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Income ‘inequality’ and Trade – even smart people can be dumb
The Wall Street Journal runs a very dumb article called, ‘Globalization's Gains Come With a Price: While Poor Benefit, Inequality Feeds A Backlash Overseas’ [such a pithy title why can’t they make it longer?]
by StFerdIII
Even smart people can be dumb sometimes. The Wall Street Journal, part of the ‘open-borders, let the world flood in, we are all brothers, one-world’ crowd, has run some outstandingly bad articles on trade. The main tenet of these tirades? Trade has some benefits but it increases income ‘inequality’. That must be music to the ears of socialist and populist mandarins eager on Marxist programs of income redistribution. The idea is of course wrong and extraordinarily misleading and disingenuous.
The belief that trade somehow leads to greater disparity in incomes, while true in some sense, is of course meaningless. In open trading regimes those with the most in demand products and services will profit and probably earn the highest reward. Those working for the capital owners of such in demand products or services will of course benefit as well, but not maybe as much. So what?
As society gets richer the owners of capital will of course have more opportunity to earn even greater returns on that capital. As the old saying goes, ‘it takes money to make money’. But those who work for the owners of capital will also benefit as profits increase or capital accumulates. These non-capital owners will receive higher wages, profit sharing opportunities, training, access to new technology and even perhaps an increase in mobility to find new and better work.
The fact that capital returns are highest for those who provide the most sought after goods or services is a positive for all of society. The workers, the government, the suppliers, and the purveyors of infrastructure, all these and more will benefit from a profit making organization. The main effect of trade is to increase the total wealth of society, which benefits its various members. Measuring absolutes between the ‘richest’ and ‘poorest’ before income transfers, redistribution programs, taxes and other fees is a form of statistical insanity.
The only people who might not benefit from an increase in trade are those in protected markets where wage gains tied to productivity improvements don’t function; those who lose their jobs and cannot be retrained; and regions or cities with poor economic policy that forces capital and business to locate elsewhere. Wage earners at the lower income levels might also see income erosion from things like illegal immigration of uneducated workers; rising costs of living not offset by an increase in wages; or inflation. But these issues have nothing to do per se with trade. They are attributable to bad government policy.
In fact there is lots of evidence that trade increases prosperity of all income classes even in developing nations. The last thing you want is trade protectionism. As a trade expert commented, “Most changes in the workplace leading to job displacement can be attributed to advances in technology, but it is increasing imports that attract more blame. Protectionism is the wrong response. Better solutions have been proposed for governments to address workers' anxiety” [David H. Feldman professor of economics at the College of William and Mary in Williamsburg, Virginia].
Retraining, opening up markets to innovation, new firms and new capital, are key aspects of what government can do to help those who need aid. Stopping trade does not help the average worker. Trade is vital because it creates higher paying jobs. The World Bank for the past 10 years in various reports has consistently shown that during the past two decades real wages rose at an average annual rate of 3% in developing countries where the growth of exports as a share of GNP was above the average, but wages stagnated in those where exports expanded least. The message? More trade is absolutely necessary to increase wealth.
International trade helps the average wage earner in two ways. First it allows workers to shop for goods or services where they are cheapest. It also allows employers to buy the equipment and technologies that are necessary to enhance worker skill. In more advanced countries imports from cheaper producers have significantly reduced the price consumer goods and business machinery. Second, a more global market frees workers and businesses from the constraints imposed by domestic demand. This entails a larger market, more economies of scale, a limitation to government rape [ie. over taxation], and perhaps even greater labor power through mobility or wage demands tied to profits. Trade is not evil. It is the basis of much that is good in a modern society.
So what is the Wall Street Journal crying about?
I don’t know the background of the three writers of the WSJ article but it is hard to believe they know anything about economics. The entire article is full of common mistakes which informs mainstream media perceptions. As usual it is littered with emotional, supposedly true stories of the down and out, or the suffering. Success stories are not mentioned. Two of the most obvious and ridiculous problems with the article are listed below:
1)'….Then foreign competition from places like India, Pakistan and El Salvador intensified: Mr. Flores, who sewed pockets onto blue jeans, says his foreman "would go around shouting, 'If you don't work harder, we are going to shut this plant down and move it to Central America.'" Today, Mr. Flores is unemployed, having accepted a $900 buyout in April after the company switched to new machines.’
In the article this Mr. Flores worked for a number of years receiving a doubling of his salary within that time. He was also paid out at a rate of 2 years worth of his salary. Previously he was unemployed. He is uneducated. Seems to me he did very well for a few years. Western firms owe Mr. Flores a job? Why? Isn’t it the responsibility of Mexican society to train and aid Mr. Flores?
2)'….skilled workers in Mexico still earn far more relative to unskilled workers than they did before liberalization. In 2004, urban full-time workers at the top 10th percentile earned 4.7 times more than those at the bottom 10th, compared with four times as much in 1987, according to Columbia University economists Eric Verhoogen and Kensuke Teshima.’
So? Since 2000, the percentage of Mexicans living in extreme poverty has fallen below 20% for the first time in history. The average Mexican needs to stay in school, get an education and/or learn a trade. That is the way to earn more money. As well given high rates of Mexican corruption, state monopolies and the fact that a 200-family elite runs the country, one would expect that the underclass, the infrastructure and the working poor are ignored. Reform Mexican politics and get rid of monopolies if you want to further aid the working poor.
It is a fact that multi-national firms pay far above national averages in wages. For every overseas Nike job that is offered, literally hundreds of applicants will apply. Why? Nike pays, trains, and helps people at a level that local firms cannot. Nike and other firms provide access to technology, education and wage levels that are dearly coveted by those workers who are supposedly ‘exploited’ by the capitalists. If it is exploitation it is sure better than what they were doing, or most likely not doing, before. Better to work for Nike or some other international firm, then to cut rice in the local paddy.
The fallacy of dumb articles like this one run by the WSJ is that the Western world or Western firms owe the rest of a planet a high standard of living. They incredibly ignore that 70% of a nation’s well being is due to domestic policy, domestic market conditions and domestic political-economic management. Most of a nation’s problems have nothing to do with trade.
Even in developing nations trade might account for at most, 30% of the GDP. How can someone blame trade for ‘income inequality’, when most countries need more trade and not less, and where domestic corruption, bad government, statist policy or outright property theft account for poor infrastructure, bad education and little opportunity?
Trade has lifted 500 millions in India and China out of poverty. Even that has been only due to a selective opening up, in a certain number of market segments, of trade opportunities. Much work still needs to be done in Asia to create transparent trade regimes. With an increase in economic activity comes greater wealth, followed by political changes. The best defense against Chinese political ambition for example is to force open its markets and allow a burgeoning middle class to forever change Chinese politics from fascist tyranny to open, transparent plurality.
It is pretty sad when a pro-business newssheet like the Wall Street Journal runs such drivel as ‘fact’. It just serves to give the Marxist warriors, the trade protectionists and the bleeding hearts of the world, some rationale for further anti-competitive, and anti-worker policy setting. Trade benefits all in society, we need more globalization not less, and we need more intelligent analysis of trade not tired dogma, especially from important media outlets like the Wall Street Journal.
[WSJ’s May 24 2007 article was written by Bob Davis and John Lyons in Puebla, Mexico, and Andrew Baston in Dalian, China. A background check into their expertise and political orientation would be interesting.]
