An Economist's Cautionary Note on Free Trade

Among most economists (among whom I count myself as one), free trade is a pretty strongly favoured policy.

The reasons for this are fairly good, and fairly straightforward, in the standard case for free trade.

Under the standard theory, the main basis for the benefits of free trade is comparative advantage. If Australia is relatively more efficient in producing iron ore (that is, if it has a comparative advantage in iron ore), and China is more efficient at producing manufactured goods, then at the country level both Australia and China are better off if Australia specialises in iron ore, China specialises in manufactured goods, and the two countries trade with each other. Then both countries are able to obtain more consumption of each good than they would alone, given whatever initial resources they have. This is an economic benefit, understood since David Ricardo wrote about it in 1817.

If one thinks of the economic units in terms of countries, free trade between China and Australia is Pareto improving. Both countries are made better off, and no one (in this limited model) is made worse off. This is the Holy Grail of economic policy. The optimal level of tariffs is thus zero, as restrictions on free trade harm both countries.

But if one thinks instead at the level of individuals within a country, then free trade is no longer Pareto improving relative to tariffs. In the example above, if I'm a worker in an Australian manufacturing firm which was previously protected by tariffs, and these get eliminated, then I really do get screwed. It's not just complaining - as my firm goes broke, I lose my job, and the previous skills I have are no longer economically useful in my country. Even if I get another job, I likely will have a lower future wage for quite a while, if not permanently.

The steel workers in Ohio complaining about free trade aren't just making it up. Things really did get a lot crappier when tariffs were eliminated.

But economics has an answer here. Free trade isn't Pareto improving, but it is Kaldor Hicks improving. In other words, the total gains to the economy are sufficiently large that the beneficiaries could organise a transfer payment to those who lost their jobs which would made the Ohio steel workers also better off. 

As a matter of political economy, this transfer doesn't actually happen. You'd have to pay the losers from free trade a very large sum of money if they have to transition to years of unemployment, or a permanently lower future income. 

Of course, this isn't really a problem of economics, more just politics. Is it the economist's fault that his prescriptions don't get followed?

So much for the standard theory. It's actually pretty good, as far as it goes. Like good economic proofs, it flows from assumptions to conclusions. If it's wrong, it's because there's something in the model that's being left out, or one of the assumptions is questionable.

There are a number of possible extensions one can make, like depreciating human capital. But to me, it's the base assumptions that are the most interesting. What are they?

We have the following:

1. Consumption is a good. You're better off consuming more goods and services than fewer goods and services, all else equal.

2a. Leisure is a good, or equivalently

or 

2b. Work is a bad.

In other words, for any given level of consumption, you'd rather work less than work more. 

These are not terrible assumptions. #1 seems probably true. You may hit a point of satiation with consumption, but over most ranges of wealth that people operate on, having more stuff beats having less stuff, unless the stuff poses other costs (like screwing up your children, in which case all else isn't equal).

But what about #2?

Going from a 14 hour work day to a 10 hour work day, with the same wages and consumption, is surely an improvement in welfare.

Going from a 10 hour work day to a 6 hour work day, with the same wages and consumption, is also almost surely an improvement in welfare. 

But the big question is the following: is it still an improvement in welfare to go from a 6 hour work day, to a zero hour work day in perpetuity?

In other words, if your consumption stayed exactly the same, would you prefer to have some sort of job, or no job, ever?

You may think work sucks, but be careful what you wish for.

What if it turns out that people actually need some sense of purpose, some reason to get up in the morning?

Admittedly, having a job isn't always a fun purpose. But it's a structure, and a discipline, and a set of people you can interact with, and a routine that, if it works well, results in the satisfaction of providing for yourself.

What would life look like if you had basic consumption needs provided for you, no strings attached, without any need to work?

Well, as it turns out, we have many decades of data on that question. They're on display in a housing estate or ghetto near you. And the results ain't pretty. Ask Theodore Dalrymple, who wrote about this extensively: 

Every few months, doctors from countries like the Philippines and India arrive fresh from the airport to work for a year's stint at my hospital. It is fascinating to observe their evolving response to British squalor.

At the start, they are uniformly enthusiastic about the care that we unsparingly and unhesitatingly give to everyone, regardless of economic status. For a couple of weeks, they think this all represents the acme of civilization, especially when they recall the horrors at home. Poverty—as they know it— has been abolished.

Before very long, though, they start to feel a vague unease. A Filipina doctor, for example, asked me why so few people seemed grateful for what was done for them. What prompted her question was an addict who, having collapsed from an accidental overdose of heroin, was brought to our hospital. He required intensive care to revive him, with doctors and nurses tending him all night. His first words to the doctor when he suddenly regained consciousness were, "Get me a fucking roll-up" (a hand-rolled cigarette). His imperious rudeness didn't arise from mere confusion: he continued to treat the staff as if they had kidnapped him and held him in the hospital against his will to perform experiments upon him. "Get me the fuck out of here!" 

My doctors from Bombay, Madras, or Manila observe this kind of conduct open- mouthed. At first they assume that the cases they see are a statistical quirk, a kind of sampling error, and that given time they will encounter a better, more representative cross section of the population. Gradually, however, it dawns upon them that what they have seen is representative. When every benefit received is a right, there is no place for good manners, let alone for gratitude.

By the end of three months my doctors have, without exception, reversed their original opinion that the welfare state, as exemplified by England, represents the acme of civilization. On the contrary, they see it now as creating a miasma of subsidized apathy that blights the lives of its supposed beneficiaries. They come to realize that a system of welfare that makes no moral judgments in allocating economic rewards promotes antisocial egotism. The spiritual impoverishment of the population seems to them worse than anything they have ever known in their own countries. And what they see is all the worse, of course, because it should be so much better. The wealth that enables everyone effortlessly to have enough food should be liberating, not imprisoning. Instead, it has created a large caste of people for whom life is, in effect, a limbo in which they have nothing to hope for and nothing to fear, nothing to gain and nothing to lose. It is a life emptied of meaning.

"On the whole," said one Filipino doctor to me, "life is preferable in the slums of Manila." He said it without any illusions as to the quality of life in Manila.

I skipped the most striking descriptions of the problem, because if I started, I'd end up quoting the whole thing. Read it all, if you haven't before.

A question, dear reader.

Do you think the problems of the people described above stem from a lack of consumption? They don't have to do any work, so in a standard model, the only problem left is that they must be consuming too little.

Suppose that Dalrymple is describing his subjects in the above article honestly, and you have two policy choices to consider for the above recipients.

Option A - Increase their welfare payments by 50%

Option B - Find them a not unpleasant job for 6 hours per day, and require them to do honest work in order to receive the same welfare payments as before.

Which of these two policies would result in a larger improvement in human welfare for such people?

In the standard model, the answer is obvious. Given our assumptions, Option A is far preferable. Do you believe that?

Would it change your mind to find out that lower class whites in America (especially in rust belt parts of the US that have been worst hit by job losses from free trade) in recent decades have been so despondent that their life expectancy has actually been dropping as they kill themselves with alcohol, opiates, and suicide?

The standard answer to this is that we have an opiate problem. And a drinking problem. These are "substance abuse" issues. But why now? Alcohol was always there. Why is it only now that people decide there is no other purpose or hope in their lives, and start drinking themselves to death?

To turn these concerns back into the language of economics, the Holmes conjecture is that if leisure is not always a good, and work is not always a bad, then it is no longer obvious that the optimal level of tariffs is zero.

Sometimes, you might prefer to have some restrictions on trade in order to keep jobs in America.

But you have to be honest about why you're doing this.

Targeted tariffs won't raise consumption. They won't spur economic growth. They will lead to more expensive goods, and less consumption. David Ricardo was right on all that. Comparative advantage still exists, and be very wary of anyone who talks about free trade without acknowledging this.

But they might also lead to more employment. And this may well be worth it in terms of the quantity that the economist's social planner is meant to care about, namely total welfare.

It might lead to fewer rust belt whites killing themselves with opiates, because their communities are totally hollowed out with everybody sitting around on welfare without any purpose in their lives.

If steel products cost slightly more as a result, personally that doesn't strike me as the end of the world.

Of course, this is a cautionary note, not a case for tariffs-a-go-go. To say that the optimal level is not zero does not imply that the optimal levels is high, or across-the-board. And it's also not clear that tariffs versus free trade is the only solution to this, or even the best one.

I personally think that automation is a much bigger worry in this regard than free trade. I have similar questions about automation, which also doesn't strike me as everywhere and always welfare improving.

These aren't straightforward questions. If you ban the automobile, we get stuck with horses and carts forever.

And yet... and yet...

The Deaton and Case finding seems to me to be one of the most important findings in social science in recent years, and portends an enormous and growing problem. There are lots of workers who simply do not seem to be economically useful anymore, and in communities where lots of these people have ended up on welfare as a result of the endless grind towards replacement by robots, life is purposeless and miserable.

There are many other purposes that can be fostered - community, charity, art, religion, family.

But until we have a handle on how to solve the torrent of lives being sucked into the abyss of misery, as large as the AIDS epidemic, I remain open to a range of different policies in response.

The purgatory of eternal twilight

In the strange no man's land between sleep and wakefulness, I sat on the plane. I had only gotten four hours of sleep the night before, but, unusually for me, sleep would not come now. I turned on my laptop, felt tired, turned it off again, but still couldn’t sleep.

And as my mind eventually turned to introspection on my situation, a meandering thought drifted towards a strange meeting I had last week.

It was an office visit, with a casual work friend at another company. I hadn’t seen him in perhaps a year or so. When I got to the door, he seemed scattered and disheveled. He was dressed in an unusually casual manner – an oversized army jacket that didn’t fit properly, and a black t-shirt advertising some business or other. The man who had escorted me there commented that it looked like my friend had just woken up. “I had, actually”, my friend replied. When our escort left, my friend still seemed out of sorts, fiddling with his phone, rubbing his eyes, looking in odd directions.

I expected him to regain his composure and for us to talk business, but he still seemed distracted after a minute or two. His conversation had odd extended pauses, halting as if he were constantly losing his train of thought in mid-sentence, and he didn't make much eye contact.

At some point, he said ‘I actually have an alarm that requires me to answer arithmetic puzzles before it turns off’. He showed it to me. I cheerfully made conversation by asking him if he used the snooze button, and he said he did. ‘I found that I actually had a lot of success by giving it up altogether’, I continued. ‘Once you get into the habit of always getting up immediately at the first alarm, it becomes almost a Pavlovian response, no matter how tired you are.’

As if my words only partially registered, he rambled about how a friend of his had an alarm clock that would walk around when it went off, and you had to get up to switch it off. ‘The effect’, he said, ‘was that he just got really adept at picking up objects and throwing them at the alarm.’ The motion he made while he did this was to dramatically pick up his keys and turn towards the wall, pretending to throw them. It was the only display of alertness the whole time, and jarring in contrast to the general struggle and sluggishness he had displayed otherwise.

By this point, the conversation had started to go on past the point where we would have been expecting to move on to substantive matters, but instead we had been on a single topic of smalltalk the whole time, which had started to feel like it had lingered too long. ‘I really wanted to come in and meet you, even though I was really tired. I’ve only gotten about 12 hours of sleep this week.’

It was Thursday.

And suddenly, the penny dropped. He was suffering from crippling insomnia.

I felt absurd, wishing to take back my self-satisfied stories about the benefits of willpower in avoiding the snooze button. My friend was drowning, for lack of sleep. He talked about it so much, for the reason that old war memoirs talk about food much more than fighting – because they were starving and wretched, and it was the only pleasure they sought in life. At a certain point of hunger, getting food becomes all consuming, and mere prospect of getting a bullet at some stage in the future becomes much more distant.

Embarrassed at myself, I heard him talk more. ‘Things got a bit worse when my wife got a job in a distant town, which means she has to get up at around 6. I’ll try to get up to give her a kiss before she goes, and…’

I don’t actually remember the way that sentence drifted off, but I was struck with an immense sadness. Suddenly the enormity of the problem became apparent. I could see him, struggling to maintain a functioning relationship with his wife in his zombie-like state, and tenderly giving up precious minutes of rest to show her affection. His work must surely be suffering too. We were halfway through our meeting time and hadn’t even begun to talk business. I cannot imagine that things got better without me there.

At last, as he started to slowly become more coherent, the conversation finally turned more towards our main productive endeavors, and he seemed to slowly approach proper functioning. When we first walked in, it was as if he were literally drunk. By this point, he seemed to be merely tipsy, slowly sobering up.

I found my eye drawn towards the odd shape of his car keys. The top of the remote was all covered with a strange uneven rubbery plastic substance, leaving only a small hole for the button. As events started to make sense, I wondered if he had dropped them a lot in his haze.

As I write these words, I wonder if he himself was the “friend” in the story with the walking alarm. The keys were quite possibly broken from being thrown in exactly the manner that he pretended. He had developed a Pavlovian response, alright. It was a visceral rage at whatever was denying him the thing his body wanted most in the world.

I wanted to say something about his plight, but as is the introvert’s curse when dealing with unfamiliar situations, the words didn’t come. His life looked like it was falling apart from tiredness, and to comment on it, even if wholeheartedly sympathetically, would risk emphasizing just how obvious that was. The only consolation was that he was probably so distracted that this might not register. I was struck by a very strange urge to give him a hug, not because it would have made things better, but out of a primal desire to offer some sort of comfort, even if wholly ineffectual, even if wholly inappropriate.

As I write these words, I can think of what I should have said. “I’m sorry to hear you’re not sleeping well, mate. I really appreciate you coming in just to see me today, given it seems tough right now.” The sympathy of the staircase, so to speak.

Sometimes, the cross that the unafflicted must bear is seeing the pain of those whose welfare one desires, knowing there’s nothing one can do.

Sometimes, even the standard consolations for this don’t work. There is no one to get angry at. There is no constructive solution you can offer. There is no hope of even finding a remotely satisfying explanation for why things are the way they are.

And in this suffering, one can only console oneself with the fact that one’s own reflected misery is a tiny problem to bear by comparison, and one should strive for compassion for others in this unsatisfactory world.

Existence is suffering, as the sage put it.

Ponder this, and wisely reflect.

Failure

There is an odd camaraderie among those who have failed.

I’ve been finding this out recently (which is the reason for the paucity of recent posts).

I used to be fairly insouciant about the prospect of getting fired. Then I got fired, and I suddenly had a lot more sympathy for people who seemed to be quite upset for a period afterwards. Like so many misfortunes in life, it’s easy to be glib about it until it happens to you. But when it does, you remember it.

Life does indeed go on, and I’m in a good position employment-wise. I initially decided that stoicism was the way forward, and asserted (part aspirationally) that everything was fine. ‘Whine less’ was already the motto of 2016, inspired by Epictetus's 'Discourses'. I stand by that motto, incidentally. But after a few days of hassling around emailing people and getting a good mix of polite but awkward refusals (along with some interest), I finally was a bit down. Now I’m actually getting towards the point I claimed to be at initially.

In the process of emailing work friends about the prospect of getting a job, when I explained the circumstances of my departure I got a surprising number of quite heartfelt responses. When I went through the list of who wrote back like this, I realised that a lot of them had gone through the same thing at one point. ‘I know how it feels’, one wrote. He wasn’t lying.

The last time I remember this happening was years ago when I was about 20, and working at my Dad’s office. There was an early 30’s guy there whom I got along with well, and looked up to in the way of young men who engage on somewhat jovial mockery and discussion. On a Saturday afternoon, when I was leaving the office, I told him that I was off to break up with my girlfriend. I expected him to make a joke, or some sort of bonhomie about the prospective fun of being single again. But his response was nothing of the sort. ‘That sucks man, I’m really sorry’, was his reply. Having not had a serious breakup before then, I found it a little unexpected, but didn’t think too much of it. 3 hours of break-up conversation later, I understood the kindness of his response a lot more.

The whole recent experience has made me want to be kinder to the people around me.

I think that’s a good addition to the 2016 motto as well, actually.

Geography and Perspective

How strange it is, the extent to which one’s thoughts depend on geography and circumstance.

In theory, one could pause and take stock of one’s life anywhere – while sitting in traffic, while waiting in line to buy lunch, while bored at one’s desk in the afternoon.

But it never seems to work out that way. Most of the time, the small obscures the large.

For me, it only happens when I’m on my own, without a phone or internet connection - with the autumn sunshine streaming down, walking in silence through grassy fields and trees with green leaves starting to dapple to yellow and red, somewhere with only my own thoughts for conversation.

Then I think about my life.

Every clod that the sea washes away makes Europe the less

Some days the world is tragic in ways that don't leave you with much left to say.

Via Athenios comes this story from Greece:

An investigation was launched on Friday into the circumstances surrounding the death of Ilie Kareli, the 42-year-old Albanian inmate who killed a prison guard on Tuesday, after he was found dead in a prison cell and a coroner’s report indicated that he had suffered serious injuries after being beaten with a blunt instrument.

So far, so ordinary. We see so much misery in the news that it's easy to get desensitised to it. A kills B, B's friends retaliate and kill A. It's a story as old as man. Unfortunate, but the guy had it coming, says the voice that reads this kind of thing every single day.

And yet, every now and then some small humanising detail will creep in and pierce the studied cynicism that all experienced newspaper readers have. It will remind you that everyone in this story is somebody's son, somebody's brother, and that the tragedy is neither an abstraction nor a morality play.

In my case, it was the following:

The medical examiners said he had been beaten up to three days before his death.
Guards at Nigrita prison said they had noticed Kareli’s bruises when he arrived at the facility. They said he declined to be seen by a doctor and instead asked for “some rope to hang myself.”

I have found those lines going around and around in my head ever since.

It is hard to bear too much of the world.

One must take consolation where one finds it. For me, I find myself returning to the words of the Great Sage:

Just as today, so also through this round of existence thou hast wept over the loss of so many countless husbands, countless sons, countless parents and countless brothers, that the tears thou has shed are more abundant than the waters of the four oceans.

Just so.