June 20, 2007
Free Trade and Inequality Posted by Fredric Smoler at 09:15 AM EST In an interesting article in the current issue of Foreign Affairs, “A New Deal for Globalization”, Kenneth F. Scheve, professor of political science at Yale University, and Matthew J. Slaughter, professor of economics at the Tuck School of Business at Dartmouth, survey some very recent history and argue for redistributing income to preserve free trade. They suggest doing this by making payroll taxes, now flat, progressive, and their argument goes like this: Americans are becoming more protectionist, there are already policy changes in response to the trend, and this is happening because increased income inequality has accompanied globalization, and the latter is blamed for the former. Scheve and Slaughter are decidedly in favor on globalization, pointing out that “trade and investment liberalization over the past decades has added between $500 billion and $1 trillion in annual income—between $1,650 and $3,300 a year for every American. A Doha agreement on global free trade in goods and services would generate, according to similar studies, $500 billion a year in additional income in the United States.” But they note that while globalization has been increasing aggregate American wealth, “real income growth has been extremely skewed, with relatively few high earners doing well while incomes for most workers have stagnated or, in many cases, fallen. Just what mix of forces is behind this trend is not yet clear, but regardless, the numbers are stark. Less than four percent of workers were in educational groups that enjoyed increases in mean real money earnings from 2000 to 2005; mean real money earnings rose for workers with doctorates and professional graduate degrees and fell for all others. In contrast to in earlier decades, today it is not just those at the bottom of the skill ladder who are hurting. Even college graduates and workers with nonprofessional master’s degrees saw their mean real money earnings decline. By some measures, inequality in the United States is greater today than at any time since the 1920s.” And they note that “public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor.” By their account, free trade is the golden goose, increasing income inequality the ax poised to kill it. I suspect they are right about that, not least because other than Anglo-American economists and a small portion of the political class, very few people seem to be enthusiastic free traders: European Union electorates are not instinctive free traders, nor are Chinese policymakers, nor, in my experience, are the majority of the Americans I have ever heard opine on the subject. Scheve and Slaughter seem to think that people may in fact have made a legitimate inference on the relationship between growing inequality and free trade, but I do not think you have to believe that to support their proposal. If they are wrong about the plausibility of the connection between inequality and globalization, that does not mean voters will stop making that connection, and they seem likelier to do it when they feel most pressed and stressed. The history of support for free trade suggests that the passion does not go from strength to strength; it waxes and wanes. American democracy is good at turning changing popular sentiment into changing policy. Europe is different. Widespread popular support there for the death penalty, for example, has yet to make an impression on the political class. And as it happens, the European elite does not need to bribe its electorates into supporting free trade, because much of the elite is itself hostile to free trade. We’re different, which means bribery may be a good investment for everyone.
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