Saturday, December 29, 2007

Populism without Borders

I'm often dismayed at the "populist" opposition to openness to trade, migration and FDI flows. The Free Exchange Blog that I linked to in Thursday's post hits on the point of what exactly is populism. It defines populism as a ideological movement "of" or "for the 'people'." Usually "the people" represent some under-enfranchised group (the middle class or poor) whose interests are often framed to be in opposition to those of the "elite." It cites James Madison economist Barkley Rosser's charge that Lou Dobbs' brand of populism is, essentially, "economic nationalism for the poor." This is the point that I want to touch on, because it raises two important questions about the tide of protectionism that has ebbed in recent US politics.

First, who are "the people" of the populist thought? The Free Exchange authors note that in the origins of the populist movement, there was debate whether the populist movement would be inclusive of blacks, or if "the people" were exclusively white. Today the debate extends to immigrants, both legal and illegal, both present and future. Many "populists" today would like to slam the "Golden Door" of immigration shut, arguing out of concern for the working poor here. But, in effect, the working poor they are most concerned about are only the native citizens. Many economic free-traders are criticized from the left for pandering to US corporate interests to the demise of the American "middle class," or at the exploitation of the poor abroad. Yet, it is precisely out of concern for these two groups that free-traders are out there fighting the good fight.

This brings us to the second issue, which is one that I have discussed several times: Who gains from open-door policies. Abroad, the preponderance of the empirical studies suggest that trade and foreign investment benefit the poor, especially when a country's labor force is free to move internally. China has been criticized as a case where openness has failed to benefit the poor, but the primary reason it has not reached the rural poor in China has to do with how the Chinese government allocates spending on public education, where it authorized foreign investors to build production facilities, and its tight restrictions on the internal migration of labor. So, we free traders fight the free trade fight, in part, for the poor living in less-developed countries.

On this side of the border, the main groups that can be shown to be harmed by either free trade or by immigration are those without a high school education or its equivalent, not quite the lower two quintiles (40%) of the labor force. I would not suggest for a moment that we should not be concerned for these Americans. However, those truly in the "middle-class" quintile (40th-60th percentile) gain, as well as the upper and upper-middle class. In addition, the gains to these groups far outweigh the losses to the poor. Some have suggested that programs could be set up in cooperation with local community colleges to help these adversely-affected Americans acquire skills in export-oriented or non-traded sectors. They have even proposed that the programs could be entirely paid for from the gains accumulated by high value-added sectors and firms, with a wage replacement stipend toboot.

The main point I've tried to make the last couple of days is this: One can be both populist and in favor of borders that are open to trade in goods, sevices and factors. This is one point that has been made by Columbia economist Jagdish Bhagwati. In addition, even if we do oppose immigration, and especially illegal immigration, we have to come to terms with the plain fact that they are here, deserve to be treated with decency, and (along with the poor still living in the countries they come from) deserve to have some inclusion in our populist agenda.

Thursday, December 27, 2007

Populism at Home

I saw this on The Economist magazines's blog, Free Exchange. I think there are a couple of debates here: (1) What is the role of "populism" in a democratic free enterprise (market) economy? (2) Can one be "populist" (of the people) and still be pro-globalization.

First, about the tides of populism in America. LOU DOBBS DOES NOT OWN AMERICAN POPULISM. There is a rising tide of populist sentiment in the U.S., and not all of it has the nationalistic xenophobic venom that Mr. Dobbs spews out. Ironically, some of it is coming from the elite (which is odd since the most traditional forms of populism embrace the masses by rejecting the elite). In fact, there is rising tide of "plutonomy" among the elite and among traditionally conservative economic journalists, like George Will (see, for example, this column by Mr. Will). Instead of touting the role of the elite as savers, investors and engines of economic growth, these elites and economic conservatives tout the role of the wealthy in promoting charity and helping the poor. With a smilar irony, I will argue over the next couple of posts that "populism" or promoting the interests of the people CAN be (and often is) mutually compatible with markets, openness to trade, and pro-growth policies, with some caveats.

Now, what is the role of populism in a free market democracy? This is an interesting point because many of the neoclassical school of economic thought talk about the optimality free markets, ignore the politics of democracy (or any other system for that matter), and scorn populist ideas. These ecnomists are right to advocate free markets (most of the time), but their naivity to the political constraints makes them blind to the important questions of income distribution that affect the political feasibility of "optimal" pro-growth policies. (In fact, neoclassical models are fundamentally flawed in this regard because they focus on the "representative agent," or essentially the "average" citizen or mean. This is one reason why their models do so well emprically.) In addition, timing, sequencing, and distributional consequences, as it turn out, all matter. Quick example: from 2000-2006 the US promoted policies that neoclassical economists supported as pro-growth. Real aggregate output increased. Real per capita output increased. Shouldn't this have been good for the "growthies?" However the real median household income declined by 2.1 percent. The middle to lower half of the population sank as the rich took off. Populism thrived. Mr. Bush, meet Speaker Pelosi.

Next up: "Populism without Borders."

Wednesday, December 26, 2007

Property Tax Pinch

Got this off the AP wire. On the one hand, I feel for people who have lived in a house their whole lives, and now are unable to afford property taxes. On the other hand, what about folks who wouldn't mind paying market value for it, and can afford the taxes? How about this for the solution? I've heard of child sweatshop labor, but I guess we've decided to turn that on its head! Discuss.