Friday, October 14, 2011

For free trade to fulfill its promise, the national government must redistribute income

As a card-carrying economist, I like trade--overall, it potentially enriches countries that engage in it.  The problem is the meaning of enrichment.

Trade theory says that trade enlarges the pie that people share.  But among the most important contributions to trade theory is the Samuelson-Stolper Theorem, which says that relatively scarce factors of production see their returns fall when trade is introduced.  In the context of an economy like the US, this means that low skilled workers see their wages fall in the presence of trade.  The trajectory of wages in the US over the past 20 years or so is consistent with the predictions of Samuelson and Stolper.

NAFTA was sold to the US public as something that would make everyone better off.  And in principle, it could have done so, had some of the gains to those who benefited from NAFTA been redistributed to those who lost as a result of it.  Instead we got the NAFTA but not redistribution.  This likely explains the widening disparity of incomes.