Why Voters Don’t Buy It When Economists Say Global Trade Is Good

economistsdoitwithmodels:

I’ve been thinking about trade a lot because of recent discussions regarding the Trans-Pacific Partnership. Turns out I’m not alone, so iet’s break things down here.

As put forth by economists, strictly speaking, I’m not even sure that I buy the “trade is good” argument. I know, I know, but hear me out. For the most part, economists focus on efficiency (i.e. what maximizes the size of the economic pie to go around) rather than equity or distribution (i.e. what is fair). The reason for this is simple- what is efficient has a (relatively) scientific answer, whereas what is fair is a matter of opinion and values (read, no right answer). In a perfect world, economists would be leveraged in two ways:

  • Tell us what is efficient and we’ll try to make it work for everyone.
  • Tell us how much value we sacrifice to make things fair so we can decide whether the tradeoff is worthwhile (or where the appropriate balance is).

This division of labor, if you will, is usually not how things work. Instead, this last step is omitted and the economists’ contributions to the discussions are rejected. Case in point: the observation that trade is efficient. To see how, let’s work through the logic.

Consider a good where the US would want to import from foreign countries if it were opened to trade. (This will happen when foreign producers can offer the good at a lower price than domestic producers.) Opening up to trade helps consumers via lower prices, but it hurts producers due to low-priced competition. That said, consumers win more than producers lose, making trade the efficient outcome. (More technically, introducing trade satisfies the Kaldor-Hicks criterion.) BUT…trade creates a clear distribution problem, where there are a large number of consumers who gain a little and a smaller number of producers (or, somewhat equivalently, workers) that lose a lot on a per-producer basis. It’s not exactly a convincing argument, for example, to tell the auto worker to be happy about losing his job because it makes cars cheaper for a lot of other people. Unfortunately, it’s also not really reasonable to cost consumers $160,000 to save the job of one auto worker. (This is what the tradeoff was estimated to be during the voluntary export restrictions of the Reagan era.) It’s also not reasonable to remind the worker that he ends up being the winner in other trade scenarios so it totally balances out (it kind of does, but probably not entirely). so we have the economist talking about how trade is efficient and a decent number of people affected being like uh, @#$! no.

This doesn’t have to be the case- the fact that the winners win more than the losers lose means that the winners could compensate the losers and create a situation where everyone is better off. BUT…this doesn’t happen automatically, and the transfer probably introduces its own inefficiency. Overall, thankfully, the distribution of gains and losses isn’t likely an unsolvable problem that makes “to hell with trade” the right answer. Yes, I recognize the hyperbole, so let me try again- the distribution of gains and losses isn’t likely an unsolvable problem that makes “institute trade restrictions so that potentially displaced workers are essentially receiving consumer-financed work-based welfare.” (I know how much everyone loves the “w” word.) Yes, it requires creativity to think about what form the redistribution (I know you love that word too) should take- job training? (hasn’t had spectacular results) Enhanced unemployment? (how do you determine whether a layoff was trade based?) It may be an intellectual challenge (especially since a solution has to involve preserving the perceived dignity of displaced workers and such), but this is a worthwhile thought exercise and a conversation that we should be having.

Mankiw’s article points out that opposition to trade isn’t simply the result of losing parties objecting to lack of compensation, but it’s hard to believe that this consideration doesn’t play a role in some fashion. I also think that people often equate foreign producers producing cheaply as “cheating,” and behavioral economists know that people have a tendency to sacrifice their own well being in order to punish parties that they think are behaving unfairly. (see, for example, the ultimatum game) In the context of trade, this tendency results in giving up some economic value in order to prevent low-cost foreign producers from benefiting, and this is achieved by restricting trade. Lastly, many people seem to view the trade outcome as “regulation” rather than the other way around, perhaps because explicit free trade agreements frame, well, unfree trade as the default option. This doesn’t exactly garner support for free trade when people don’t like to feel like they are being regulated.

tl;dr: “Screw you, worker” and “let’s shoot ourselves in the foot so this guy gets to do a particular job” don’t have to be the only two options on the hypothetical policy table.

FAQ: But what about exports? Easy- just switch the outcomes of consumers and producers in the above discussion, as in “producers win more than consumers lose”.

Why Voters Don’t Buy It When Economists Say Global Trade Is Good

The truth about the gender wage gap

economistsdoitwithmodels:

You know, what I’ve always said about the gender wage gap discussion is that it needs more stick figures…

I will now be sending this link to anyone who cites the 79 cents on the dollar statistic without context. (I had previously used a piece I wrote for the Boston Globe, but I think the lack of pictures was kind of a deal breaker.) I feel like it should be clear to most people that you can’t attribute the entire difference in male versus female wages to employers literally seeing ovaries and applying a 21 percent salary discount, but even the slightest bit of nuance seems lost on this issue (and, frankly, doesn’t put women in a positive light intellectually as a result). Not surprisingly, a bit of the difference can be attributed directly to the ovaries discount (i.e. not getting “equal pay for equal work”), and a chunk of the difference can be attributed to occupational choices (which some argue are partly discrimination based), and some of the difference does appear to correlate with hours worked. Far more surprisingly, a large chunk of the difference can be attributed to workplace inflexibility, under which caregivers have no option but to take (explicit or implicit) “mommy track” positions, leaving the status and disproportionate raises and such for others.

I find this argument hard to make- not as in I don’t believe it, as in I literally find it difficult to get people to not misinterpret this finding. The common response I get is “yeah, but people who work more *should* get paid more.” That’s kind of hard to argue with, though it’s not quite what the research is calling out- the research specifically cites *disproportionate* differences in pay for those who work longer or less flexible hours, or, equivalently, differences that remain once number of hours worked is controlled for. For example, a 60 hour a week worker who makes $100,000 per year versus an equivalent 40 hour a week worker who makes $50,000 would illustrate the inflexibility gap, since the former works 1.5 times as much but gets paid twice as much. Similarly, a 9-5 worker who makes $60,000 versus a 6-2 worker who makes $50,000 would also illustrate the gap, since there appears to be a compensation reward not for more hours but for more typical hours. Hopefully that helps clear things up.

I think the researchers are right in that “equal pay” legislation often goes awry because the root causes, as we see here, are really hard to legislate. I’m a creative person, but I have yet to come up with a good way to identify which professions are being unnecessarily inflexible (probably a lot, but certainly not all) and develop a rubric for appropriate workplace flexibility. As such, it’s probably not surprising that a lot of the probably well-meaning legislation is kind of wonky, but not in the proper nerd sense of the word. For example, just in the last few days, Massachusetts passed what is being called an “equal pay for comparable work” law, which, as stated, addresses only a small part of the underlying issue. Interestingly, the provisions of the bill itself are more roundabout- the bill outlaws asking for salary history, for instance, and the legislators hope that this will prevent initially small differences in pay from snowballing over time. Examples like these show that even when policymakers have decent goals in mind, it’s not particularly clear how to write rules that will achieve those goals.

As the researchers note, there are a number of professions that have self organized in order to provide greater flexibility to workers and, as an intended or unintended consequence, narrowed the gender pay gap. That said, I expect there to be more pushback regarding these sorts of policies than the researchers (or even employers) acknowledge, since one of the key components to increasing workplace flexibility appears to involve “making workers interchangeable.” I would expect employees to push back against interchangeability on the grounds that interchangeability decreases their leverage vis a vis employers. (I might even expect objection from those whom the flexibility would benefit, since interchangeable sounds intuitively bad to some degree.) I would particularly expect employees who don’t value flexibility to push back, especially if the inflexible scenario gets reframed as “workers who can work 80-hour weeks capture economic rents.” Under that regime, I wouldn’t necessarily want to go messing with the status quo either (as that 80-hour worker of course). I’d like to think otherwise, but I have a feeling that this last consideration is going to be a significant impediment to change along the workplace flexibility dimension.

The truth about the gender wage gap

Ramen is displacing tobacco as most popular US prison currency, study finds

economistsdoitwithmodels:

So the internet seems pretty much obsessed with this story right about now…

The headline, taken at face value, isn’t particularly surprising to economists- we are quick to point out that a pretty wide variety of items can count as “money”, provided that they perform a few functions:

  • A medium of exchange
  • A unit of account
  • A store of value

By this characterization, sure, ramen could serve as money- I guess ramen packs aren’t so large as to be too cumbersome to be traded, you could quote “prices” of other items in terms of packs of ramen (and measure your wealth in packs of ramen, I suppose, though that sounds a little sad), and ramen isn’t particularly perishable so it could make a decent store of value. If you think about it, basically any non-perishable commodity could be used as money in this way, it’s just a matter of changing your “base currency” to the good in question. For example, let’s say that the “price” of a pack of cigarettes is 3 packs of ramen- this means that 3 packs of ramen can be traded for one pack of cigarettes. (Note that prices are really just terms of trade.) I could have just as easily quoted the price of a pack of ramen as 1/3 of a pack of cigarettes- nothing has changed except I’m in an universe where the cigarettes are the base currency, i.e. money. (This framing shift happens all the time in foreign exchange, since a nominal exchange rate is just the price of one currency in terms of another currency.) I used this example because, historically speaking, cigarettes are commonly used as currency in prison situations, as the article points out.

When economists talk about money, we are careful to distinguish between commodity money- i.e. money with intrinsic value- and fiat money, which isn’t useful in and of itself. Clearly, ramen falls under the heading of commodity money, since, if you are anything like me, you get utility from eating ramen. (Technically I am referring to the restaurant version, but just go with me here.) Interestingly, it’s precisely this feature that causes me to question a. whether ramen is actually being used as money is typically used, and b. whether, if true, such use would even be a good idea.

The article above states that “the decline in quality and quantity of food available in prisons due to cost-cutting has made ramen noodles a valuable commodity.” I completely buy this statement, but “valuable commodity” and “money” are not synonymous. The article does go on to mention that ramen does often get traded for other goods and services, and the “prices” imply that there is some sort of arbitrage opportunity for those who can acquire ramen at the commissary price of 59 cents and then trade for other goods rather than acquire the other goods directly. The “money” argument kind of breaks down, however, when the article clarifies that people do in fact want to eat the ramen- I suppose you can technically eat a dollar bill if you wanted to, and you see situations where people use pennies decoratively rather than as a medium of exchange, but it seems like the opportunity cost of forgone consumption is pretty low when it comes to traditional currency, and you don’t see a lot of traditional currency being diverted for consumption purposes. Ramen, on the other hand, has a high opportunity cost of forgone consumption, literally speaking…and a prisoner decreases the the money supply every time he or she gets hungry! I’m not convinced that that is how money is supposed to work- just imagine the hunger-related swings in interest rates that could result. (At least when money is used to buy food, the food gets consumed whereas the money just gets transferred.) Even if the prison economy isn’t sophisticated enough to support a market for loans, eating the ramen currency is going to result in deflation, since there’s going to be less ramen currency to go around to conduct other economic transactions. (In other words, ramen purchasing power will increase because there is less of it available for purposes of exchange.) This isn’t great, since stable prices are thought to be a desirable feature in an economy.

I do think that there’s an important metaphor here- the above discussion suggests that sure, ramen can technically function as money, but the fact that it’s useful in itself causes it to function suboptimally as money in a number of ways. More generally, using an item as money either takes that item out of consideration as a useful resource or causes undesirable money supply/price stability effects (or some combination of the two). In this way, fiat money is pretty efficient in that it minimizes the productive stuff diverted to count as money (mainly some fancy paper, zinc, etc. Hey, it’s not a perfect system.). By similar logic, it’s not surprising that gold was a popular form of commodity money, since the uses for gold (electronics, jewelry, tooth caps. etc.) are actually pretty limited compared to the amount of gold available in the world. (If this were not the case, we wouldn’t see so much of it in bar form.)

I guess what I’m saying is that I hope this ramen as currency thing doesn’t catch on as a larger trend, since I don’t want to have to feel as bad about eating ramen as I do about leaving dollar bills in jeans pockets when I do my laundry. (I was going to say that I didn’t want to have to decide between eating the ramen and buying stuff with it, but I suppose the tradeoff between consuming one good and consuming another exists even when money itself is not consumable.) Also, it’s thought that contractionary monetary policy can cause recessions, and I certainly don’t want my ramen consumption habits to be responsible for that.

Ramen is displacing tobacco as most popular US prison currency, study finds

McDonald’s counters Fight for $15 with automation

explainguncontrolandsafespaces:

Liberals, one day you will understand math and business. 

If people need to make a living wage, they should work on their skill set. Make themselves worth more to their employer. They shouldn’t strive to work for the minimum.

The solution to creating more jobs is not more than doubling the cost to hire them.

McDonald’s counters Fight for $15 with automation