contains one country that is a true superpower. It is preeminent–economically, technologically, politically, culturally, and militarily. But it lies at the east edge of a vast ocean. And across the ocean is another country–a country with more resources in the long-run, a country that looks likely to in the end supplant the current superpower. What should the superpower’s long-run national security strategy be?

I think the answer is clear: if possible, the current superpower should embrace its possible successor. It should bind it as closely as possible with ties of blood, commerce, and culture–so that should the emerging superpower come to its full strength, it will to as great an extent possible share the world view of and regard itself as part of the same civilization as its predecessor: Romans to their Greeks.

In 1877, the rising superpower to the west across the ocean was the United States. The preeminent superpower was Britain. Today the preeminent superpower is the United States. The rising superpower to the west across the ocean is China. that was the rising superpower across the ocean to the west of the world’s industrial and military leader. Today it is China.

Throughout the twentieth century it has been greatly to Britain’s economic benefit that America has regarded it as a trading partner–a source of opportunities–rather than a politico-military-industrial competitor to be isolated and squashed. And in 1917 and again in 1941 it was to Britain’s immeasurable benefit–its veruy soul was on the line–that America regarded it as a friend and an ally rather than as a competitor and an enemy. A world run by those whom de Gaulle called les Anglo-Saxons is a much more comfortable world for Britain than the other possibility–the world in which Europe were run by Adolf Hitler’s Saxon-Saxons.

There is a good chance that China is now on the same path to world preeminence that America walked 130 years ago. Come 2047 and again in 2071 and in the years after 2075, America is going to need China. There is nothing more dangerous for America’s future national security, nothing more destructive to America’s future prosperity, than for Chinese schoolchildren to be taught in 2047 and 2071 and in the years after 2075 that America tried to keep the Chinese as poor as possible for as long as possible.

While I am far less certain than Brad and a lot of other smart people that the United States is fated to lose its position of economic preeminence in this century, I certainly agree with Brad’s strategy, and I am continually surprised and alarmed to run into many well-meaning people who believe the opposite strategy would be optimal.