Left Flank

TNR's Canadian ownership might be helpful when exposing the machinations behind the Obama campaign's Austan Goolsbee NAFTA-Gate kerfuffle, but not if this is all Michael Blanchfield's got (and not much better than Bob Shrum).

First and foremost, the U.S. media has identified his chief of staff, Ian Brodie, as the leaker of the diplomatic cable written by the Chicago consulate reporting on the Goolsbee meeting. Harper's domestic political foes are advancing a narrative that has already angered Democrats, and would be bad news for bilateral relations: that Harper was trying to do a favor for the GOP by tossing a piece of political dynamite in front of Obama's train as it was barreling down on Ohio.

"They will do what is necessary to help Republicans. They're a nasty, unprincipled bunch, who are incompetent to boot," Bob Rae, foreign affairs critic and member of the opposition Liberal party, wrote on his blog. "Is it possible that the prime minister himself knew about this information and authorized the leaks in order to discredit the campaign of Mr. Obama for president of the United States?" New Democratic Party leader Jack Layton asked.

All of this forced Harper into issuing a denial--that neither Brodie nor anyone in his office had anything to do with the leak. Harper called the leak regrettable and "blatantly unfair" to Obama's campaign, and has promised a full internal investigation to find the source. But his attempts to distance himself and his office aren't ringing true to some. As one opposition Liberal MP correctly noted, leaks from the Harper government are rare. It is well known that Harper's office keeps cabinet ministers--not to mention diplomats abroad--on a tight leash. These days, even the most seasoned of former diplomats check with Ottawa before talking to the media.

Unless we attribute omnipotence to Harper as a leader in his own government and party, it could just be a mistake. Andrew Sullivan, Obama's leading Republican fan, calls this episode a "bum-rap" (replete with a decent CBC News video). After all, between the three contenders active in the American presidential field, the most FTA-skeptical is Senator Clinton (or is she really skeptical?). With Obama there is at least the possibility of a "Nixon Goes to China" moment, when President Obama sells free trade to the Midwest and saves Canada's bacon. To reach that future, even Canada's Conservatives can see the value of hedging bets between McCain and Obama, without granting Clinton any favors—Canada's disdain for Clinton's free trade views would probably award her conservative votes.

Perhaps, though, this episode presages a diplomatic era, when Ottawa does have spit ball accuracy in America's politics.

If nothing else, Paul Krugman has sparked some of the best (from the perspective of my IR comps next year) the most useful arguments on economic liberalization. Simon Lester points out other issues with Krugman's essay, and links to two other contributions to this debate. The Economist and Angry Bear seem to be talking to each other.

I agree with Stormy at Angry Bear about "...the lack of rules underpinning globalization.". However, I think those include more than just labor, although collective bargaining is important. The international dimension is something Yglesias, Cowen, et al have minimized. Yglesias is downright mercantilist. Lester also discusses the effect of second-best domestic policies, like tariffs and subsidies, on trade.

But, The Economist has the clearest exposition:

If a very small and very rich group of Americans are enjoying most of the benefits of trade, then we should determine how best to capture a portion of those gains for redistribution. Are increased income tax rates an appropriate means to that end, or are there more efficient ways to go about sharing the surplus? It's all well and good to propose a stronger safety net, but one must also discuss how to pay for it, and what effects a payment scheme may have on the incentives of investors and innovators in the economy.

Next, we must determine the best methods for downward redistribution, with a keen eye to incentive structures. Wage subsidies and unemployment insurance are attractive policy options, but the ultimate goal must be to increase the size of the skilled workforce relative to unskilled workers. As Mr Krugman states, "[H]ighly educated workers in the United States benefit from higher wages and expanded job opportunities because of trade." Investing in policies to enlarge the proportion of highly educated workers in America must become a high priority.

(...)

Where trade is troublesome, it's also important to understand that concerns about wage-effects miss the point entirely. If Chinese manufacturing is far more environmentally damaging than first-world production, then we ought to attempt to address those externalities, regardless of trade's impact on incomes. In fact, Chinese goods are cheap in large part because the costs of pollution and carbon (and unhealthy labour conditions) are not included in the shelf price. These problems are just as pressing as inequality concerns, and their solutions may have the effect of killing several birds with one stone.

Again, the reason we're having this debate has to do with translating economics into political policy, via the democratic process. So, I'll take full-bore clarity over disguised protectionism, from Krugman or Yglesias, anyday.

Matthew "New Deal" Yglesias and Tyler "SWF" Cowen are still talking about Paul Krugman's "protectionist" about-face. Both oppose Krugman's call for social safety nets to help the losers from free trade.

The Economist points out two problems with SWFs, or sovereign wealth funds: transparency and knowledge. "The last time governments were this involved in sinking money into private assets, the process tended to be called nationalisation. Now the funds are invested both abroad and domestically. A new term will have to be coined: internationalisation, perhaps." An American SWF could hide its decision-making in a blizzard of paper and regulations. Moreover, it is mostly likely an SWF would invest less efficiently than a private investor. That goes for Yglesias' and Cowen's arguments.

Both Cowen's and Yglesias' proposals would create more problems than they solve. Foreign governments would certainly take Washington's creation of SWFs as a cue, that multilateral trade reform is dead. Also, individual governments might oppose American SWF-led investment just as America does. As many have commented on both sites' boards, an SWF wuld be prone to corruption caused by lobbying. SWfs would likely exacerbate already existing market distortions, like tariffs and subsidies. The first-best solution is reducing these barriers; the second-best involves the right combination of domestic employment insurance, domestic healthcare reform, domestic pensions reform, multilateral immigration reform, multilateral financial reforms, private investment, and education needed to maintain an increasing rate of global and domestic economic growth.

Krugman is right.

Paul Krugman starts what passes, to a non-economist, for fun when reading about economics. Admittedly, I fall asleep when people talk about math - unless it concerns my money - but I will put in the effort for comparative advantage (and, so should you). If for no other reason, it's fun when intelligent people get stuck in cat fights like this.

So am I arguing for protectionism? No. Those who think that globalization is always and everywhere a bad thing are wrong. On the contrary, keeping world markets relatively open is crucial to the hopes of billions of people.

But I am arguing for an end to the finger-wagging, the accusation either of not understanding economics or of kowtowing to special interests that tends to be the editorial response to politicians who express skepticism about the benefits of free-trade agreements.

It's often claimed that limits on trade benefit only a small number of Americans, while hurting the vast majority. That's still true of things like the import quota on sugar. But when it comes to manufactured goods, it's at least arguable that the reverse is true. The highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose.

As I said, I'm not a protectionist. For the sake of the world as a whole, I hope that we Americans respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect.

Don Boudreaux responds with Krugman's own 1996 essay attacking Krugman's 2007 argument. Greg Mankiw gives Krugman an "out" (since Krugman claims he's not a protectionist, but Dani Rodrik praises Krugman.

Perhaps we can make more progress here if we stopped using blanket terms to characterize where people stand, and used real words to describe what their views are.

I think Rodrik is on to something here, even if I think Krugman's essay encourages arguments in favor of protectionism. Firstly, let me emphasize what Suranovic argues (assuming you read the passage about comparative advantage before this):

Many people who learn about the theory of comparative advantage quickly convince themselves that its ability to describe the real world is extremely limited, if not non-existent. Although the results follow logically from the assumptions, the assumptions are easily assailed as unrealistic. For example, the model assumes only two countries producing two goods using just one factor of production. There is no capital or land or other resources needed for production. The real world, on the other hand, consists of many countries producing many goods using many factors of production. In the model, each market is assumed to be perfectly competitive, when in reality there are many industries in which firms have market power. Labor productivity is assumed fixed, when in actuality it changes over time, perhaps based on past production levels. Full employment is assumed, when clearly workers cannot immediately and costlessly move to other industries. Also, all workers are assumed identical. This means that when a worker is moved from one industry to another, he or she is immediately as productive as every other worker who was previously employed there. Finally, the model assumes that technology differences are the only differences that exist between the countries.

With so many unrealistic assumptions it is difficult for some people to accept the conclusions of the model with any confidence, especially when so many of the results are counterintuitive. Indeed one of the most difficult aspects of economic analysis is how to interpret the conclusions of models. Models are, by their nature, simplifications of the real world and thus all economic models contain unrealistic assumptions. Therefore, to dismiss the results of economic analysis on the basis of unrealistic assumptions means that one must dismiss all insights contained within the entire economics discipline. Surely, this is not practical or realistic. Economic models in general and the Ricardian model in particular do contain insights that most likely carry over to the more complex real world. The following story is meant to explain some of the insights within the theory of comparative advantage by placing the model into a more familiar setting.

I would argue that most laypersons, like me, would doze during a economics lecture (but I fight the urge). And, since most people do understand their interests, based on their particular experience at whatever company or agency, better than what they learned in college, haranguing them about learning comparative advantage is probably an impossible task. But, lest I become completely cynic, many people do think in political terms for elections, if only right before entering the booth. So, the task is to translate economic theory into political language people can scrawl on their hand, as it were.

Starting with models and lectures about wine in Portugal, X's and Y's, and two countries is like labelling oneself a "free trader", unless one then proceeds to lampoon that argument. "Free trader" becomes a caricature which translates to a political epithet, "Republican" or "Clintonian". Resisting this impulse requires a political platform cut from whole cloth that emphasizes the "free trade" program and an emphasis on national interest fit enough to tangle with the mercantilist impulse.

How that would work is another question...

Philip Brasor writes a great piece about the conflict between the market and agricultural traditions and government trade policies. With only a change, from «rice» to «maize», a farmer in Iowa could feel a Japanese farmer's pain.

Though they paid lip service to the farmers' hard work, some of the studio participants wondered out loud if there wasn't something stone-headed about government support for rice. University of Tokyo Professor Masayoshi Honma said that the main reason the government promotes rice consumption right now is that rice is the only crop that holds up the self-sufficiency rate, as low as it is.

In response, the farmers' position in advocating the continuation of government protection through tariffs and subsidies became increasingly defensive. They said that if the Japanese rice market collapsed, the rural environment would deteriorate, small communities would disappear, and Japan's connection with its agrarian past would cease to exist. While these developments would certainly be dire, they have little to do with the problem's source, which is that Japanese people don't want to eat as much rice any more.

The government's rice protection policy was formulated during World War II, when the citizenry was starving. After the war, production increased and rice was pretty much all there was. The quality wasn't very good, but everybody ate it for breakfast, lunch and dinner. Consumption peaked in 1963, when the average Japanese person ate five bowls a day. That statistic decreased to 3 1/2 bowls by 1978 and now stands at 2 1/2.

There's a simple reason for this: more choice. Japan's standard of living is among the highest in the world. Japanese people can eat anything they want, and they famously do. There is no reason to eat as much rice as they once did, or any at all, for that matter; but as the arguments on the NHK program showed, rice has a powerful hold on the Japanese imagination.

Halfway through the three-hour marathon, the moderator put this question to the studio participants and the viewers: Should Japanese people eat more rice? Again, the voters at home overwhelmingly sided with the farmers: yes, they should. But a number of people in the studio took issue with the question itself.

«Why can't I eat anything I want?» asked one student, even though he said he ate more rice than the national average. And Honma seemed offended. «That question is pointless,» he said. Whether or not Japanese people «should» eat rice was irrelevant to the debate, since you couldn't do anything about people's preferences in a free society.

There's no PR in the world can compete against free choice and affluence.

I'm almost certain Smith and Ricardo would agree. that a free-trade agreement that includes a provision about dumping hazardous waste, is not a win-win situation.

At Thursday?s hearing, groups opposed to the treaty even managed to impress Ambassador to Japan Domingo Siazon.

Siazon commended Junk JPEPA lawyer Golda Benjamin for her ?excellent, thorough, articulate and well-researched? arguments that the treaty would promote the entry into the Philippines of toxic and other hazardous waste from Japan.

Under JPEPA, the tariff rates for hazardous waste would be reduced to zero.

Siazon, who flew back to Tokyo after the hearing, said the Philippines needed the support of a ?technologically advanced? country like Japan to deal with its own hazardous waste.

Health Undersecretary Alexander Padilla, meanwhile, stunned the senators when he disproved the Department of Environment and Natural Resources? claim that Japan would not export hazardous waste to the Philippines.

Padilla said the Department of Health had ?concerns? that the treaty would allow for reciprocity, meaning that both the Philippines and Japan could export hazardous waste to each other.

?While we agree with the noble objectives of the JPEPA, we feel we do live in an imperfect world,? he said.

That's an understatement, indeed!