The Washington Post | By Paul Blustein | February 26, 2004
If economists could condemn members of their profession for heresy, Paul Craig Roberts would probably be a candidate for excommunication.
Few tenets, after all, are so widely shared among economics PhDs as the belief in the positive impact of free trade. Yet Roberts is publicly challenging that precept, and making waves doing so at a time when trade has leapt to the forefront of the nation's political debate.
Roberts, a former assistant secretary of the Treasury for economic policy in the Reagan administration, co-authored an op-ed article in the New York Times last month with Sen. Charles E. Schumer (D-N.Y.) in which they contended that the case for free trade "is undermined by the changes now evident in the modern global economy." Thanks to the movement of American jobs overseas, including well-paying jobs for engineers and computer programmers, "the United States will be a Third World country in 20 years," Roberts said at a Brookings Institution forum, according to a transcript of the event.
In university economics departments and establishment think tanks, such talk is akin to a biology professor endorsing creationism. "These pronouncements are especially troubling" because Roberts is "a professional economist with a genuine free-market bent to his work," wrote Donald J. Boudreaux, chairman of the economics department of George Mason University, in a draft article he wrote for a journal published by the libertarian Cato Institute.
According to Boudreaux, "Paul Craig Roberts does not understand the principle of comparative advantage," one of the central tenets of trade theory. For his part, Roberts dismisses such criticism as typical of the profession's "knee-jerk" views on trade.
Whether Roberts is right or wrong, economists acknowledge that he is forcefully raising concerns that deserve to be addressed as controversy mounts over the loss of jobs to foreign competition. Passions are running high over the issue in the Democratic presidential primaries, especially after N. Gregory Mankiw, the chairman of President Bush's Council of Economic Advisers, was quoted recently as saying that the outsourcing of jobs abroad was "probably a plus for the economy in the long run." The White House had to scramble to quell the political firestorm -- Mankiw clarified his position with a statement that "any loss of jobs is regrettable" -- even though his basic point was defended by many economists, including Democrats.
Roberts's deviation from the prevailing orthodoxy offers an illuminating window into the trade debate. A few other PhDs in economics can be found whose opinions are similar to Roberts's, but among trade specialists at universities, they are almost unheard of. (One of the exceptions is Ravi Batra of Southern Methodist University, author of "The Great Depression of 1990," but he hasn't received much attention since the economic disaster he predicted failed to materialize.) Other economists who question the benefits of trade tend to be employed by labor unions, pro-labor research institutes, or industries favoring protection from imports.
Roberts is no left-winger, and though he serves on the board of one multinational firm, he appears to be largely independent from union or industry entanglements. He does, however, have a reputation as a prickly outsider in the economics profession; even conservative allies often describe his zealotry as hard to take.
He was one of the most combative of the true believers in supply-side economics, first as an aide in the 1970s to Rep. Jack F. Kemp (R-N.Y.), co-author of the tax-cut bill under President Reagan, then as a member of the Wall Street Journal editorial page staff, then as a top Treasury official in 1981-82. In the years since, Roberts has worked as a columnist and writer while holding positions at several conservative and libertarian think tanks.
His emergence as a critic of free trade elicits head-shaking dismay from his former comrades-in-arms in the supply-side movement.
"I've been trying to figure this out myself, why Craig has moved in some of the directions he has," said Richard W. Rahn, who helped promote the Reagan tax cuts as chief economist for the U.S. Chamber of Commerce and considers himself a onetime close friend of Roberts.
Other conservative economists aver that Roberts's trade views presumably stem from xenophobic sentiments that they discern in some of his columns and Internet postings. In one Washington Times column, for example, Roberts complained that "native-born U.S. citizens are being 'ethnically cleansed' " by liberal immigration policies. "When I first came to Washington, D.C., 25 years ago, the only international-looking people one saw were in the diplomatic community," he wrote." Now, it is every third person."
In a phone interview from his home in Panama City, Fla., Roberts, 64, said the questions his detractors have raised about his motives show the weakness of their case. "They're looking for some reason that has nothing to do with my economic argument, because they cannot confront my economic argument," he said. The overwhelming majority of economists, he said, take the free-trade side because they "are just programmed. For them, free trade is a religious experience. They just 'know' it's good."
Like virtually all economists, Roberts was taught -- and, he said, still accepts -- the classical argument for free trade based on the 1817 tract by British economist David Ricardo, who showed that trade between two countries could benefit both of them even though intuitively that didn't seem possible. Using the simple example of trade in wine and cloth between England and Portugal, Ricardo said both nations could raise their overall living standards through trade despite the fact that Portugal, with its low costs, had an absolute advantage in producing both goods. As Ricardo demonstrated, each nation could gain by specializing in the product in which it held a comparative advantage -- that is, an advantage relative to all the other things it could make -- and buying other goods from abroad.
The problem, in Roberts's view, is that Ricardo's theory does not apply to the world of 2004, because it was based on assumptions that are no longer valid. The British economist, he notes, assumed that a country's "factors of production" -- its land, its labor and its capital (factories and machinery) -- could not be moved abroad.
"The way it's working today, firms close facilities here, remove them to China, produce there and send the products back here," Roberts said. "This is not the 'Ricardian' case for free trade." Moreover, he said, the Internet has made it possible for labor to effectively move across borders as well, with Indian radiologists examining X-rays and Chinese software engineers writing code -- jobs that their American counterparts never used to worry about losing to lower-wage foreigners. Under those circumstances, which vary starkly with Ricardo's assumptions, "the case for free trade -- that it benefits all countries -- collapses," Roberts said.
Not so at all, according to Roy J. Ruffin, a University of Houston economist whom Roberts frequently cites as his main expert on Ricardo. Roberts "is simply not an expert on international trade, and he's making these outrageous claims," Ruffin said.
Even though Ricardo did base his argument for free trade on certain assumptions, the validity of the theory doesn't depend on them, Ruffin said. "It's like the law of gravity. To prove it, you assume you're in a vacuum. Well, just because we're not in a vacuum doesn't mean the law of gravity is false," he said.
Many other economists after Ricardo have demonstrated the positive effect of both free trade in goods and the free movement of factors of production, Ruffin said, and although "you need a lot of hairy mathematics" to prove the point, "the evidence is overwhelming" that with free trade, "you have benefits that exceed the costs. There are always costs, but the benefits always exceed the costs."
Roberts, however, is not convinced. Sure, he said, trade is usually beneficial when it's just trade. For example, if China ships cheap brassieres to the United States and 20,000 workers in U.S. bra factories lose their jobs, the lower prices for 100 million American women mean that "the gains to the multitude are greater than the loss to the displaced workers," he wrote in one of his Internet pieces. That is because the savings enable people to spend more money on other things, creating demand for other jobs, he said.
But the U.S. economy as a whole will suffer if bra manufacturers and other industries move overseas, according to Roberts, because so many workers would lose their jobs that "the loss of incomes outweighs the lower prices."
Mainstream trade experts contend that such a scenario is no more grounded in reality than past scares about mass job losses, which centered on "automation" in the 1950s and 1960s, "de-industrialization" in the 1980s, and the "giant sucking sound" of jobs moving to Mexico conjured up by Ross Perot during the debate over the North American Free Trade Agreement in the early 1990s. In each case, the limited job losses that occurred drove down costs and generated efficiencies that fueled increases in U.S. productivity -- the ultimate source of higher American living standards. Now that the big worry is outsourcing, the basic lesson of those episodes is being overlooked, said Brink Lindsey, director of trade policy studies at the Cato Institute.
"If a back-office job is consigned to oblivion by a computer, that's 'progress,' '' Lindsey said. "But if a living, breathing Indian gets a job as a result, that's a national catastrophe."
Still, mainstream economists can't answer a key question that Roberts raises, which is how the U.S. economy can generate better employment opportunities to replace the white-collar jobs that are suddenly vanishing. In his article dissecting Roberts's argument, Boudreaux asserted that as long as the United States maintains policies that make it an attractive place to invest, the U.S. capital that gets shipped overseas "will in all likelihood be replaced by new and more productive capital." But there's no way to be more specific than that. "Some entrepreneur out there will figure out something; that's the best answer you can give," said Ruffin, the University of Houston economist.
Roberts recently got some support for his argument from a heavyweight academic economist, William J. Baumol of New York University. Though not a trade specialist, Baumol is a past president of the American Economic Association, and a book he published in 2000 with a leading mathematician, Ralph E. Gomory, pokes some holes in economic orthodoxy by showing that free trade will not necessarily provide mutual gains to countries. (Gomory is a member of The Washington Post Co. board.)
Regardless of what the academic evidence shows, the people who subscribe to Roberts's views seem to be winning the battle for public opinion at the moment, lamented Robert E. Baldwin, a trade economist at the University of Wisconsin. "We're all scrambling to counter these guys at a political level," Baldwin said. "It's not hard to counter them at the classroom level. But in the real world, it's not so easy."The Washington Post:
