In the early days of the Clinton administration, we faced three principal economic-policy priorities. We had to deal with creating a budget, of course, and that budget included dozens or maybe hundreds of policy decisions. There was NAFTA, the North American Free Trade Agreement, which had been left by the outgoing Bush administration for the Clinton administration to finish under some tight deadlines. And then there was health-care reform, in which both the president and the first lady were keenly interested.
There was a battle inside the administration about the order in which we should address these priorities. I would argue that these three policies are examples of what economists would call “irrelevant alternatives”: what you think about NAFTA and what you think about health care are probably unrelated as a matter of logic. On substance, the order shouldn’t matter. But the three became related because of the policy-making process.
The administration decided that the budget had to come first. As I said, the budget had a lot of policy in it, and it needed to get pushed through a recalcitrant Congress. The health-care team argued for including health-care reform in the budget, but that argument was rejected as impractical by the president. Then NAFTA came along, with its tight deadline that was already established. The health-care team again argued, “We have to do health care next. NAFTA should wait.” But NAFTA was pressing and got done next.
As a result, health care got pushed off the end of the bench. By the time the administration turned its full attention to health-care reform, it had utilized a tremendous amount of its limited political capital on getting the budget passed and getting NAFTA passed. It was not the economics of the health-care reform, but the political process involved, that kept it from getting done.
Selling free trade
One of my favorite examples of economists’ ineffective role in public policy is free trade, which we have been touting since the British classical economist David Ricardo laid out his theory of comparative advantage 200 years ago. Almost all economists believe in it deeply. But a lot of other people don’t, and nobody would say that free trade in the way Ricardo described it is the norm around the world.
It’s sometimes said that the public is against free trade. That’s not quite right—it depends on what you ask. You get especially hostile answers from the public if there’s any mention or hint of job losses in the question. If there’s a suggestion that work goes abroad rather than being done at home, public opinion is overwhelmingly hostile to trade. But if you stay away from that completely and just talk about trading with other nations to get the things we want, you get much more positive evaluations from the public.
Still, the basic gestalt of the public on free trade is miles away from where economists are. Even in this day of horrible partisanship, there is one issue on which there’s bipartisan agreement, and that’s protectionism. There’s a long history in the United States of one party being for trade and the other being protectionist, but now both major parties are protectionist. We economists certainly haven’t made the sale. Why?
I divide the answer into two pieces, one having to do with ideas and the other having to do with interests. In the realm of ideas, comparative advantage is one of the few important principles of economics that is counterintuitive. In particular, people balk at the idea that one country could be less efficient than its trading partner at everything and yet still benefit from trade between the two countries. Wouldn’t there be massive unemployment as jobs moved abroad?
In the realm of interests, Adam Smith wrote of the “interested sophistry of merchants and manufacturers” regarding their self-serving ideas about trade policy. About 160 years later, Upton Sinclair observed that “it is difficult to get a man to understand something when his salary depends on his not understanding it.” And yes, there are often special interests that are hurt by free trade and helped by protectionism.
This brings me naturally to a further challenge to economists who seek to advance free trade: trade openings generally create both winners and losers. And the politics involved aren’t good because the gains from trade are typically diffuse, barely visible, and—for most people—very small, whereas the losses are concentrated and highly visible and they fall on well-defined groups. It’s precisely the opposite of my earlier example of political calculus, where policy created a new, small group of millionaires by making each member of a much larger group ever so slightly poorer.
Because the overall gains from trade normally exceed the losses, it’s possible to compensate those who lose out. But we don’t do that; we rarely even try. And even when we try it, the aid to losers is penny ante and often unpopular. Think of trade-adjustment assistance, which has been derided by labor as “burial insurance.”
A final difficulty in making free-trade policies politically palatable is that they allow people to focus blame for negative outcomes. The late economist Charles L. Schultze articulated the political principle of “do no direct harm”—no politician wants to make a decision that leads directly and identifiably to a loss for someone else. So while trade among nations is seen as a natural thing, something that just happens, trade agreements are identifiable policies that are made in Washington and in other capitals. So the losses from these agreements are seen as caused by deliberate government actions. Furthermore, and conveniently, damage from trade can be blamed on foreigners, who make great political scapegoats with nobody defending them in Congress.
These challenges go a long way toward explaining why economists have had so little success pushing for freer trade. But our struggle to sell better trade policy is suggestive of my broader point: there are still big opportunities for better economic policy making. But to turn these opportunities into realities, economists need to understand some of the customs and attributes of that rival civilization, the politicians, and be willing to step out of the one circus ring in which many of us feel most comfortable—substance—and into the others.
Alan S. Blinder is the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton. This essay is based on the keynote address he delivered as part of a conference hosted by Chicago Booth’s Initiative on Global Markets in April titled the Role of Economics and Economists in Public Policy and Public Debate.