Free trade with benefits
Washington Post
Never send an economist to do a political scientist’s job.
Mexican President Andrés Manuel López Obrador looks on as Canadian Deputy Prime Minister Chrystia Freeland, Mexican Deputy Foreign Minister for North America Jesus Seade, and U.S. Trade Representative Robert E. Lighthizer sign documents at the Presidential Palace in Mexico City on Dec. 10, 2019. (Henry Romero/Reuters)
If there is a last redoubt for this idea inside the Beltway, then it is surely the Peterson Institute for International Economics. PIIE has made the best case for the economic merits of U.S. economic openness for some time now. In the latest issue of Foreign Affairs, PIIE President Adam Posen makes a provocative case for continued openness, arguing, among other things, that “populist anger is the result not of economic anxiety but of perceived declines in relative status. The U.S. government has not been pursuing openness and integration over the last two decades. To the contrary, it has increasingly insulated the economy from foreign competition, while the rest of the world has continued to open up and integrate.”
Posen’s essay “The Price of Nostalgia” is well worth reading for two reasons. The first is the evisceration he provides on more populist takes on what trade liberalization did to the U.S. economy. The second is the unintentional revelation for why neoliberalism faces such stark political head winds.
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The good parts first. Posen makes a persuasive case that all of the things that critics of neoliberalism rage against — such as rampant inequality and declining manufacturing employment — actually strengthened at the same time the United States became a more closed economy. Even during the heyday of the 1990s, the United States was less integrated with the global economy because of its size compared to other countries. Posen deftly explains how the raising of trade barriers has accomplished nothing but harm for the U.S. economy, and that the trends many decry — such as declining manufacturing employment — are a global phenomenon.
Posen’s best example is the decline of foreign greenfield investment. As he explains, “Foreign greenfield investment is generally associated with increases in higher-paying jobs and R & D spending. But since 2000, the inflow of greenfield investment to the United States has been trending down sharply, from $13 billion annually in 2000 to $4 billion annually in 2019. Blame goes to a succession of nationalist policies that have increased the threat of arbitrary restrictions on technology transfers and foreign ownership.” The idea that protectionism would trigger productive foreign direct investment is foolhardy.
Posen also proffers useful suggestions for policies that can ameliorate some of the more pernicious effects of untrammeled globalization — including the need to address corporate tax havens, carbon pricing and labor standards.
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Where Posen falls short is his discussion of communities ailing from acknowledged negatives such as the “China shock.” He writes:
Accordingly, much of the writing from policy wonks in recent years has called for plans to recognize the importance of local communities and build them back up. Elected officials, for their part, make a pilgrimage to these places of suffering to show their concern and empathy and then follow up with targeted government assistance.
The problem is that there are precious few examples of a government successfully reviving a community suffering from industrial decline. Geography is not destiny, but it is the embodiment of economic history in many ways, and accumulated history is difficult to overcome....
No one should be abandoned simply because of where they live, and no community deserves to decline. But governments should not lie to their citizens, either. There simply is no reliable method of saving local communities when they lose their dominant employer or industry, even with a massive amount of resources devoted to the effort. Any promises made to revive particular communities through government action are likely to lead to disappointment, frustration, and outright anger when they fail.
Now on the one hand there is a refreshing candor to Posen’s argument. I have read enough economic geography about trying to replicate places such as Silicon Valley to know that he is probably correct. State interventions to rebuild ailing communities after a dominant employer has left the scene face long odds of success.
The problem is that the message of “there is nothing the government can do, so best to just let it happen” is a dead-bang loser argument that no politician can sell. Between hearing that message and hearing some shyster say they will fight like hell to preserve what once was, the politics of nostalgia will win every day of the week and twice on Sundays.
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This is not just about economics, either. For all the talk about footloose and mobile Americans, the bulk of the country does not live this way. According to one moving company, more than 70 percent of Americans live in or close to the city where they grew up. In 2015, the New York Times reported that “the typical adult lives only 18 miles from his or her mother.” Simply telling families that they should move to where the jobs are significantly understates the transaction costs of doing so.
There are policy responses that would be appropriate here. Matthew Yglesias’s idea of relocating federal agencies outside of the Beltway retains its appeal. The pandemic realization that perhaps folks can work far away from their places of employment might also improve the chances of de-clustering employment. It is worth considering how governments can enact policies to turn fading communities into “Zoom towns.”
The point is, neoliberals have a valid critique of the populist critique of globalization. But to push back against populists, they need a better response for struggling communities than a shrug of the shoulders.
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