Throwing Out the Baby With the Bath Water

At Cafe Hayek, Don Boudreaux highlights a new paper by Jonathan Rothwell challenging the findings of David Autor et al that trade with China is harming American workers.  The abstract of the paper sounds interesting, but I want to focus on one point in particular (Emphasis mine):

At the community level, Autor, Dorn and Hanson (2013) find that local areas have experienced slower job and wage growth and higher unemployment because of import competition with China. Upon analyzing their data, I conclude that their results are biased by the weaker macroeconomic performance of 2000-2007 relative to the 1990s. When I analyze inter-local area economic changes — rather analyzing changes within and across areas — I fail to reject the null hypotheses that import competition has no effect on wage or employment growth, except within the manufacturing sector during the most recent period, or that it has no effect on many other outcomes, including labor force participation, intergenerational mobility, and mortality.

There’s an interesting lesson to be learned here, beyond just what Rothwell finds:

Findings can depend on how one slices the data. To wit, Autor et al find significant negative effects when the data is within or across areas and Rothwell finds significant positive effects when the data is inter-local area. We see the same in minimum wage (time series vs panel data, etc).

Any statistician can tell you that regression models can change depending on how you cut and categorize the data: different “n” can give different outcomes, different controls and dummies can give different signs, etc. We try for robustness, but it is still at the end of the day a model.

Of course, none of this is to disparage the work of Autor et al or Rothwell, or even econometrics in general (an important field, if used correctly). But we need to fully understand its limitations and our own assumptions, and be very careful before tossing out theory.

Gordon Tullock, in his 1967 paper in the Western Economic Journal, demonstrates exactly this.  Tullock begins with a conversation regarding welfare costs from monopolies and tariffs, citing recent research that finds these welfare losses are pretty minimal.  In fact, they’re so small that Tullock finds:

Judging from conversations with graduate students, a number of younger economists are in fact drawing the conclusion that tariffs and monopolies are not of much importance.  This view is now beginning to appear in the literature.

Does this mean our theory about trade and tariffs are wrong?  Does this mean tariffs can be helpful, or at least not substantially harmful?  Does this mean microeconomists spend too much time focusing on tariffs at the expense of other topics?  Or is it a measurement issue and the theory is fine?  Tullock explores this issue and finds it is a measurement issue, not a theoretical issue.  In other words, our tools not theory were incomplete.  Tullock explains in the article the need to factor in lobbying costs which do not show up in the standard welfare analysis but are nonetheless substantial (read the article for yourself to see his argument.  It’s short, 9 pages, and not technical at all).

Had Tullock not looked beyond the initial challenge to trade theory, had he (and other economists) just thrown off the theory based upon the small welfare losses, the world would be a far worse place.  As it is, his (and Jim Buchanan’s) explorations eventually lead to the field of Public Choice and provided us with a cleaner understanding on the theory of trade, tariffs, monopolies, politics, and the costs associated therefrom.

The story of Gordon Tullock in the 1960’s is why anyone should be weary of claims that theory of any kind is “mistaken” or “proven wrong” by this or that study.  We see this all the time with minimum wage.  The good economist (or scientist) will ask the question, as Tullock (and Mundell) did back in the 60’s: Is the theory invalid, or our tools?  It may be the theory is (such as with the case of geo-centrism) or our measurement tools are lacking.  In fact, we see this with regards to minimum wage: measurable job losses may be minimal, but there are many other margins firms adjust along, not all of whom are measured.  It would be mistaken to toss out the theory.

Economics is still a young science.  I suspect, as has already happened, some of our theories will be tossed out as we gain more insight and knowledge.  But we musn’t be too hasty in doing so (especially when there is political pressure to do so), lest we sacrifice knowledge for convenience and insight for what my professor Thomas Startmann calls “naive analysis.”

9 thoughts on “Throwing Out the Baby With the Bath Water

  1. Its not trade with China that hurts American workers, its the trade China doesn’t let happen between American companies and Chinese citizens that hurts employees not employed by those companies and of course the Chinese citizens who would otherwise gain by trading with American companies.

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    • Yes, Chinese protectionism harms Chinese citizens. That is undoubtedly true. We should oppose protectionism in China on those grounds. But to argue, as some do, that Chinese protectionism harms Americans is dead wrong; it’s just the opposite. Americans benefit disproportionately due to the protectionism.

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      • What is your logic behind this statement? If we take as an article of faith that voluntary exchanges between Americans and Chinese are mutually beneficial, if the Chinese government (or the US govt, it doesn’t matter who does the blocking) blocks that mutually beneficial trade, that protectionist action makes both parties worse off, the seller and the buyer.

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        • The logic behind my statement is from supply and demand analysis. Check out the Tullock paper I linked to and you’ll see what’s going on (hard to describe in words). The article is short and non-technical.

          But it depends on the kinds of protectionism going on. If China were to embargo us, then us both buyers (us) and sellers (the Chinese) would be hurt. But they’re not doing that. They subsidize our imports, which benefits us but the costs of such fall upon the Chinese citizens who pay taxes for those subsidies.

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          • I understand, I’ll check out the Turlock link later when I can better peruse it. As for your further qualification, while US obviously does trade/export with China, China does actually block things physically which typically takes the form of ‘frustrating’ trade. I have been so imposed upon. Beyond that they do physically restrain websites. For instance, your nice blog here may actually be in that class of websites generally consisting of ideas the PRC wouldn’t approve of and also being a WP website.

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          • babelblogs

            If the Chinese government blocked Chinese web surfers from visiting Jon’s excellent blog would Jon be harmed in some way?

            How have you been so imposed on by the Chinese government, if I may ask?

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          • Well Jon’s blog is relatively new so it might not get much traffic. But I have had websites blocked, both the one my screen name here alludes to and another. How does it hurt? Well, aside from blocking communication, websites can have advertising deployed ln them, common method is google adsense for instance. Now, let’s say I have 1.5mm visitors includibg 100,000 visitors from China. Those Chinese visitors woulf jave ads deployed on their visit and they’d click on them and I’d make money off of that. The instant website sells translations. I know both the Thai and Chinese governments blocked the websites, so now those people cannot engage me on the website and buy translations and the Chinese as it turns out aren’t as English proficient as their Indian neighbors to the South and they want to communicate all kinds of things to the world beyond, in various languages, but prinarily English sonce its the lingua franca of international business. That’s me of course. Major players have been impacted. Google, yahoo, wordpress……you can read about it in detail because the story isn’t just a story of an outright embargo on those particular players. But for sure Great Firewall is vosting US businesses billions, no question about that.

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          • Any harm to me would be minimal. Rather, the harm would come substantially to the Chinese citizens (who cannot benefit from my product and who must pay, via taxes, to keep me out).

            As an aside, I know my blog is not blocked in China. I have a decent number of hits from China each day

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