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June 26, 2007

Deflating the $500 billion number

Since 2005, a lot of pundits have been throwing around the following number:

Harvard's Dani Rodrik, a long-standing globalization skeptic, argued recently that "closed markets may have been a fundamental problem during the 1950s and 1960s; it is hard to believe they still are." But this complacency is wrong. The Peterson Institute for International Economics calculates that the removal of remaining trade barriers would boost U.S. income by $500 billion a year. Whether or not you accept this particular number, there's no doubt further liberalization can unlock huge benefits.

As it turns out, this number is totally bogus, finds L. Josh Bivens of the Economic Policy Institute in a recent brief. Among Josh's findings:

  • The mainstream estimates done by the U.S. government and World Bank -- even in their most optimistic models, and Josh runs some numbers even more "optimistic" still -- find gains from trade that are less than 5 percent of the $500 billion figure found by Peterson.
  • The methodology that Peterson used "are premised overwhelmingly on the assumption that barriers to trade exist even when no explicit price or quantity restrictions on imports or foreign investment can be identified."
  • Finally, rather than relying on the trade theory that has been standard for over half a century that predicts the wage stagnation of the U.S. workforce that we have (in fact) seen over the period, Peterson examines "only those workers directly displaced by trade. This group generally never shows up in most trade theories, which assume full-employment always and everywhere. Displacement, in short, while a real-world problem, is decidedly not the biggest cause of income losses due to trade and trade liberalization. Rather, the largest cost from trade is the permanent and steady drag on the wages of all American workers whose education and skills resemble those displaced by trade. Waitresses, for example, do not generally lose their jobs due to trade, but their pay suffers as workers displaced from tradeable goods industries crowd into their labor market and bid down wages. Not acknowledging these wage costs is a very good way to minimize the total debit column in the balance sheet of globalization’s impact on American workers."

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