The perils of extreme moderation

The fine art of see-saw balancing and Paul Samuelson's protectionist-hating dogs.

Published June 26, 2006 7:16PM (EDT)

For a 91-year-old guy, Paul Samuelson looks pretty spry. But the Nobel prize-winning economist also came off as a bit contrite when he tried to explain to the audience at the Wilson Center day-long seminar on "Global Competition and Comparative Advantage" the hullaballoo over his September 2004 paper in The Journal of Economic Perspectives, "Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Concerning Globalization."

That paper was widely interpreted as a critique of "win-win" theories of free trade. But apparently, Samuelson did not intend to suddenly cross over completely to the other side of the aisle.

"I got considerable embarassment from the publication of that article, because terrible protectionists, the kind of people I love to hate -- when I name their names my dog growls on order -- began to write to me and try to drag me into it."

Samuelson blamed the misunderstanding on "young" journal editors who "didn't understand the topic and didn't send it out for peer review." Be that as it may, the real problem may have been in his effort to navigate the perilous waters between free trade and protectionism, or to be, as Baumol put it, an "extreme moderate.". All the economists during the first panel session of the Wilson Center seminar professed themselves to be pro-trade. But they all also emphasized that not all outcomes of increased trade are equally beneficial to both parties -- and in fact, economist William Baumol specifically noted that the best outcome for one country is invariably bad for its trading partner.

It's a tricky business, to stand there and declare that trade is good, but can also be bad. It doesn't satisfy ideologues on either side; it sounds wishy-washy; and it ends up in policy prescriptions that have been heard countless times before and seem to lack oomph: increase funding for education and research in basic science, pump up job training and wage insurance programs, etc. The challenge of this dance was obvious during the panel discussion: every declaration that there could be negative consequences to trade had to be balanced by slams against "isolationism" and the specter of increased tariffs.

In the middle of this seesaw the assembled men did make one interesting point that is well worth investigating further. A common response by free traders to their critics is to note the benefit that low-priced goods bring to an economy. So what if manufacturing industries are moving wholesale to China? If American workers can buy $50 DVD players, then their standard of living is still rising.

Ralph Gomory and William Baumol, co-authors of "Global Trade and Conflicting National Interest," argued that just focusing on the cheap prices of imported goods missed the larger impact on overall terms of trade. If Americans make fewer things, they still may ultimately end up spending more, as measured in terms of the percentage of their wage-earning power, in the long run.

"Your country is now not making as much stuff as before," said Gomory, "but you can only consume the value of what you make. That forces a change in the terms of trade, and you start paying more for things."

It would been nice to have a contesting view on this panel, someone who might have argued that the cheap prices counteract declines in wage-earning power -- or that the rise of service sector will counteract the decline of manufacturing. And it might also have been nice to put a little more emphasis on a larger theme: developing nations tend to gain more from trade than the developed nations lose, so the world as a whole stands to benefit from increased trade.

But there is a pitiful constituency for looking at such matters from a global perspective, especially at seminars that take place in Washington, D.C.. There, the natural question is always, what can be done for us?

That something can be done should be without doubt. As Gomory noted, the great difference between our time and David Ricardo's, two centuries ago, is that "we no longer trade on the basis of natural advantage. We can create advantage, we can create the ability to make sneakers in Indonsesia, the ability to make silicon chips in Taiwan or Korea -- not because their sand is better, but because they create the knowhow and make the enormous investments necessary to build a chip fab."

The panel was short on offering specific policy choices for the United States -- apparently that will be a topic of a subsequent Wilson Center seminar. But Baumol did close the session calling for attention to education and research and "those things that Adam Smith said were good for the general welfare even if not to the benefit of any individual institution."

Such "things" would "not be in an isolationist directison, and they are not the building of tariffs. But they are measures that besides helping us, will also help China and India."

And maybe would result, if not in the best outcome for any particular country, then in benefitting the best interests of us all.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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