April 12, 2016
A popular theme in the media in recent days is that the world’s poor would face disaster if Bernie Sanders ended up in the White House.[1] The story is that Sanders would try to protect jobs for manufacturing workers in the United States. The loss of these jobs has been a major source of downward pressure on the wages and living standards of a large portion of the working class over the last four decades.
While saving manufacturing jobs here may be good for U.S. workers, the media line is that by trying to block imports from the developing world, Sanders would be denying hundreds of millions of people their route out of poverty. This story may be comforting for elites in the U.S. and Senator Sanders’ political opponents, but it defies basic economics and common sense.
To see the problem in the logic, note that the essence of the Sanders as an enemy of the world’s poor story is that manufacturing workers in the developing world need people in the United States to buy their stuff. If people in the United States didn’t buy their stuff, these workers would be out on the street and growth in the developing world would grind to a halt.
In this story, the problem is that we don’t have enough people in the world to buy stuff — there is a shortage of demand. But is it really true that no one else in the world would buy the stuff produced by people in the developing world if they couldn’t sell it to consumers in the United States? Suppose people in the developing world bought the stuff they produced, you know, raising their living standards by raising their consumption.
That is actually the way the economics is supposed to work. In the standard theory, general shortages of demand are not a problem. Economists have traditionally assumed that economies tended toward full employment. The economic constraint was a lack of supply. The problem was that we couldn’t produce enough goods and services, not that we were producing too much and couldn’t find anyone to buy them.
In the standard story, capital was supposed to flow from rich countries to poor countries. Capital is relatively plentiful in slow growing rich countries, meaning it gets a low rate of return. It is scarce in fast-growing poor countries, which should mean that it will get a higher rate of return. That would cause capital to flow from rich countries to poor countries as investors looked for better returns.
This means that we would expect the United States, Japan, and the European Union to be running large trade surpluses, which is what an outflow of capital means. In effect, we would be providing developing countries with the means to build up their capital stock and infrastructure, while they continued to provide their populations with their basic needs.
This wasn’t just theory. That story accurately described much of the developing world, especially Asia, through much of the decade of the 1990s. Countries like Vietnam and Malaysia were experiencing extremely rapid growth even as they ran very large trade deficits. However this changed in the wake of the East Asian financial crisis. The bailout from this crisis, directed by the Clinton Treasury department and the I.M.F., imposed harsh terms on the affected countries.
In the wake of this bailout, countries throughout the developing world decided that they had to build up large reserves of foreign exchange, primarily dollars, in order to avoid facing the same harsh bailout terms as the countries of East Asia. This meant running large trade surpluses. This was the period in which the U.S. trade deficit exploded, going from just over one percent of GDP in 1996 to almost 6 percent of GDP in 2005, a rise in the size of the annual deficit equivalent to almost $900 billion in today’s economy. This rise in the trade deficit coincided with the loss of more than 3 million manufacturing jobs, roughly 20 percent of employment in the sector.
There was no necessary reason that the textbook growth pattern of the 1990s could not have continued. It was the failure of the bailout and the international financial system that forced developing countries to go on a different path, not laws of economics.
There is a further point in this story that is generally missed: it is not only the volume of trade flows that is determined by policy, but also the content.
The conventional story is that we lose manufacturing jobs to developing countries because they have hundreds of millions of people who are willing to do factory work at a fraction of the pay of manufacturing workers in the United States. This is true, but they also have tens of millions of smart and ambitious people who would be willing to work as doctors, lawyers, and in other highly paid professions in the United States at a fraction of the pay of our professionals.
The arguments on gains from trade are the same with doctors as with textiles and steel. The reason that we import manufacturing goods and not doctors is that we designed the rules of trade that way. We deliberately wrote trade pacts to make it as easy as possible for U.S. companies to set up manufacturing operations abroad and ship the products back to the United States. We did little or nothing to remove the obstacles that professionals from other countries face in trying to work in the United States. The reason is simple: doctors have more political power than autoworkers.
For those worried about brain drain from developing countries, there is an easy fix. Economists always like to talk about taxing the winners, in this case developing country professionals, to compensate the losers, which would be their home countries. We could tax a portion of the professionals’ pay to allow their home country to train two or three professionals for every one that came to the United States. This is a classic win-win from trade.
Finally, a major push in recent trade deals has been to require stronger and longer patent and copyright protection. Paying the fees imposed by these terms, especially prescription drugs, is a huge burden on the developing world. There would be much less need for Bill Clinton to fly around the world with the Clinton Foundation had he not inserted the TRIPS provisions in the WTO, which required developing countries to adopt U.S. style patent protections. Generic drugs are almost invariably cheap, patent protection is what make drugs expensive. (There are more efficient mechanisms for financing research, but that is another story.)
In sum, the recent pattern of trade and development is anything but natural. It was imposed on developing countries by the United States and other rich countries. It is just not true that it is their only path to development.
It’s clear that many people in elite circles in the United States are prepared to be very generous in giving away the jobs and wages of ordinary workers here. Senator Sanders is hardly a villain because he doesn’t share this generosity.
[1] This piece was solicited by an editor for the Washington Post’s Outlook/Post Everything section. By the time it was submitted the next day, the Post apparently lost the ability to reply to e-mail.
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