Sunday, April 5, 2015

Libertarian Economics Helps Poor Countries

(This is an extended version of a Letter to the Editor I wrote to the JHU Politik.)

The latest tiresome hit-piece in a JHU Politik writer’s bombastic crusade against libertarianism accused free trade of creating “instability, burgeoning inequality and slower growth” across the world.

If free trade has caused those things, libertarians make a poor scapegoat for its implementation; sadly, they have not found political power much of anywhere in recent (or even distant) memory. Rather, what free trade protections we have arose only when even non-libertarians came to realize the shortcomings state interference. NAFTA, for instance, was signed by Bill Clinton and supported by hundreds of congressman from both parties – not including libertarian icon Ron Paul, for the record, who called it “managed trade” and voted against it. What the article actually criticizes is not libertarian economics, but a broader distrust of protectionism that has led to isolated and limited free trade agreements between some countries. By mislabeling the very boogeyman it seeks to create, the article attempts to marginalize the mainstream.

In reality, there is an overwhelming consensus among economists – libertarian or otherwise, and rivaling those of climatologists on global warming or public health experts on vaccines – that international free trade is a net boon for the world economy in poor countries, rich countries, and everything in between. Contestable and cherry-picked anecdotes in Chile and South Korea do not suffice to refute that consensus. Neither does the eyebrow-raising version of history in which Russian citizens were better off under communism than they were after it (in truth, the majority of that 40% reduction in GDP was due to cessation of Soviet Era military spending and the halted production of goods for which there was very little demand. This is an excellent illustration of how the usefulness of GDP as an economic indicator is inversely related to the portion of GDP comprised of government spending. But I digress).

Even if we accept those case studies as accurate, the primary argument for free trade remains unanswered. The article confines it’s analysis to the individual countries which liberalized their policies, ignoring benefactors in other places. Yet the main appeal of free trade is that it stands to improve efficiency globally by permitting economies of scale to emerge elsewhere. Short term benefit for formerly protected but inefficient producers in the home country is neither guaranteed nor even desirable.

By analogy, restricting carbon emissions may temporarily hurt the economy of the individual nation emplacing the carbon controls, as they can no longer shift costs onto others through the externality of carbon pollution. But all those countries which previously absorbed those costs are now unburdened by the change, and should they enact carbon restrictions as well, the original country will benefit in turn. The result is that from a global perspective, decreasing carbon emissions helps everyone in the long run. So too with free trade: the hurt imposed by reducing one’s own tariffs is outweighed by the aggregate advantage that comes when everyone else reduces theirs too. When governments refrain from punishing one another’s economies in the quest for relative gains, everyone wins.

Nowhere is this more apparent than in the developing world, where the process of economic globalization that so displeases Mr. Grable has lifted a billion people out of poverty since 1970, and hundreds of millions more since 2005. I described this a few years ago in response to another protectionist shrill:

The influx of capital investment (what protectionists decry as outsourcing) to Asia from the West has transformed the world’s most populated nations – China and India – from desolate wastelands of intense hardship to vibrant and thriving global economies. In turn, the wealth created has lowered the price of goods across the world, improving living standards for millions of western consumers as well. Technologies that would have seemed unthinkable merely a decade ago have been made easily affordable to the average citizen thanks to this process. Over the coming years, dozens more impoverished countries housing billions more poor people stand to benefit in the same way, as the West finally lets Southeast Asia, South America and Africa in on the lucrative and mutually beneficial trade partnerships it had formerly reserved for white nations.

Within the context of these developments, there is something decidedly illiberal about using a portion of our abundant wealth to erect artificial and coercive impediments on the ability of poor foreigners to accrue their own. Economists agree that free trade does wonders for American consumers, but that’s not the primary reason we should support it. Rather, we need free trade because the alternative is unconscionable: turning the force of the state against desperate manual laborers and would-be market entrants across the globe. If progressives truly care about global wealth inequality, encouraging the world’s wealthiest countries to adopt protectionist policies that prevent jobs and capital from moving to the third world is among the most regressive stances they could possibly take.

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