Tuesday, February 20, 2007

Does Free Trade Require An Extensive Welfare State?

While economists may disagree on many issues, virtually all (with just a handful exceptions, like Paul Craig Roberts) agree that free trade will benefit all countries who pursues that policy. But there is also an almost similarly large agreement that some individuals and companies will benefit from protectionist trade policies. This is similar to other subsidies and regulations where there is usually at least some who benefit financially from it, at the expense of the rest of society.

So, with near unanimous support for the theory that the economy as a whole benefits from free trade while a minority loses from it, an increasing number of economists now seem to think that an extensive welfare state is needed to compensate the losers from free trade. See for example Sebastian Mallaby in Washington Post and here Brad DeLong quoting approvingly Martin Wolf in Financial Times.

This argument for the welfare state because it is necessary for free trade to work basically expresses agreement with the idea advanced by some paleoconservatives, like Paul Craig Roberts and Pat Buchanan, that trade protectionism is linked to limited government. Only the paleoconservatives argues against free trade on account of the virtues of limited government, while left-liberals like Sebastian Mallaby, Martin Wolf and Brad De Long argues for big government on account of the virtues of free trade.

The left-liberal "free trade requires a welfare state" argument is really two arguments-one political pragmatic and one moral. The political pragmatic argument is that in order to ensure support for free trade, a welfare state is needed to bribe the losers from free trade into accepting it. Here they often point to how protectionist sentiment is much stronger in relatively low tax America than in relativeky high tax Scandinavia. But that overlooks that the Scandinavian countries first of allin sharp contrast to America have large trade surpluses, making the false "trade deficit kills jobs" argument against free trade inapplicable. Secondly, the Scandinavian countries are so small that the idea of national self-sufficiency is more obviously absurd than in a very big country like America. That is the real reasons why protectionist sentiment is stronger in America. To test the effect of an extensive welfare state on protectionist sentiment we can look at France, whose welfare state is as extensive or more than the Scandinavian countries. Yet protectionist sentiment is at least as strong as in America.

The other argument is moral. Supposedly, since free trade increases real national income while reducing real income for a few, we should redistribute these gains for the country as a whole so that the losers too can enjoy it too. But this presupposes that the losers from free trade deserve the higher income they have under protectionist trade policies. Neither protectionists nor "free trade requires an extensive welfare state" left liberals have been able to say why they the deserve that income more than others. It would be more accurate to label the losers from free trade the winners from protectionist privilegies. The winners from protectionist
privilegies don't get their higher income by providing better value for others. In that case they wouldn't need protectionist trade policies. Instead, they earn their higher income by monopoly privilegies from the government that prevents other inhabitants of their countries from trading with people that provide better value. Thus, there is certainly no moral obligation to compensate the losers from free trade.


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