Redistribution Going In the Wrong Direction

On his blog, Paul Krugman discussed how “the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins.”  Aside from the historical and intellectual issues with this statement, Krugman makes another rather anti-Progressive point (albeit he does so unintentionally): that wealth should be redistributed from the poor to the wealthy.

“Whoa whoa whoa, back that train up!” you might be saying.  “How on Earth is Krugman making that argument?  He is a noted proponent of redistribution from the wealthy to the poor!”

You’d be right to say that; he is such a proponent.  But this is where his argument becomes contradictory.

If, indeed, the role of the government is to redistribute from the winners of trade to the loser of trade, then that necessarily means that gains must be transferred from the poor to the wealthy.

Who benefits from trade liberalization?  It is, overwhelmingly, the poor.  This is a point even Paul Krugman understands. For example, if a factory opens in Africa, the local population benefits hugely. There are few (if any) losers in that area (except, perhaps, a local monopoly). In the US, the poor benefit from the now lower-priced goods. So, in both areas, the poor are helped. Where the “losers” might be are the now-displaced factory workers and owners, who were relatively better off than those who have been helped by trade. If redistribution from the winners to losers is necessary, then it must come at the expense of the relatively poor.  Tariffs and other taxes or sanctions against imports are, inherently, regressive.  This means that the poor are now paying higher taxes (which they can ill-afford) to protect the relatively wealthier displaced workers (of course, this is not even including the severe poverty that the residents where the new factory is located face).

If, indeed, the case for free trade rests upon the necessity to redistribute (which, again, it doesn’t) then the best thing that could happen is for as free trade as possible given its already-inequality-reducing abilities.  Actions taken to make it more “fair” only harm those most vulnerable.

5 thoughts on “Redistribution Going In the Wrong Direction

  1. “Paul Krugman discussed how “the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins.”

    You can knock me over with a feather. I had no idea that was so.

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  2. Jon,

    I think this discussion suffers from both sides conflating two very different types of “redistribution.” Free trade tends to “redistribute” incomes in a way that benefits everyone over time despite causing some very obvious losses to some people over the shorter term.

    Social safety net programs (like the guaranteed minimum income that you favor) redistribute in a different way. They tend to tax those individuals who have benefited the most from free trade in order to confer some benefit on those who are deemed to be most in need of that help. Whether or not you think this is a good idea, it should be easy to recognize these are two quite different types of “redistribution” and the way someone feels about one type can be unrelated to the way they feel about the other type.

    As barriers to globalization and free trade have fallen, both the world’s poorest people and the world’s richest people have benefitted. The poorest have benefitted from better jobs and more opportunities. The richest have benefited from being able to scale up and market their products to the entire world. The middle class in developed countries has had to face more competition and has seen a smaller share of the gains from globalization.

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    • Greg

      This may just be a difference in word usage – something we’ve never previously disagreed on – but if you wrote that “Free trade tends to *distributes* incomes in a way that benefits everyone over time…” I would agree completely.

      If I can freely choose between 2 suppliers and I choose supplier #1, would you say that income has been *redistributed* from supplier #2 to #1? Supplier #2 never had the income to be redistributed? And even though I spend some of my income with supplier #1, I wouldn’t call that redistributing my income.

      I’m way more familiar with the second definition in which income is redistributed from those who have earned it to those who have not, usually by a third party using force..

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      • Ron,

        I think we are on the same page here. A different trade policy will result in a different distribution of wealth. In that sense (the sense that a change has been caused) some people will want to refer to that as a RE-distribution of wealth.

        We both agree that is an entirely different kind of redistribution than the redistribution caused by taxing some citizens to provide a social safety net for others. Those should be two separate discussions.

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