March 03, 2004

Clarifying Friedman

My post the other day praising Tom Friedman's op-ed on offshoring got a lot more criticism than I expected, both in the comments and verbally. Julia obviously laid into me in the comments. And Mike F. told me over brunch at his parent's house that in an area where we mostly agreed I picked the one quote that he thought was unsupportable. T McGee asked "what percentage of [my] posts involve... making an argument by anecdote?"

So it's worth reexamining the quote and trying to explain what I took away from it and why I didn't have the visceral negative reaction that others did.

First, it's worth saying again why free trade is supposed to be good. It all comes down to the fact that in the absence of tariffs, the increase in consumer surplus will be greater than the decrease in producer surplus. Combine this with David Ricardo's comparative advantage – trade is beneficial to both countries even if all goods can be produced more cheaply in one country than the other; it's the ratio of the costs of production that matters – and neoclassical economics argues pretty strongly for it.

The current politically hot argument against free trade is that it "destroys" American jobs – there are or have been other arguments, but in this election year, environmental and labor standard critiques are on the back burner compared to the effects on domestic workers. Listen to Kerry, Gephardt, Edwards or even Bush if you want to hear this argument (in fact, listen to anyone except Gregory Mankiw and Alan Greenspan).

But there are two ways that trade helps the country in the long run. The first is by offering lower prices, both for companies and consumers. This makes everything from food to durable goods cheaper for consumers. It also makes American companies more competitive in the global market by make their inputs cheaper (and hence their marginal costs lower). This is why steel tariffs and sugar quotas backfire – steel-using companies are hurt by higher prices and candy-makers move to other countries. People (including me) talk about this effect fairly often – it's the standard argument for free trade.

But the other effect is just as real, even if harder to see and longer in coming. The idea is that, due to rising standards of living over time, demand is created in other countries for American goods. Because of comparative advantage, we live pretty high up on the food chain of production – we have huge advantages in creative, marketing, high-tech and many other areas that require educated workers and efficient capital markets. That's good for us because it makes us highly productive and wealthy, but the problem is that it takes rich people to buy the stuff that we produce well. So it stands to reason that having more rich people to buy our luxury items, see our movies, use our software is good for us.

I took Friedman's op-ed to be an argument, not for shareholder democracy, we all benefit because investors do, but for this second benefit of free trade. It was an argument that was part anecdotal, part statistical, and part (implicitly) logical.

Exports to India have gone up 72% in the last 12 years. And these outsourcing companies are (anecdotally) buying our products to help get their businesses up and running. And this is an expected benefit of free trade.

That's what I thought was worth highlighting.

No, the components for the Compaq computers probably aren't built in the US, but the marketing, R&D, integration testing, financing, industrial design and (maybe) final assembly is. The Microsoft software probably is written here. What makes the Coke bottled water valuable (the brand) is mostly made here. And all the call center reps and computer programmers probably go home and listen to US music, watch Hollywood movies, and wear American brand clothes.

Anyway, that was my reason for pointing to the op-ed. Maybe I left too much unsaid, maybe I selected a bad quote, maybe you all still disagree with me.

As to T McGee's criticism, while the people I link to or quote often include anecdotes in their arguments, I think a perusal of my economics category (or the front page) will show more statistics and rational argument than anecdotes. I'd be interested in knowing what percentage (and which posts) he thinks are anecdote-based. I try to use real data and economic arguments as much as possible, but anecdotes can be illustrative and persuasive in a way that raw numbers and logic can't.

Posted by richard at March 3, 2004 06:40 PM