Answering the Critics: Summary
Summary of the paper "Answering the Critics: Why Large American Gains from Globalization Are Plausible"
© Peterson Institute for International Economics.
The Peterson Institute calculates that the US economy is approximately $1 trillion richer each year owing to past globalization—the payoff from technological innovation and policy liberalization since the Second World War—and could gain another $500 billion annually from future liberalization (Bradford et al. 2005 ). But polls show that many Americans blame globalization for an array of miseries: job insecurity, layoffs, stagnant wages, and extraordinary riches for CEOs. Consequently any good news—including the Institute's calculation—serves as a ready punching bag for globalization skeptics.
Notable among the critics are Harvard University Professor Dani Rodrik and L. Josh Bivens of the Economic Policy Institute. Unlike Lou Dobbs and Patrick Buchanan, neither Rodrik nor Bivens doubts that globalization benefits America, but they do question the magnitude of our estimates: $1 trillion annual payoff today and possibly another $500 billion in the future with full policy liberalization here and abroad. We answer the critics in a recent essay and summarize our arguments here.
Rodrik (2007) resurrects arithmetic developed long ago as a "reality check" on our calculations. While relevant in the classroom, Rodrik's formula only considers the cost of tariff protection on individual products in perfectly competitive markets and misses the powerful forces that are the basis of our estimates. These include "sifting and sorting" so that the most efficient firms flourish, reducing regulatory barriers, curtailing monopolistic markups, expanding product variety, nourishing international supply chains, and exploiting returns to scale. If we were blind to these forces, like Rodrik, we would question a payoff of $1 trillion annually.
Bivens (2007a, 2007b, 2007c) examines the inner workings of our calculations. We welcome a rigorous critique, but we believe he misses the mark. Our essay responds to Bivens in detail, but one comment is worth highlighting here. Bivens ignores the central role of productivity growth in the dynamic US economy and the contribution of globalization in boosting the productivity of American workers. To ignore this channel is to miss the biggest payoff from globalization.
The Peterson Institute calculations say nothing about the distribution of the $1 trillion payoff between blue collar and white collar workers, between salary earners and the superrich, or between labor and capital. However, Institute authors stretching back two decades have loudly criticized America's policy inattention to the losers from globalization and the meager social safety net provided by unemployment insurance and trade adjustment assistance. The Institute calculates that the costs to workers of job dislocation may reach $50 billion a year as a result of globalization. But our country spends only $1 billion per year on Trade Adjustment Assistance to cushion the job transition for trade-imported workers. The payoff to the US economy as a whole is more than adequate for Congress to provide a much better deal to those who are seriously harmed.
Bivens, L. Josh. 2007a. Marketing the Gains from Trade. Economic Policy Institute. Issue Brief #233 (June 19).
Bivens, L. Josh. 2007b. The Marketing of Economic History: Inflating the Importance of Trade Liberalization. Economic Policy Institute Issue Brief #238 (December 17).
Bivens, L. Josh. 2007c. The Gains from Trade: How Big and Who Gets Them? Economic Policy Institute. Working Paper (December 17).
Bradford, Scott C., Paul L. E. Grieco, and Gary Clyde Hufbauer. 2005. The Payoff to America from Global Integration. In The United States and the World Economy: Foreign Economic Policy for the Next Decade, in C. Fred Bergsten and the Institute for International Economics. Washington: Institute for International Economics.
Rodrik, Dani. 2007. The Globalization Numbers Game (May 7). Dani Rodrik's Weblog (http://rodrik.typepad.com).