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September 09, 2004

High Priest Fires at Free Trade Orthodoxy

Paul Samuelson is the economist's economist: more undergraduates have probably learned introductory economics from his textbooks than any other.

So when he announced that free trade between countries does not necessarily improve the lives of people in both countries, the economic establishment reacted, as this NY Times article recounts.

Samuelson's point is actually pretty intuitive. While it makes sense that everyone gains when tropical islands trade bananas for copper mined in mountainous regions, it's less clear that the United States will gain from sending high tech jobs to countries like India. Essentially, he argues that average wages across the world will very likely drop faster than prices for global goods we import:

But doesn't purchasing cheaper call-center or programming services from abroad reduce input costs for various industries, delivering a net benefit to the economy? Not necessarily, Mr. Samuelson replied. To put things in simplified terms, he explained in the interview, "being able to purchase groceries 20 percent cheaper at Wal-Mart does not necessarily make up for the wage losses."

The global spread of lower-cost computing and Internet communications breaks down the old geographic boundaries between labor markets, he noted, and could accelerate the pressure on wages across large swaths of the service economy. "If you don't believe that changes the average wages in America, then you believe in the tooth fairy," Mr. Samuelson said.

I have no love for protectionism as an alternative. Developing nations should move into better paying jobs as they are able to, but the process should not be designed to increase the profits of multinational companies at the expense of pay of US workers.

At the moment, economic orthodoxy is justifying the bloated profits of those multinationals with the fairy tale that US workers will come out all right in the end. If American workers recognize that this is an illusion, we can have a more serious debate about how to support global economic development that benefits workers here and abroad. If even a portion of those excess multinational profits were diverted to better wages for all workers in the world, there is no reason that trade can't benefit everyone-- but only if current "free trade" orthodoxy is abandoned.

Posted by Nathan at September 9, 2004 07:34 PM